Analyzing The Unknown Domestic Oil Service Companies

by: Stone Fox Capital

After watching a Mad Money feature on little known Key Energy Services (KEG), it got me to wondering what other oil service plays I didn't really know. Everybody has heard of the big players in the sector such as Haliburton (NYSE:HAL), Schlumberger (SLB), and Baker Hughes (BHI). What about the second tier companies?

Hydraulic fracturing and horizontal drilling remain all the rage, even with natural gas prices plunging to 10 year lows this year. Even with expected rigs drilling for natural gas declining, it wouldn't be surprising to see them move directly into oil shale plays as oil remains around $100. Not to mention one needs to be careful when focusing on the current price of natural gas as future prices on the NYMEX remain in the $4-5 range.

Long term natural gas will recover as the U.S. either decides to use it as a transportation fuel or work is completed to export it as LNG or CNG to foreign countries where prices are much higher.

Some interesting facts from a recent Key Energy presentation.

  • The number of active drilling rigs is flat with the 2008 peak around 2,000.
  • The percentage drilling horizontal wells is approaching 60%, compared to 30% back in 2008.
  • The percentage drilling oil wells is around 55% compared to only 20% back at the peak in 2008.
  • Horizontal wellbore is driving service intensity higher, especially around completion services where worldwide spending is expected to more than double from 2009 through 2012.
  • Horizontal wells typically require 2 -5 times overall service intensity versus conventional wells.

Outside the major players above, a handful of small players have the ability to grow faster and offer compelling valuations.

Key Energy Services
According to the presentation, it is the largest onshore, rig-based well servicing contractor with 787 rigs in the U.S. The majority of revenue comes from U.S. rig services (38%) and fluid management services (20%), with international revenue totaling 18%.

Analysts expect revenues to surge 26.5% in 2012-- to $2.35B from $1.85B. Earnings estimates have been dropping slightly for 2012, but they appear to have stabilized around $1.62 for a forward PE of 9. Remember that as Q4 reports close out 2011 numbers, those forward PEs will focus on 2013 numbers.

Like most stocks in the sector, the stock price has slumped since the July highs. It peaked out over $20 and now trades at $14.60.

Basic Energy Services (NYSE:BAS)
The company has 417 well servicing rigs and 890 fluid servicing trucks plus 10 drilling rigs. The majority of revenue comes from U.S. BAS completion services (50%) with the remaining mostly split between fluid services and well servicing and limited contract drilling revenues.

Analysts expect an 18.6% increase in revenues to $1.48B in 2012 and a 31% increase in earnings to $2.54. With a current stock price of $18.20, the forward PE is a very low 7.

Basic provided us some December operating data that gives us at least a glimpse of whether business is slowing down with natural gas prices plunging. All numbers were dramatically higher than December 2010, but mostly lower than November 2011. The December drop is not surprising considering the extended holidays in around Christmas and New Years. According to the CEO, demand remains strong with pricing firm to higher driven by a tight labor market.

Heckmann Corp (HEK)
Heckmann currently owns and operates 24 disposal wells with a permitted capacity of approximately 383,000 barrels per day. The Company owns and operates a fleet of approximately 450 trucks, 433 trailers and 1,100 frac tanks. Water is also transported though the Company's wastewater pipeline, which will be approximately 70 miles long when completed. Additionally, the Company will put a 40-mile fresh water pipeline in service in the fourth quarter of 2011.

Analysts expect a 49% increase in revenues to $256M in 2012. Earnings are expected at only $0.16 for a forward PE of 38.5. Clearly this stock is the more speculative of the sector, with fast growth and a high PE.

Superior Energy Services (NYSE:SPN) /Complete Production Services (NYSE:CPX)
The companies expect to complete a merger in early 2012 that will create a premier diversified mid-cap oilfield services company. The purpose of the merger is to expand further into unconventional resource plays and international markets. As of October, roughly 40% of combined revenues come from pressure pumping to provide hydraulic fracturing services and coiled tubing.

Even with the 61% merger premium, Complete Production Services only trades at a 8 forward PE. Analysts expect earnings to grow 38% in 2012 as well. Revenue, on the other hand, is expected to grow 25%. Clearly this is why Superior expects the deal to be accretive, even with a huge premium offered.

Analysts expect Superior to grow earnings by 49% in 2012 while revenues will only grow 17%. With a forward PE of 9, the stock trades in the mid range of the sector.

Superior is expected to have $2.4B in revenue while Complete Production should hit $2.8B, giving the combined company $5.2B in annual revenue. The combination will possibly create the fastest growing company with $5B in revenue. At least outside Apple (NASDAQ:AAPL), it's the fastest growing large company most people have never heard of in the investment community.

C&J Energy Services (NYSE:CJES)
This company is our most exciting play in the sector, with its 100% focus on hydraulic fracturing services. Instead of rehashing old stories we'll just point people to a previous article with more details on the stock.

The sector clearly offers high growth potential at reasonable valuations. Fortunately for new investors, the market remains concerned about reduced drilling from ultra low natural gas prices or the fears of the EPA proposing stiff regulations over the practice.

Either way, these stocks are worth watching to snap up if the market ever makes a clear preference for them. Demand for their services will bounce around over the next decade, but it's almost certain that demand will continue growing as obtaining natural gas and oil now requires a tremendous amount of oil services work.

Disclosure: I am long CJES.

Additional disclosure: Data sourced from Yahoo! Finance. Please consult your financial advisor before making any investment decisions.