After reporting earnings on Thursday morning, C&J Energy Services (CJES) fell sharply after initially jumping more than 5%. For some reason the market was disappointed with earnings that easily beat estimates and guidance of a significantly accretive acquisition.
The company is an oil services firm that focuses on hydraulic fracturing, coil tubing, and wireline services primarily in the Eagle Ford Shale and Permian basin.
As mentioned with the article on SodaStream (SODA) last week, the market appears fixated on certain stocks while allowing others to slide. C&J not only has the lowest multiple in the sector, but it also appears to have better operating results. Not only did the company mostly sidestep the natural gas issue by focusing on oily plays, it also has made attractive acquisitions. On top of that, it has mostly avoided the guar and sand issues that have plagued the other oil service companies.
Q2 2012 Highlights
The company reported the following highlights for Q2 2012:
- Reported net income of $53.3 million, or $0.99 per diluted share, for the second quarter of 2012, compared to net income of $33.2 million, or $0.68 per diluted share, in the second quarter of 2011.
- Total revenue for the second quarter of 2012 was $278.4 million, an increase of 53% compared to $182.2 million for the second quarter of 2011 and up 16% compared to $239.1 million for the first quarter of 2012.
- Hydraulic fracturing service line averaged monthly revenue per unit of horsepower of $307 during the second quarter, down from $319 in the previous quarter and $371 in the same quarter a year ago.
- Hydraulic fracturing contributed $216.4 million of revenue and completed 1,667 fracturing stages during the second quarter of 2012, compared to $186.4 million of revenue and 1,476 fracturing stages for the previous quarter and $150.6 million of revenue and 856 fracturing stages for the same quarter last year.
Analysts expected earnings of $0.92, so the adjusted earnings of $1.00 were seen as a big earnings beat. As the company keeps reporting strong numbers, the 5x earnings multiple provided by the market just doesn't add up. The stock has some of the best growth potential in the industry yet has the cheapest valuation.
The Casedhole acquisition has provided the company a foothold in several new basins including the Bakken. This move allowed them to transfer two coiled tubing units to the play and immediately begin service.
The company has been pre-qualified with a Middle East oil producer and has the potential for significant growth with an international expansion. C&J Energy has been unclear on how the international expansion would take place.
The company has two more 32,000 horsepower fracturing fleets to be delivered this year with plans for moving one into the Bakken and the other to the Permian basin. Presumably an existing fleet could move to the Middle East or possibly new fleets would be built.
In comparison to the other domestic oil service providers, C&J has both the best growth potential and the lowest valuation. The thesis against the company no longer holds up after it was able to report strong profits in the midst of a weak environment.
Halliburton (HAL), Basic Energy Services (BAS), and Key Energy Services (KEG) are all mostly domestic oil service providers. All three of the companies reported lower sequential earnings and yet trade at higher multiples. In fact, Halliburton is considered a market leader yet it has had numerous issues with guar that hit earnings that C&J has been able to successfully avoid.
The below table highlights the relative value of investing in C&J:
|Company||2013 Revenue Growth (%)||5 Year Growth Rate (%)||2013 Earnings Multiple|
|C&J Energy Services||18.7||20.0||5.3|
|Basic Energy Services||1.0||10.0||11.8|
|Key Energy Services||9.6||12.0||8.2|
* All numbers sourced from Yahoo! Finance.
Using the 2013 numbers provide a better glimpse into where analysts view a company in the future. Amazingly the average analyst sees C&J having the best growth out of this diversified group, but investors give it the lowest earnings multiple by roughly half.
Even more incredible is that the average estimate for the other three companies is for increased earnings next year while analysts currently forecast lower numbers for C&J. Watch for the 2013 estimates for this company to rise making it even more attractive.
The market valuation of this stock remains extremely difficult to understand. The company appears to out execute the whole industry, yet it is rewarded with industry-low multiples. While most competitors are pulling back, the company expands fleets and makes a very accretive acquisition. A deal that apparently allows the company to quickly expand into other very attractive areas such as the successful move into the Bakken.
As noted in the last couple of weeks, several high profile exploration companies such as Continental Resources (CLR) and SandRidge Energy (SD) have expanded capex spending for oil production. As the sector turns around, look for C&J Energy Services to eventually obtain an industry leading multiple.
Additional disclosure: Please consult your financial advisor before making any investment decisions.