What are we looking for?
Since last fall, the price for both West Texas Intermediate and Western Canadian Select oil has doubled, with some analysts calling further upside, to US$100 a barrel for WTI, in the next 12 months. Oil has rebounded for multiple reasons, including higher demand as COVID restrictions ease, lower spare capacity among the world’s major producers, reduced investment and a slowdown in the growth of U.S. shale output.
Over the past year, active rig counts in the United States have also doubled. The active rig count – the number of rigs actively producing – acts as a leading indicator of demand for products used in drilling, completing, producing and processing hydrocarbons.
With that backdrop, are there firms that service this industry presenting investment opportunities?
We used StockCalc’s screener to select the 10 largest oil field equipment and services companies on the Toronto Stock Exchange. We then used 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.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which 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 look at the consensus target price.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month).
What we found
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 our models and analyst target data.
This industry includes 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.
Note that when we did a similar analysis of the industry 12 months ago, the average valuation was 30 per cent higher than price at that time. The share prices of today’s constituents have actually moved up by closer to 100 per cent, on average, primarily owing to the price of oil moving up much higher than expected, including an increase of more than 25 per cent in the past eight weeks alone.
Let’s look at a couple of these companies:
Pason Systems Inc. is a provider of specialized data management systems for drilling rigs including data acquisition, wellsite reporting and remote communications. Its clients include exploration and production firms as well as drilling contractors so it has leveraged benefit from an increase in the number of active rigs. Our models show a range of valuations; cash flow and comparables are less than the current price but book and analyst targets are well above.
Total Energy Services Inc. provides contract drilling services, equipment rentals, transportation and well servicing. Our DCF analysis has cash flow doubling for the company over the next two years, leading to that component being very high in the table, but all our models, plus analyst target, support a higher valuation 12 months from now.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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