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oilfield services

We will soon gain a new corporate citizen in the oilfield services sector, as Houston-based Civeo Corp. says it will become a Canadian company later this year.

Now, there are reasons to not get too excited: One is that the company is simply reincorporating from Delaware to British Columbia to save money on taxes, tap Canadian corporate lending markets and get closer, legally, to its operations in the oil sands. It plans to keep its headquarters in Houston and is non-committal about adding a listing on the TSX.

Another reason is that Civeo, a provider of housing, food and other logistics for resource companies, has been an out-and-out disaster for its investors since its May, 2014 spinoff from Oil States International Inc. Thanks to earnings misses, poor guidance and a suspended dividend, the shares are down nearly 90 per cent since their debut.

The collapse has helped pull down two TSX-listed companies in energy's worker-housing sector, Black Diamond Group Ltd. and Horizon North Logistics Inc., each down roughly 70 per cent in the same time span. Of course, it's not just guilt by association: With the sharp drop in oil prices, and the increasingly poor outlook for 2015, every company that serves the energy industry has seen its shares plummet.

Black Diamond and Horizon North are now in the uncomfortable position of trying to reassure investors that their dividends – now yielding near or at double digits – will still be paid, even as analysts expect their earnings to fall this year.

If the companies are right, the shares should appeal to value-oriented investors with a strong vulture streak. If the energy downturn is longer and deeper than they or Canadian equity analysts expect, they may follow Civeo and erase even more shareholder value.

First, let's take a quick look at Civeo, which accomplished the neat trick last year of falling roughly 50 per cent in a day not once, but twice. The first time came at the end of September, when it said it would miss fourth-quarter revenue estimates and would not convert into a real-estate investment trust, as many shareholders had hoped. The announcement it would instead save on taxes by becoming a Canadian corporation was, apparently, an unsatisfactory alternative, even though it pointed out it gets 90 per cent of its earnings from Canada and Australia, and would still have to pay taxes on those profits if it became a U.S.-based REIT.

The next fiasco came Dec. 29, when the company proved real news can indeed happen over the Christmas holidays. Civeo said its 2015 revenue would come in at $540-million (U.S.) to $600-million, below an average analyst estimate of $815-million. It eliminated its dividend to conserve cash. Its largest shareholder, Jana Partners, sold all 12.2 million of its shares the next day. (That's not a typo.)

Part of Civeo's problem is its debt. Its $533-million in net debt (total debt minus cash) is 1.45 times its $368-million in past 12 months EBITDA, or earnings before interest, taxes, depreciation and amortization, per S&P Capital IQ. The company is projecting 2015 EBITDA of $135-million to $160-million, which more than doubles that leverage ratio.

How do the Canadian firms compare? Horizon North's ratio is slightly higher, at 1.88, while Black Diamond, the least-leveraged of the three, checks in at a debt-to-EBITDA ratio of 0.82.

This helps explain why Scott Treadwell of TD Securities says that Horizon North is a "possible exception" to his view that he does not expect dividend cuts in his oilfield services coverage group. He cites the "current yield" – Horizon North's quarterly dividend of 8 cents (Canadian) a share yields 14.5 per cent – and his view that Horizon North "has the potential [through a dividend cut] to strengthen its balance sheet with incremental cash."

For its part, Horizon North said Dec. 22 it expects 2015 EBITDA levels to be "similar" to 2014, and combined with a "conservative capital [spending] program," it is "confident that it will be able to maintain its current quarterly dividend."

Mr. Treadwell, even with his skepticism about the dividend, is one of just two analysts with a "buy" rating on the shares among the nine who cover it, according to Bloomberg. Despite his belief that 2015 will see drops of roughly 35 per cent in well counts and 33 per cent in drilling days, he says many of the companies are trading below his estimate of their asset value. (S&P Capital IQ says Horizon North trades at 0.9 times its tangible book value, a measure of the company's hard assets minus liabilities. Black Diamond, which Mr. Treadwell does not cover, trades at 1.2 times TBV.)

He sets his $3 target price – a 38-per-cent upside from Friday's close of $2.16 – by applying a 4.9 multiple to his estimate of 2016 – not 2015 – EBITDA.

Black Diamond, befitting its balance sheet, generates more enthusiasm among analysts, if by that we mean six "buys" among 13 analysts. The average target price of $16.71 represents a 60-per-cent upside from Friday's close of $10.11.

The company says its 2015 EBITDA should be "slightly below" 2014 levels, and its balance sheet, "capital discipline, cost-awareness," cash flow, and "healthy sales pipeline" gives it "confidence" it can maintain a monthly dividend of 8 cents, a yield of 9.8 per cent.

"Black Diamond remains in a good spot despite the maelstrom of oil prices," says AltaCorp Capital analyst Dana Benner, who has an "outperform" rating on the shares and a $19 target price. "The storm shall pass and this company is likely to be in a solid growth mode soon enough."

Investors who believe the oil-price storm shall pass, and relatively soon, might eye all three of these companies, even the woeful Civeo. Those with a more pessimistic view of the energy sector should have already vacated these premises.

Is there a home for energy housing in your portfolio?