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The oil industry has recently developed technology to allow oil companies to extract large amounts of oil from oil shale fields that had not previously been commercially viable. This has opened up a plethora of new oil shale fields for development, and the number of fields is growing larger every day. These new technology oil fields represent approximately 70% of drilling (natural gas and oil) in the continental U.S. The new horizontal wells require 3 to 5 times more oil services (such as fracking) than the conventional vertical wells with longer total job duration (Key Energy Services).

All this has created a secular bull market in U.S. lower 48 oil services. The huge growth in work to do has translated into huge growth for oil service companies, especially the smaller, more nimble ones. Some of the fastest growing of these are Helmerich & Payne Inc. (HP), RPC Inc. (RES), Key Energy Services Inc. (KEG), and Calfrac Well Services Ltd. (CFW.TO in Canada or OTCPK:CFWFF in the U.S.).

HP views itself as the leader of this smaller oil services contingent. HP asserts that the industry is undersupplied with high performance AC drive rigs, which are better suited to the new drilling being done. HP is a leader in the replacement effort. The BHI chart below indicates how extensive the shift to horizontal drilling has been.

click to enlarge

For this horizontal drilling AC drive rigs are the best performers. However, only 25% of the active rigs in the US land market are AC drive rigs currently. HP has 42% of this market share. Fully 82% of HP’s US land rigs are AC FlexRigs. This has helped HP gain market share in the US land market. In 2001 HP had only about 5% of the US land market. As of 2010 it had about 11% of the market. The chart below shows HP’s outperformance in growing business in the US land rig market.

The chart below shows HP’s relative out performance in increasing operating margin. Its leadership in the AC drive rig area (described above) has helped allow it to charge premium rates, especially since these rigs tend to drill at a much faster rate. Another reason HP can charge more is its customer base. It does about 80% of its business with major oil companies or large operators. Many other companies do nearly 50% of their business with smaller operators. They tend to want to scrimp on costs more.

RES is another growing small services company. It was spun off from Patterson in 1984, It is a different company than HP, which is mostly a drilling company. The chart below describes RES’s businesses distribution best.

As you can see a lot of the revenues come from Pressure Pumping. The chart below describes RES’ quarterly revenues growth in Pressure Pumping since 2000. The grow has been fantastic for the last two years as the new oil shale fields have accelerated oil service development.

The above has really helped RES recover from the recession. However, the chart below shows that it has demonstrated good growth over the last ten years with a CAGR of 20%.

KEG Is probably in between HP and RES in what it does. The chart below shows the percentage breakup of its services.

The new horizontal drilling for oil shale fields is driving drilling expansion, but it is driving well completion services such as fracking even more. The chart below shows the industry growth in both completion revenues and drilling revenues.

The completion services are expected to more than double from 2009 to 2012, while the drilling services are only supposed to grow by about 50%. KEG is positioned to benefit from this growth distribution. Its historical 30% CAGR in international revenue growth has been impressive over the last seven years. For the near term we may see faster growth in the US. The horizontal drillers are tending to go to higher and higher numbers of fracking stages. The chart below gives an indication of why this is.

As you can see the IP rates go up as the number of stages is increased. The above chart was for natural gas fracking, but the same is also true of oil development fracking. This new technology complexity is also increasing KEG’s fishing and rental revenue opportunity per well. The company should continue to do well.

CFW.TO is another mostly fracking company with fracking accounting for 90% of its revenues. Of course, with the new technology fracking has evolved to 30%-60% of the well cost (from 10%-15%). The following chart for North American rig drilling type shows why this may be so.

From 2005-2010 CFW.TO has managed a CAGR of 24%. In 2010 Canada and the U.S. have led the revenue growth (vs. international), accounting for 86% of all revenues. With so much of its business in low political risk areas, the profits and growth of this company are secure. The chart below shows how the acceleration in the US and Canadian growth (from the new oil shale fields mostly) has helped CFW.TO's overall revenue growth.

Some of the fundamental financial data for the above stocks are in the table below. The data is from TDameritrade and Yahoo Finance.

Stock

HP

RES

KEG

CFW.TO

Price

$54.80

$20.49

$13.65

$31.75

1 yr Analysts’ Target price

$67.37

$27.00

$19.19

$49.00

Predicted % 1 yr. Gain

23%

32%

41%

54%

PE

15.03

10.84

14.17

12.35

FPE

11.59

7.82

8.37

6.93

Avg. Analysts’ Opinion

2.5

2.3

1.8

1.8

Miss Or Beat Amount For Last Quarter

+$0.02

$0.00

$0.00

-$0.09

EPS Estimate for FY2012

$4.73

$2.62

$1.63

$4.58

EPS Estimate for FY2012 90 days ago

$4.79

$2.64

$1.76

$3.55

EPS % Growth Estimate for 2011

53.10%

114.00%

1,980.00%

209.80%

EPS % Growth Estimate for 2012

20.70%

22.40%

73.40%

20.20%

5 yr. EPS Growth Estimate per annum

23.53%

18.20%

12.00%

15.00%

Market Cap

$5.87B

$2.98B

$2.02B

$1.39B

Enterprise Value

$5.93B

$3.11B

$2.74B

$1.72B

Beta

1.41

1.79

2.70

N/A

Total Cash per share (mrq)

$2.69

$0.05

$0.13

$3.21

Price/Book

1.82

4.23

1.66

2.2

Price/Cash Flow

8.41

6.86

9.27

6.67

Short Interest as a % of Float

5.09%

15.58%

6.25%

--

Total Debt/Total Capital

9.80%

16.38%

38.77%

--

Quick Ratio (mrq)

3.18

2.55

--

--

Interest Coverage (mrq)

124.14

153.14

7.1

--

Annual Dividend Rate

$0.28

$0.40

--

--

Gross Profit Margin (ttm)

43.18%

45.71%

33.14%

--

Operating Profit (ttm)

26.75%

27.18%

4.80%

--

Net Profit Margin (ttm)

16.50%

16.75%

2.96%

--

All of the above stocks look like good investments. Some look better than others. HP looks like the most mature and dependable. Plus it has the highest 5 year EPS % growth estimate per annum -- 23.53%. CFW.TO has the highest predicted one year percentage gain. It missed estimates on earnings last quarter. However, that is only disturbing until you realize that its FY2012 estimates were increased from $3.55 to $4.58 in the last 90 days. For all of the other stocks FY2012 estimates were either flat or lowered in the last 90 days. To me this means CFW.TO is a great grower. It also has the lowest FPE at 6.93. KEG and RES both have their good points.

On a technical basis all of these stocks are at or near overbought levels on their slow stochastic sub charts. However, they all likely are still oversold longer term from the big plunge in the markets over the summer. CFW.TO looks like it has been in a long term consolidation pattern. It may be ready to break out of this. If the market cooperates this may happen. The Greeks have made progress over the weekend. They have agreed on a coalition government to approve the bailout package. PM Papandreou has agreed to stand down. This is good news from Greece. However, now the markets are starting to turn their attention to Italy, which is a much bigger worry -- a much bigger economy. One will have to watch carefully to see how this issue evolves. The EFSF may play a big part. However, part of the problem is that the solution for Italy’s high bond yields (borrowing rates) has not been unraveled yet.

Legging in is a good strategy in such troubled times. Keeping some of you powder dry is also a good idea.

Source: Look At Small Cap Oil Services For Growth