Seeking Alpha
Michael Filloon, Split Rock (390 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
Profile| Send Message| ()  

Oil service doesn't get the love that oil producers do. When an investor sees the price of oil move higher, it is obvious that producers benefit. The oil service sector moves with a different dynamic. When the price of oil increases, oil service names also benefit, However, this sector's downside is protected. Oil service operates in an oil range, where 5% moves in oil price matters much less. Since oil has recovered, production companies are moving quickly to get production on line. Expect further price increases to help the bottom line for oil service going forward.

Basic Energy Services (BAS) is a company I own. It is up 410% from its 52 week low. Basic's move can be attributed to pressure pumping. This is needed to frac (fracture) shale so oil will flow into and out of the well. Since the majority of Basic's business is from pressure pumping, it has benefited from steep price increases as it becomes more difficult to find a frac crew.

This is a new dynamic that has developed within the business. When pressure pumping services were not in demand, producers could get a frac crew in a short period of time. Now producers have to wait months. Producers are forced to sign a contract for a dedicated frac crew if it wants to complete wells with in a reasonable time frame.

Basic surprised analysts by posting a first quarter beat by 566.7%. Analysts estimate Basic will grow 234.2% this year and 30% next. Basic recently hit a new 52 week high. Basic is the second largest holding in my portfolio.

ION Geophysical Corp. (IO) is up 208% from its 52 week low. It sells for 16 times next year's earnings. Of the four analysts covering the stock, an average growth of 143.8% this year and 61.5% next is expected. ION has beat earnings three out of the last four quarters, but had a large miss in the first quarter of this year.

ION participates in the seismic market. Most know that seismic is a big part of deep sea drilling, but now it is important to land drilling also. Shale drilling has much less room for error and because of this, the utilization of seismic is increasing. A horizontal well that's 10000 feet deep may have only forty feet to drill horizontally. Many of the companies will run a seismic before getting started, or look at a company's current seismic if interested in buying acres. ION has three main division of business. Each of these businesses have a good portion of world market share:

  • Data Library Sales-8% Market Share

  • Data Processing-8% Market Share

  • Equipment-10% Market Share

ION seems to be well situated with respect to seismic services. Its newly formed JV should continue to expand its equipment business over the next few years. For more information on Ion read ION Geophysical: Bullish on Patent Ruling.

Global Geophysical Services (GGS) is up 207% from its 52 week low. It sells 15 times next year's earnings. Five analysts estimate Global will grow 132.1% this year and 126.9% next. Earnings have been erratic, so be careful with this name. Global did have a much better first quarter than expected. I wrote a bullish article in February about Global, and still think this company has upside. Global is benefiting from the same economics as ION Geophysical. It has recently taken on international jobs in these countries:

  • Mexico

  • Columbia

  • Brazil

  • Argentina

  • Nigeria

  • Algeria

  • Iraq

  • India

Global is being used in conjunction with unconventional plays in the United States. Thousands of square miles of seismic have been shot.

  • Eagle Ford Shale-3250 sq. miles

  • North West Louisiana-875 sq. miles

  • Fayetteville Shale-870 sq. miles

  • Niobrara Shale-830 sq. miles

  • Bakken Shale-780 sq. miles

  • East Texas Bossier-590 sq. miles

  • Barnett Shale-395 sq. miles

  • Green River Basin-170 sq. miles

  • Anadarko Basin-140 sq. miles

  • Marcellus Shale-60 sq. miles

Due to Global's higher resolution images, it can do much larger projects. To give an idea of the scale of seismic work available in United States shales, I have some statistics of image completions.

  • Bakken Shale-less than 10%

  • Marcellus Shale-less than 10%

  • Eagle Ford Shale-less than 20%

  • Haynesville Shale-less than 30%

There is plenty of work left, and it could take decades to cycle through it. With 3D, 4D and microseismic, oil and gas producers are seeing close to perfect success rates.

Pioneer Drilling Company (PDC) is up 203% from its 52 week low. Pioneer operates as an oil service company specializing in land drilling, well service and wireline. It trades for 23 times next year's earnings. Analysts estimate growth of 150% this year and 146.4% next. It recently signed four new build drilling contracts for the first and second quarter of next year. It is also adding additional well service rigs and wireline units. Some 69% of Pioneer rigs have 1000+ horsepower and 42% are electric. And 68% of Pioneer's well service rigs are 2007 or newer.

I like Pioneer. It has a newer drilling and well service fleet. It is currently expanding its wireline business. But the most important reason to buy Pioneer here is demographics. Much of its business is situated in the mid-continent. From the Bakken in the North to the Eagle Ford in the south, it will grow along with the number of new wells. Pioneer is well positioned going forward. For more information read Pioneer Drilling: Good Growth Potential.

RPC Inc. (RES) is a stock I own. I am not as bullish this name as I am Basic, but it still has very good potential. It is up 183% from its 52 week low. I have addressed this stock in several previous articles. Most recently I gave a brief overview of why this stock has a bullish future in Bakken, Oil Service and Refining Plays for the Second Half of 2011. It sells for 11 times next year's earnings.

At the end of last year, 48% of RPC's revenues were from pressure pumping. Due to demand, this business will be able to increase prices. Because of this I would not be surprised if pressure pumping revenue increases to over half of its business this year. RPC has been consistent with respect to earnings. It has beat the street four quarters in a row. It is expected to grow 103% this year and 13.8% next. I believe 2012 earnings will be much better as pressure pumping contracts will lock in more consistent and better revenue per truck.

Union Drilling (UDRL) is up 163% from its 52 week low. This is a small United States land drilling company. It trades for 27 times forward earnings. It operates in Texas, Appalachia, and Arkoma. Six analysts have Union growing 92.8% this year and 940% next. Union has benefited from increased activity in the Permian where it now has 16 rigs. Since 2006, Union has added 23 rigs. It will have three new 1000 hp rigs by the end of this year. Twenty six of its 71 rigs have less than 750 hp. This is concerning, as much of the fleet is out of date and much more difficult to market. Union has grown exponentially and could continue to do so. Pioneer is a much better play.

All aspects of the oil service industry will increase utilization. Wall Street equity research conducted a survey as to the most important technologies influencing the E&P business from 2004-2009. The results were:

  1. Fracture/Stimulation

  2. 3D/4D Seismic

  3. Horizontal Drilling

  4. Directional Drilling

  5. Reservior Recovery Optimization

  6. Drill Bit Technology

  7. Measurement While Drilling

The results were interesting as its top technologies are creating growth in top stock performers. Basic and RPC have companies levered towards fraccing and stimulation. ION Geophysical and Global Geophysical Services provide seismic technologies. Pioneer Drilling Company and Union Drilling provide horizontal drilling. These companies are outperforming competing companies, and should continue to have upside.

Disclosure: I am long BAS, RES.

Additional disclosure: This is a list of companies with the most growth from its 52 week low and is not a buy recommendation. Be careful as stocks can lose a significant value in a short period of time, especially those driving profits from commodities. There are also several economic factors that can push stock prices lower. Please study stocks before you buy as it is good to go with several opinions to find out the best stock to purchase.

Source: 6 Oil Service Companies That Deserve More Love