Buy when there’s blood in the streets? O&G edition

So many investors pride themselves on being a contrarian. I’m not really interested in labels, but I do like to increase my net worth.

Oil and gas has been out of favor for years now. Back in 2015 $WTIC was over $100, it bottomed in early 2016 around $30 and today it sits around $55. There are numerous reasons, many of them I’m not very versed in.

Activity in my backyard here in Alberta has been particularly hit hard. You can see the number of active rigs in Alberta below.

Western Canadian Select has been under pressure with the broader market and the difference between West Texas Intermediate and Western Canadian Select was growing until the mandatory production curtailments. The curtailments are in response to the inability for our oil to reach international markets given pipeline capacity constraints. You can get some more information here on the curtailments.

With so much negativity around oil and gas companies in today’s market I have decided to take another look. I’ve been down this road before.  I’m taking a top down approach, with some specific criteria in mind to lower my risk. I believe that we need at least stability in the oil and gas market in order for these trades to be profitable. We may not need significantly higher oil/gas prices, but I will need sentiment to change. I don’t expect all my picks to be winners, but I do expect this to be a reasonable way to deploy capital and generate above average returns.

As usual, I chose the oil and gas services/support companies. I like the indirect play on oil and gas activity and these small names seem to be delayed in sentiment which allows me to do research and build a position before shares move higher. I’ll do a quick post on each of the companies I have taken a position in. It may take several weeks or months to scale into each position. Stay Tuned.

Let me know if you have any companies you’d like me to take a look at related to O&G.





Filed under Random Thoughts

2 responses to “Buy when there’s blood in the streets? O&G edition

  1. sculpin2

    Essential & Strad are attractive. SDY with the appt of Ewing Morris’ Lee Matheson to the board recently….

    Essential is awaiting a major catalyst that should see either its shares significantly move upward or be subject to a takeover by an industry competitor given its current valuation. The lawsuit by Packers Plus has been overhanging this Company for over 4 years now. Last Fall they won the lawsuit on all counts. Now awaiting an appeal decision there is strong likelihood that Essential will prevail & receive their costs back. Tangible book value is over $1/share while the Company has been generating positive cash flow in the past few years to almost eliminate all debt.

    Raymond James…
    It doesn’t take fancy arithmetic to conclude ESN stock is wildly under-valued at $0.325. Essential has $0.45 per share of working capital, which after deducting $0.17 in total debt per share still
    leaves shareholders with $0.28 of net working capital per share. The remaining $0.04 per share
    difference between the share price and net working capital is all that remains for Essential’s
    PP&E ($6 mln). These assets include 29 coiled tubing rigs, 19 fluid pumpers, 8 nitrogen pumpers,
    fabricating facilities plus vehicles, land, buildings, and office equipment. Essential carries these
    assets at $138 mln on its balance sheet – their tangible cost was more than $260 mln.
    Regardless of the carrying value or what ESN paid, even the stingiest of investors would have to
    concede assets that generated $7 mln EBITDA in 3Q18 alone are probably worth more than
    $6 mln, irrespective of their outlook.

    Strad is doing well financially with low debt and taking advantage of the same large amount of pipeline & infrastructure work that is driving Macro Enterprises results. Cormark…

    At a recent price of $1.48, Strad is valued at an EV/EBITDA multiple of 1.0x our 2020 estimates. Our $2.50 target price implies a 2020 EV/EBITDA multiple of 1.9x.  With Strad’s industrial matting business becoming a dominant source of income and a number of large pipeline projects offering the potential for significant contract awards, we believe that Strad offers a compelling combination of near-term growth, value and the financial flexibility to continue to expand its matting fleet in advance of (or in response to) a large contract award. We reiterate our Buy recommendation on Strad.

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