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Oil drilling near Grande Prairie, Alta. (Rob Ganzeveld/Rob Ganzeveld)
Oil drilling near Grande Prairie, Alta. (Rob Ganzeveld/Rob Ganzeveld)

Eye on Equities

Oil services stocks seen pumping out strong returns Add to ...

Crude oil prices are well off their boil and natural gas values remain in the doldrums. But Desjardins Securities Inc. believes there are some solid returns to be made in the energy sector for investors who cast their eyes toward those doing the actual heavy lifting.

Analyst Jamie Murray initiated coverage of several Canadian oil services companies today, and contends that a recent pullback in share prices makes for an opportune time to invest. He sees them benefiting from growing North American onshore oil production, which is typically less cyclical in nature and allows for better capital planning.

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“We forecast strong growth in the North American drilling markets through 2012. In response, oil service companies have started a new round of equipment building, particularly drilling rigs, directional drilling units and pressure pumping capacity,” Mr. Murray wrote in a research note.

Even though crude oil prices are well off their highs from earlier this year, and natural gas values remain depressed, he believes they are still strong enough to support drilling and rig activity approaching 2006 highs. Furthermore, Mr. Murray believes drilling activity is in the early stages of a multi-year cycle, led by growing light oil production.

Valuations are also attractive, he said, with oil services stocks trading at substantial discounts to historical levels.

Mr. Murray’s “top pick” in the sector is Essential Energy Services Ltd. , which generates about 70 per cent of its revenue from well services activity - an area in whcih he expects to see particularly robust growth. The stock trades at just 2.9 times his 2012 earnings before interest, taxes, depreciation and amortization forecast. His price target on the stock is $3.

Mr. Murray’s preferred driller is Savanna Energy Services Corp. , which bulked up with two well services acquisitions in the first half of this year. His price target is $11.

Among the directional drillers, his favourite is Cathedral Energy Services Ltd., given its strong operating performance. The price target is $9.50.

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Citing the cyclical nature of Caterpillar Inc.’s end markets and “the hasty retreat” in the global economic outlook, Raymond James Ltd. analyst Theoni Pilarinos downgraded the global manufacturer of construction and mining equipment to “outperform” from a “strong buy.” The company’s strong results of the past 12 months have yet to show definitive signs of weakness, but growth in China and emerging markets is slowing and the U.S. economy isn’t picking up much speed, he commented.

Downside: Mr. Pilarinos cut his price target by $19 to $116 (U.S.).

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Wealth management firm Gluskin Sheff + Associates Inc. announced an 80-cent-per-share special dividend, more than many analysts had expected, signalling management’s business confidence. But net redemptions continue to grow and are likely to stay negative for another three to four quarters, said CIBC World Markets Inc. analyst Paul Holden.

Downside: Mr. Holden, citing slower assets under management growth, cut his price target by $1 to $20.50 and maintained a “sector performer” rating.

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HudBay Minerals Inc.’s transformation from a cash-rich producer with few growth plans, to predominantely a project developer with a robust growth profile, is well underway, commented UBS analyst Matt Murphy. He is concerned, however, with rising capital expenditure costs at its Constancia project in Peru and also lowered his resource expectations at the Lalor project in Manitoba.

Upside: UBS cut its price target by $1 to $16 while maintaining a “buy” rating.

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Allied Nevada Gold Corp. has released a positive milling feasibility study for its Hycroft project in Nevada, outlining plans for slightly more gold and less silver production. Desjardins Securities Inc. analyst Brian Christie sees significant gains ahead for the stock, reflecting both the results of the study and his revised expectations that bullion will average $1,800 an ounce next year. That’s $500 more than his previous forecast.

Upside: Mr. Christie raised his price target by $15 (U.S.) to $60.

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