Oilfield Services: Another Great Year Ahead
What you need to know:• We expect oilfield service stocks to continue to outperform in 2023 and beyond based on supportive oil price fundamentals, rising capex levels amongst E&Ps, and pricing power leading to margin expansion
• Despite the sector’s strong fundamental tailwinds and the probability for a multi-year commodity supercycle, oilfield service companies are still trading at trough-level multiples
Investment Thesis
Supportive Oil Prices
While we will not go in-depth on oil price fundamentals in this report, we think the outlook for oil continues to be strong with China rapidly re-opening, OPEC cutting production, and the SPR (strategic petroleum reserve) reaching its lowest level since the 1980s. Even in a recessionary scenario in 2023, oil demand will remain resilient, declining only a few percentage points as seen in previous downturns. In order to end the oil supply deficit, additional rigs are required to be deployed; providing organic growth and pricing power for oilfield service names. Rig counts are currently 20% below the 10-year average with frac spreads slightly above the 8-year average (Figure 1,2,3), implying there is room to expand back to 2018 highs (40% higher). With large-scale electrification still many years (likely decades) away, peak oil demand is likely farther into the 2030s than most expect. These factors are creating a multi-year bullish environment where oilfield service companies can continue to add new rigs and increase pricing.
Rising Capex Levels for E&Ps
While capital discipline has been the main theme amongst E&Ps through the last year (i.e., returning capital to shareholders via dividends and buybacks), capex levels are still expected to rise in 2023 as the higher oil price incentivizes more exploration and deposits continue to become harder to reach. Consensus currently has large-cap Canadian E&Ps increasing capex by 15% in 2023, accelerating compared to 2022. Furthermore, the Canadian federal government’s $1.7B aid program for abandoned/orphaned wells will start taking effect in 2023, leading to even more rigs being deployed. We expect similar trends in the United States. This will provide a supportive environment for oilfield services where utilization rates and pricing can both continue to increase.
Pricing Power
The oilfield services market continues to be very tight, with customers not wanting to give up rigs in fear of not being able to secure a replacement. With supply chain issues preventing new rig deployments (i.e., labour and equipment), we expect the market to remain tight even with the supportive capex and oil price conditions. This will create another year of margin expansion for oilfield service stocks as they take advantage of operating leverage.
Deep Value Multiples
Our peer group currently trades at 4.3x 2023E EBITDA, well below the historical average multiple of 7-9x. We believe all commodities including oil will be in a supercycle over the next five years, and thus the oilfield service stocks are likely not over-earning based on 2023 numbers. We also are betting on a vast outperformance of value stocks in general and the continued adoption of oil and gas investing amongst generalists, providing justification for multiple expansion through the supercycle.
Calfrac Well Services is engaged in providing specialized oilfield services, including fracturing, coiled tubing, cementing and other well stimulation and completion services which are designed to increase the production of hydrocarbons from wells to the oil and natural gas industries. Co.'s operations are mainly in Canada, the United States, Russia, Mexico and Argentina.
Cathedral Energy Services Ltd. and its subsidiaries are engaged in the business of providing selected oilfield services to oil and natural gas companies in western Canada and selected oil and natural gas basins in the United States.
Computer Modelling Group is a computer software technology firm engaged in the development and licensing of reservoir simulation software. Co. sells reservoir simulation software licenses to oil and gas companies, consulting firms and research institutions. Co.'s suite of reservoir simulators facilitates the analysis of the various types of reservoirs encountered by oil and gas companies in different parts of the world. Co.'s principal products are STARS, GEM, IMEX, BUILDER, RESULTS, WINPROP, CMOST and iSegWell. Co. also provides services consisting of support, consulting, training, and contract research activities.
Essential Energy Services Trust is an open-ended unincorporated investment trust. The Trust was established to invest in debt, equity and other securities of its operating entities; hold directly all types of, or acquire or invest in, securities of any other subsidiary of the Trust and in securities of any other entity; holding or acquiring royalty or other interests in various assets and businesses; dispose of any part of the monies, properties and assets of the Trust; temporarily hold cash and investments, making certain other permitted investments, paying amounts payable by the Trust, making distributions to Unitholders; and pay costs, fees and expenses.
Precision Drilling is engaged in the provision of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States. Co. operates two segments: Contract Drilling Services and Completion and Production Services. The Contract Drilling Services segment includes drilling rigs, directional drilling, procurement and distribution of oilfield supplies, and manufacture, sale and repair of drilling equipment. The Completion and Production Services segment includes service rigs, snubbing units, oilfield equipment rental, camp and catering services, and wastewater treatment units.
Secure Energy Services is an energy services company that focuses on providing specialized services to oil and natural gas companies operating in the Western Canadian Sedimentary Basin. The services provided by Co. include clean oil terminalling, custom treating of crude oil, crude oil marketing, produced and waste water disposal, oilfield waste processing, landfill disposal and the purchase and resale of crude oil. Co. also provides a range of these services in each of its operating facilities throughout Alberta and British Columbia. Co. operates three types of facilities: full service terminals, stand alone water disposal facilities and class I and II landfills.
Trican Well Service is an oilfield services company. Co. is engaged in the provision of specialized products, equipment, services and technology for use in the drilling, completion, stimulation and reworking of oil and gas wells in western Canada, Russia, Kazakhstan, the United States, and Algeria.
Atrium Research provides institutional quality issuer paid research on North American public equities using deep fundamental analysis. Our research reports are disseminated through Bloomberg, FactSet, Capital IQ, Reuters and many more, as well as through our social media and email distribution lists.
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