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What are we looking for?

Companies in the oil and gas sector have seen their stock prices decline anywhere from 25 per cent to 75 per cent over the past year. Today we select the oil and gas equipment and services industry to see whether we can find undervalued companies we can hold over the next 12 months for significant upside.

The screen

We used StockCalc’s screener to select the 10 largest oil field equipment and services companies on the Toronto Stock Exchange. We then use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price. We calculated fundamental valuation for each stock in this portfolio using standard valuation techniques including discounted cash flow, comparables and adjusted book value.

Discounted cash flow (DCF value) is a valuation technique where cash flow projections are discounted back to the present to calculate value per share. A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies. An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio. If we have analyst coverage we include the consensus target price in our analysis.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for the 8,000 U.S. and Canadian-listed public companies. StockCalc also contains lists of undervalued and overvalued stocks as well as numerous tools to understand what the stocks you are investing in are worth.

What we found

This industry is composed of companies that provide oil field services and equipment for activities such as contract drilling and seismic surveys. It also includes equipment and tool rental, pumping and processing services, and inspection and contracting services. Activity in this industry is directly driven by the underlying price of oil and natural gas. Brent Crude for example, is currently trading in the range of US$35 to US$40 a barrel and the price is projected to increase to around US$48 in 2021, according to the U.S. Energy Information Administration.

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from the models (DCF value, price comparables, adjusted book value) and analyst target data. With commodity service stocks like these we can see a lot of variability in valuations with the different techniques used.

Enerflex Ltd., Secure Energy Services Inc., CES Energy Solutions Corp., and North American Energy Partners Inc. lead the undervalued list in this group with Enerflex and North American Energy showing the strongest cash flows based on the DCF calculations.

Examined separately, the different valuation techniques can provide additional insight. A low (or negative) DCF versus price, for example, indicates cash flow or debt levels need to be looked at in detail to ensure the company has the liquidity needed to continue operating.

Enerflex manufactures and services equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline. All of our models strongly support price upside for the company, on the expectation of a more robust economy in 2021.

Secure Energy Services specializes in oil field waste treatment and disposal. From the analysis shown we see that two of the models and the analyst price target support a much higher share price, but the DCF value is negative. I did some digging into the DCF and found that the level of debt in the company is higher than the calculated enterprise value. This means debt is a concern for the company. If it can manage that, it should see significant upside in share price with rising commodity prices.

Investing involves risk, especially for volatile stocks like these. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select oilfield services and equipment companies

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Valuation ($)% DifferenceDCF Value ($)Price Comps. ($)Adjusted BV ($)Analyst Tgt. Price ($)1Y Rtn. (%)Div. Yld. (%)
Mullen GroupMTL-T773.56.758.6928.78.803.3114.308.69-26.50.0
Pason SystemsPSI-T639.17.228.5818.92.944.1316.858.58-57.12.7
CES Energy SolutionsCEU-T293.51.091.5945.81.332.694.181.77-53.81.8
Secure Energy Serv.SES-T288.41.582.6970.4-2.342.857.292.69-75.21.9
TerraVest IndustriesTVK-T287.415.2614.92-2.220.675.7212.94n/a17.72.6
N. American EnergyNOA-T251.48.3211.3636.654.5513.917.6513.83-38.31.9
Trican Well ServiceTCW-T226.70.850.905.41.310.711.390.88-29.80.0

Source: StockCalc

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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