In a recent article by Nawar Alsaadi, an author I respect for his in-depth work on GasFrac (GSFVF.PK), I disagreed with his conclusion about C&J Energy Services (CJES) when he stated "standard water fracking operations by the likes of ....... C&J Energy Services will become increasingly commoditized."
His description of CJES was in relation to an article put out by Reuters that reported the future of fracking in the eyes of Schlumberger (SLB) Chief Executive Paal Kibsgaard. Kibsgaard made general industry comments such as these:
We see hydraulic fracturing ... moving away from the current approach of trying to achieve more production with more resources, towards achieving more production with less resources. This will be essential to lower well costs and to reduce the operational footprint.
In North America, hydraulic fracturing and profitability have soared, purely as a function of the under supply of horsepower, but they are now quickly coming under pressure as horsepower supply and demand approaches equilibrium.
The barrier to entry remains low, as seen by the number of smaller players in the market that buy generic frack fleets from third-party manufacturers and only pump basic fluid systems ... The pressure pumping industry is generally focused on the ability to do bigger and more resource intensive fracturing jobs, and on the ability to do jobs faster.
I assume it is for these comments that Nawaar decided to throw CJES into the "fracking commodity pool" as a company that will go the way of the dinosaur while new technology makes CJES obsolete.
This is where I would have to ask myself, "Is he right? Am I invested in a company that brings no real value to the fracking industry, a company whose service is a dime a dozen"?
These are fair questions an investor should be asking in light of the stock price going down sharply recently as a glut of new fracking fleets hits the market where they operate. This in addition to the comments being made by the biggest player in the industry that it sees pressure on fracking prices through the rest of the year.
As I looked at the most recent investor presentation, I was left feeling even more confident that CJES provides a valuable niche in the areas where it operates. Here are a few highlights from the presentation, along with my comments in parenthesis as to why I still am comfortable owning this business. I list the title for each page of the presentation that I am referencing:
"Favorable Long-Term Supply/Demand Fundamentals"
Supply-Side Drivers: Older equipment not well-suited to meet demanding completion requirements. (This means that the competition is moving much older equipment from the natural gas regions into the areas where CJES is currently operating. CJES has one of the newer fleets in the industry, and its fleet is designed for the demands of the regions in which it works. This will be a competitive advantage moving forward.)
"Limited industry experience executing the most complex completions"
This would argue CJES management feels it knows something more than the competition when it comes to fracking in the Eagle Ford area. While the news articles are flying around lately about how fracking companies are moving into CJES's territory, this statement implies that it may not be as easy as just picking up your fleets and moving into a new region. I hope to ask managers to shed a little light on what they mean by this specifically, and how they are different. To put it into the investor presentation means they must think it is material information that differentiates the company from competitors.
"We Offer an Attractive Value Proposition to Our Customers"
Specific competence in fracturing fluid design and local application. Design fluids that perform well in various environments. (This would argue against CJES being just another brute force fracking company. It has gained valuable information in the most complex and challenging basins in which it has operated for many years. Certain fluids like LPG used by Gasfrac do not work in many basins. Each basin will require different expertise and fluids, thus mitigating the general statement that all fracking companies are the same.)
CJES's stock price continues to boggle the minds of myself other investors. I am getting emails from SA readers asking what is going on. Relative to the competition, CJES has performed just as poorly as its peers. To me that means the issue is not company specific, but industry specific. Regardless, I continue to like this business, which has no debt and earns a healthy amount of free cash flow. Now that General Atlantic (which is focused on helping small companies grow as well as help them expand internationally) has reported it continues to buy more and more stock, I find myself adding at ever lower prices as the business is sound even though the stock price is horrid. Now that General Atlantic is on board, I would not be shocked to hear CJES announce a deal in the Middle East soon for fracking services. In the same investor presentation, the company stated it is "actively pursuing coiled tubing and fracturing opportunities with multiple potential customers in the Middle East."
My guess is that General Atlantic will be a driver in getting a deal done there sooner, rather than later. Pricing pressure aside in the short term, I still see this company earning $3.00-$3.50 this year as the market continues to recognize the efficiency and superior skill set that CJES brings to a customer in the more difficult regions.
Disclosure: I am long CJES in my own personal accounts as well as in client accounts.