RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
Drewheyl,
Thank you for your comment. I am about to write another article, the main contents of which is below -
The prediction was definitely premature, and it was not fun watching the stock climb to $17 but I'm definitely glad I sold now that it is back under $13. It seems that in our current market it takes unusually long for the fundamental picture to trump speculation (and on a side note I this is a precursor to what is about to happen to the larger market in general).
As to your comments, I was initially attracted to RPC because unlike drillers it is not necessarily directly tied to the price of natural gas, and is in a far superior cash position.
In RPC's case lower natural gas prices only affects earnings growth, while in the case of a driller (i.e. CHK or XCO) lower natgas can quickly make the driller bankrupt.
RPC's relationship to the commodity is indirect because while their business might decline due to lower drilling resulting from lower natural gas prices, RPC can offset that through pre-arranged contractual agreements and therefore remain profitable even amidst low natural gas prices. Furthermore RPC can reduce its workforce and activity in this area accordingly as to save costs until prices rise.
That being said, the majority of RPC's servicing contracts just expired at the end of 2012 and were not renewed, which is what caused the stock to drop almost 12% in one day. Accordingly, RPC is now more tied to the price of natural gas because they do not have work until the drillers decide the spot price is high enough to resume drilling, and then RPC has to beat out the competition on pricing.
However I think the price of natural gas will steadily rise. We are now at a 14yr low in rig count, and by most accounts everyone who is looking to take rigs offline has done so. Furthermore, there remains a large demand for natural gas (i.e. DOW chem., fertilizers).
Going forward, I expect basic economics to take over soon where stable demand and lower drilling pushes the price of natgas back into the driller's profitable range. When that happens the situation will reverse and there will be a rush to bring rigs back online and RPC will be able to get good pricing on future contracts and plenty of work in the spot market.
Accordingly, I am holding off on buying now but I plan to start buying should RPC fall into the low 12's and then really increase purchases as natgas nears or passes $4.50+ (the level at which most producers can drill profitably).
The bottom line is that if your a long-term investor this weakness should be temporary (I would say less than a year), you will get paid a good dividend to wait, and you don't have to worry about the company going bankrupt (at least is much less of a risk as compared to drillers). But if your looking to buy for the short term now is not a good time becasue the price will most likely fall in the short term and at the very least be very volitile.
A perfect scenario would be natgas climbing towards $5 and RES remaining below $13 - at which time I'll be "backing the truck up" so to speak.
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
Well before deciding keep in mind that the article is meant to be an analysis of intermediate term direction over the next 6 months to 1yr. As the last paragraph points out, RES has great long term potential (I'm looking out 2-5yrs). Good luck!
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
j,rogers - Thank you for your comment. The company being sold in the near future would definitely be a catalyst for the stock, but I prefer to invest based mainly on the current earnings outlook.
I would only hold a position in expectation of a buyout if the company was known to be in negotiations and the stock price had yet to reflect what I perceived as a likely sale.
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
Thank you for your comment. I believe that RES will benefit from a rise in natural gas prices and thus a rise in rig counts, which will occur when natural gas prices near $4.50/btu.
However, I am selling now because I expect RES's stock price to decline for the intermediate term - the catalyst being that rig count has now declined to a level where RPC is seeing a slowing of demand for their services - and current natural gas prices are not high enough to reverse the ongoing trend of declining rig count and drilling.
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
Thank you for your comment. I am about to write another article, the main contents of which is below -
The prediction was definitely premature, and it was not fun watching the stock climb to $17 but I'm definitely glad I sold now that it is back under $13. It seems that in our current market it takes unusually long for the fundamental picture to trump speculation (and on a side note I this is a precursor to what is about to happen to the larger market in general).
As to your comments, I was initially attracted to RPC because unlike drillers it is not necessarily directly tied to the price of natural gas, and is in a far superior cash position.
In RPC's case lower natural gas prices only affects earnings growth, while in the case of a driller (i.e. CHK or XCO) lower natgas can quickly make the driller bankrupt.
RPC's relationship to the commodity is indirect because while their business might decline due to lower drilling resulting from lower natural gas prices, RPC can offset that through pre-arranged contractual agreements and therefore remain profitable even amidst low natural gas prices. Furthermore RPC can reduce its workforce and activity in this area accordingly as to save costs until prices rise.
That being said, the majority of RPC's servicing contracts just expired at the end of 2012 and were not renewed, which is what caused the stock to drop almost 12% in one day. Accordingly, RPC is now more tied to the price of natural gas because they do not have work until the drillers decide the spot price is high enough to resume drilling, and then RPC has to beat out the competition on pricing.
However I think the price of natural gas will steadily rise. We are now at a 14yr low in rig count, and by most accounts everyone who is looking to take rigs offline has done so. Furthermore, there remains a large demand for natural gas (i.e. DOW chem., fertilizers).
Going forward, I expect basic economics to take over soon where stable demand and lower drilling pushes the price of natgas back into the driller's profitable range. When that happens the situation will reverse and there will be a rush to bring rigs back online and RPC will be able to get good pricing on future contracts and plenty of work in the spot market.
Accordingly, I am holding off on buying now but I plan to start buying should RPC fall into the low 12's and then really increase purchases as natgas nears or passes $4.50+ (the level at which most producers can drill profitably).
The bottom line is that if your a long-term investor this weakness should be temporary (I would say less than a year), you will get paid a good dividend to wait, and you don't have to worry about the company going bankrupt (at least is much less of a risk as compared to drillers). But if your looking to buy for the short term now is not a good time becasue the price will most likely fall in the short term and at the very least be very volitile.
A perfect scenario would be natgas climbing towards $5 and RES remaining below $13 - at which time I'll be "backing the truck up" so to speak.
John
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
I would only hold a position in expectation of a buyout if the company was known to be in negotiations and the stock price had yet to reflect what I perceived as a likely sale.
RPC Surges On Earnings But Necessitates A Deeper Look Into Natural Gas [View article]
However, I am selling now because I expect RES's stock price to decline for the intermediate term - the catalyst being that rig count has now declined to a level where RPC is seeing a slowing of demand for their services - and current natural gas prices are not high enough to reverse the ongoing trend of declining rig count and drilling.