All Value-driven investors have one man to thank: Benjamin Graham. His formula aims at the cautious investor and takes into account primarily the book value per share which, in conjunction with few other parameters, can determine the real value and evaluate the true potential of an asset. Then the investor should sit back and wait until the market recognizes this overlooked value.
Benjamin Graham, a.k.a. the "Godfather of Value Investing" advocated a defensive approach to investing. According to Graham, a strategy based around locating undervalued stocks was the safest, surest way to thrive in a tough market. He championed the concept of margin of safety, the difference between a stock's intrinsic value and its market value, making it the core of his philosophy. I will add on Graham's theory that it has to be a growth stock too. When so, I do not expect it to have Ultra Petroleum (UPL) performance overnight, but the upward trend will come sooner or later. By the way, Ultra Petroleum is just one of the numerous examples that indicate how much higher the book value of a stock can rise when it has good margins, earnings and growth YOY. I urge all folks to check Ultra's performance despite the fact it has a PBV of 7 currently and an annualized DCF ratio of 3,5. I also like the oilfield and energy services companies. This is a good website for the newcomers to become more familiar with the sector.
The oilfield services industry provides investors with exposure to the oil and gas commodity sector minus the inherent risks associated with exploration and development drilling. When one invests in the oilfield services sector, he removes a lot of risk but not all of it, as a sharp decline in commodity prices for an extended period of time will impact the capital spending of E&P companies. However, winter is coming along with QE3. Both factors can provide a floor at the oil and natural gas price for the next months. So the market fundamentals for oil service companies remain solid, and oil prices (Brent) are stubbornly holding their ground above $100 per barrel in a tough macroeconomic environment. The resilience of high oil prices is fueling increasing exploration and production spending by operators. All that being said, here are some companies with growth YOY that trade below their book value:
Tuscany International Drilling (TIDZF.PK) : The profitable Tuscany operates in South America and Africa (6 different countries) where there is no Canadian "spring breakup", no natural gas glut, no controversial hydraulic fracturing exposure and where oil fetches prices closer to Brent rather than WTI. The interest is growing in South America actually and several multinationals rush there to tap the local resources. This is the reason I am long for the Canadian Canacol Energy (CAAEF.PK) and I have already written an article about it.
Drilling in the African countries looks bright as well according to the latest updates and it does not seem to abate soon. Tuscany has closed a contract to drill and expand in Uganda recently. The company currently has PBV of 0,25. The rapid expansion strategy of 2011 has started paying off during 2012 as the company has a very strong growth YOY in EBITDA, Revenue and Funds from Operations which are 350%, 300% and 1600% respectively as of Q2 2012. That being said, this is probably the fastest growing drilling company in North America. The 2012 EV/EBITDA ratio is 3,5. The current market cap is just 2x its FFO annualized and only 0,2x the estimated annual sales for 2012. 2012 DCF ratio is 3,5.
In addition, the funds from operations are expected to rise further in 2013 as 3 refurbished rigs return back to service in Q4 2012 and are being marketed currently. It has high insiders' ownership and it is run by a proven management team as the President is an industry veteran who he has already founded and sold 3 oilfield companies in the past. The corporate presentation is very interesting and it provides a lot of details. Tuscany International Drilling trades primarily at the main Toronto board with the ticker TID.
Vantage Drilling Company (VTG): It is engaged in offshore drilling-- the most complex and expensive way of accessing oil and gas reserves particularly when it comes to deep water and ultra-deep water exploration activities. The rising complexity and costs of such endeavours demands huge capital investments, long term commitments, higher efficiencies and a growing reliance on technology in order to reduce uncertainties. For Offshore drilling companies, we need to remember that every operator faces one additional risk in comparison with the onshore drillers.
Offshore drillers are exposed to storm damage which may result in significant damage or a total loss of a rig. Vantage has a PBV of 0,8 currently, along with a significant growth YOY in Revenue. However the company keeps losing money every quarter and the Funds from Operations have not stabilized yet-- but they fluctuate from positive to negative every quarter. So the DCF ratio can not be calculated safely as of today. Any potential investor has to check the debt which is piling up rather quickly lately due to the ongoing rig construction activity and it has not topped yet as there is one more drillship (Tungsten) to be completed. The 2012 EV/EBITDA ratio is 10 and the current market cap is 1,1x the estimated annual sales for 2012.
Hercules Offshore (HERO): Hercules is another offshore drilling company. It has the fourth largest fleet of jackup rigs in the world, and the largest fleet in the U.S. Gulf of Mexico. It also owns the largest liftboat fleet and an inland barge drilling fleet. The recent hurricane Isaac did not damage any of its rigs or liftboats fortunately. The stock has risen a lot lately and the gap between the market value and the book value has closed significantly. However, the company still trades below its book value and this is why it is captured in my article.
Hercules currently has a PBV of 0,9. The Revenue of the company has not been increasing during the last 3 years and the company has not returned profits. The good thing is that the net debt is being paid off gradually YOY through a tighter cost control, a targeted expansion policy and several sales of idle assets that carried significant cost. It is also worth noting that the company's backlog has been increasing gradually during the last 8 months. The Funds from Operations look more stabilized than the ones of Vantage and they seem to remain consistently positive for the rest of the year. The current market cap is 8x the estimated FFO annualized and 1,1x the estimated annual sales for 2012. The 2012 DCF ratio is also estimated to be around 8.
Pioneer Energy Services (PES): Pioneer provides contract land drilling services to independent and major oil and gas operators in the USA and internationally in Colombia through its Drilling Services Segment. Pioneer also provides well, wireline, coiled tubing and fishing and rental services to producers in the U.S. Gulf Coast, offshore Gulf of Mexico, Mid-Continent and Rocky Mountain regions through its Production Services Segment. The company trades at a PBV of 0,8 currently. It has strong growth YOY in EBITDA, Revenue and Funds from Operations (FFO) as of Q2 2012. The 2012 EV/EBITDA ratio is 3,8. The current market cap is 2,5x the FFO annualized and 0,5x the estimated annual sales for 2012. The 2012 DCF ratio is 2,5.
The company has minor diversification geographically as it targets primarily the offshore and onshore U.S. drilling market coupled with a small exposure to Colombia. This U.S.-focused strategy is an obstacle for the next few quarters as: "Due to low natural gas prices and increased competition for energy services in oil and liquids-rich basins, we expect to see moderate pricing and utilization pressure for Drilling Services in the third quarter, which should be partially offset by the impact of deploying our new-build drilling rigs". Hurricane Isaac also impacted the company's operations with a revenue impact greater than $2M in Q3 2012. Pioneer was the safest among the 15 largest contract drillers in the USA for 2011 as reported through the IADC.
Nabors Industries (NBR): Nabors has both onshore and offshore drilling and oil services activities in the USA and multiple international markets. In addition, Nabors is one of the largest providers of hydraulic fracturing, cementing, nitrogen and acid pressure pumping services. Nabors also manufactures top drives and drilling instrumentation systems and provides comprehensive oilfield hauling, engineering, civil construction, logistics, and facilities maintenance and project management services. The company currently trades at PBV of 0,8. It has significant growth YOY in Revenue, but the Funds from Operations (FFO) YOY are stagnant and the company fluctuates from losses to profits during the last quarters due to non-cash charges and write-downs. The 2012 EV/EBITDA ratio is 6. The current market cap is 3x the FFO annualized and 0,6x the estimated annual sales for 2012. The 2012 DCF ratio is 3.
The company receives most of its revenue from the U.S. market which experienced a natural gas glut in the past few months. Going ahead, the company sees an increasing pressure on spot pricing as competitors offer their rigs at lower rates and minimal terms as they switch from drilling natural gas to oil and liquids. The Canadian spring breakup also hit Nabors as expected and "Canada reported a loss of $3.7 million during the quarter, down $53.0 million from the seasonally high first quarter. The normal late second quarter recovery in rig activity that typically follows the Spring thaw did not materialize due to a very wet June. The forecast for the rest of the year has deteriorated somewhat, but remains targeted to approximate the results achieved in 2011".