Activity levels in the oil sands are poised for an earlier-than-expected recovery putting to an end almost two years of weakness in the oilfield services sector, says CIBC World Markets analyst Jeff Fetterly.
In a note to clients he wrote:
While the magnitude and length of a recovery remain uncertain, we believe the outlook for the oilfield services sector has improved significantly in recent months.
The analyst said several factors are driving the recovery including strength in commodity prices, which has created meaningful amounts of cash flow that he expects will be reinvested in the form of increased capital spending over the coming quarters and into 2009.
He also noted that adjustments to the revised royalty framework announced by the Alberta government earlier this month provides added incentive for near-term development in the province.
From an investment perspective, Mr. Fetterly noted that there continues to be opportunities for oil sands services investors, despite the runup in recent months on equity markets as a result of the renewed optimism in the patch.
Mr. Fetterly increased price targets on seven energy services plays including Calfrac Well Services (OTCPK:CFWFF) from C$20.50 to C$28, Cathedral Energy Services Trust (OTC:CEUNF) from C$12 to C$16, Ensign Energy Services (OTCPK:ESVIF) from C$20 to C$25 Savanna Energy Services (OTC:SVGYF) from C$18 to C$22, Total Energy Services Trust (OTC:TOTFF) from C$8 and C$12, Trican Well Service (OTCPK:TOLWF) from C$18 to C$24 and Trinidad Drilling (OTCPK:TDGCF) from C$13 to C$15.
Units in Total Energy Services Trust were getting the biggest bang from Mr. Fetterly's price target increases with the stock rising nearly 20% or C$1.48 to C$9.53 very early Tuesday morning. He wrote:
While Total's units have increased significantly from their trough earlier in 2008, over the past two months the trust's units are largely unchanged compared to a 27% increase in the STENRE. In addition, at current levels Total trades at a meaningful discount to its peer group.