Oilfield Services: Still Way Too Cheap
What you need to know:• We anticipate oil prices to remain within the US$80-$90 range, which will sustain the current uptick in E&P capital expenditure and foster a strong environment for oilfield services firms.
• Our peer group continues to trade at deep-value multiples; currently at 4.5x/4.0x 2024E/2025E EBITDA.
• We highlight a few of our favourite small-cap names that we believe have significant upside as we move into H2/24.
Following our last oilfield services thematic note (published in January 2023, read here), we continue to be bullish on the industry based on the continued tightening of supply, rising capex levels for E&Ps, and dirt-cheap valuations.
Investment Thesis
Continued Tightening of Supply
We will not go in-depth on oil price fundamentals in this report, however, we think the tightening supply of oil production as OPEC extends its cuts through Q2/24 and the remainder of the year as well as Russia continuing to voluntarily reduce oil production will maintain per barrel oil prices in the US$80-$90 range. This is considered a sweet spot for oilfield services firms to deliver strong profitability without dampening demand. It is expected that OPEC will continue to hold tight control on the production front, stabilizing prices well into 2025. Rig counts are currently 25% below the 10-year average with frac spreads slightly below the 8-year average (Figure 1,2,3). Rig counts dropped about 20% in 2023 after rising by 33% in 2022 and 67% in 2021, due to a decline in oil and gas prices, and high labour and equipment costs. In the first half of 2024, rig counts continue to fall, mainly in the U.S., continuing to tighten supply further.
We continue to believe that large-scale electrification is still many years, if not decades away, and peak oil demand will continue into the 2030s. These factors create a compelling opportunity for investment in oilfield services as elevated oil prices and a tight supply environment are expected to sustain profitability and growth for companies providing critical support to the oil and gas industry.
Rising Capex Levels for E&Ps
While capital discipline has remained a key focus for E&Ps over the past few years, 2023 saw a 15% increase in capital expenditures among the largest E&Ps, with an additional 10% rise budgeted for 2024. This uptick is driven by sustained favourable market conditions and cash flow, incentivizing further exploration and production. Consequently, this trend is expected to foster a robust environment for oilfield services, characterized by higher utilization rates and pricing.
Dirt-Cheap Valuation
Our OFS universe trades at 4.5x/4.0x 2024E/2025E EBITDA on average, with the drillers trading at 3.9x/3.6x, pressure pumpers trading at 3.0x/2.7x, and equipment and other services trading at 5.9x/4.9x. With large-caps trading at a premium and small-caps at a major discount, we believe the small-cap players will see significant upside moving into H2/24 and FY25. We highlight a few of our favourites below including E, SDI, SHLE, TGH, and CVW.
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.
Enterprise Group is a construction services company operating in the energy, utility and transportation infrastructure industry. Co.'s focus is primarily underground construction and maintenance and specialty equipment rentals. Co. provides directional drilling and installation of underground power, telecommunications and natural gas lines to the utility infrastructure segment of the construction industry. Co.'s heavy equipment rentals division, E One Limited, provides equipment rentals for both the oilfield and civil construction sectors and project crews constructing pipelines and facilities.
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.
High Arctic Energy Services is an oilfield services company providing specialized drilling and well completion services to the oil and gas industry in Canada and other countries. Co. has two operating divisions, the International Division and the Domestic Division offering contract drilling and Workover services, Snubbing services and the supply of Cryogenic Liquid Nitrogen Pumping Services.
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.
Matrrix Energy Technologies is engaged in the acquisition and supply of downhole drilling technologies and services for the oil and gas industry in North America.
Titanium Corporation is engaged in the business of researching and developing a separation process for the recovery of heavy minerals and bitumen from oil sands froth treatment tailings. Co. is in the development stage as it has yet to earn any revenues and is devoting substantially all of its efforts toward research and development of this process. The recoverability of amounts expended on research and development, is dependent on the ability of Co. to complete pre-commercialization activities, commercialization at oil sands sites, and achieve future profitable operations.
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.
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