CANADIAN OILPATCH / SERVICE SECTOR
Canadian oil & gas service firms gaining respect
October 16, 1996
ÿIt took a major takeover, booming oil prices and the promise of new pipelines, but after years of being kicked around, oilfield service stocks are finally gaining some respect.
ÿThe Toronto Stock Exchange's oil and gas services group has been hitting highs for the year recently. From a 52-week low of 698.12, the index climbed to a high of 1853.43 Oct. 8. It closed yesterday at 1812.95.
ÿWhile it has had a stunning run, the sector's performance is not all it appears, since it only includes two companies -- Precision Drilling Corp. (pd/tse) and Canadian Fracmaster Ltd. (cfc/tse). Most of the growth has come from Precision Drilling, which has been rising steadily.
ÿHowever, there is a galaxy of other oilfield companies taking advantage of the current spending spree in the oilpatch, many of which are also highly regarded by the analysts who follow them.
ÿ"I like the whole industry right now," says David McCracken, of Newcrest Capital Inc. "We are going into an unprecedented drilling boom that appears to be sustainable."
ÿApart from Precision, which became the big kid on the block in Canada with its merger with EnServ Corp., a number of other established and up-and-coming oilfield services companies -- which provide the seismic surveys energy companies use to decide where to drill -- have been strong performers in the market.
ÿCompanies trading at or near their highs for the year include Akita Drilling Ltd. (akta/tse), CE Franklin Ltd. (cfk/amex), Computalog Ltd. (cgh/tse), Enerflex Systems Ltd. (efx/tse), Ensign Resource Service Group Inc. (esi/tse), Mullen Trucking Ltd. (mtl/tse), NQL Drilling Tools Inc. (nql/tse), Peak Energy Services Inc. (pes/ase), Tesco Corp. (teo/tse) and Veritas DGC Inc. (Ver/tse). That is from a field with less than 30 publicly traded companies. Those highs have been built on booming oil prices and the promise of new pipeline capacity that should sustain drilling demand for years.
ÿ"The business environment has been pretty strong," says Glen Dagenais, vice-president of finance at Ensign Resource Service Group, which provides drilling and oilfield services in Western Canada and the U.S. Rocky Mountain states. "There's been more activity and, with oil prices holding, we expect it to be fairly steady."
ÿDagenais says that natural gas drilling activity should also be boosted by a big increase in pipeline capacity planned for the next few years.
ÿLow prices caused by a lack of transportation to U.S. markets have discouraged oil and gas companies from spending money to look for gas. However, new pipeline capacity should help bring Alberta prices closer to U.S. rates, and more drilling is expected.
ÿ"Generally, the outlook for the sector is positive," says Carl Hoyt, an analyst with Goepel Shields & Partners Inc. in Vancouver. "As a result of higher commodity prices we are seeing a lot of drilling activity, which should continue through 1997 as long as prices stay favorable."
ÿBut drilling is not the only thing driving these companies. Many have developed leading-edge technologies that can dramatically alter the economics of exploiting an oil and gas find, or revitalize a "tired" field.
ÿ"People in the U.S. are amazed by the technology and concepts," says John King, who follows oilfield service companies for Calgary's Peters & Co. "Look at [Ryan Energy Technologies Inc. (ryn/tse)]. This is a little independent company whose intellection resources are just phenomenal."
ÿRyan, which recently moved onto the Toronto Stock Exchange from the Alberta Stock Exchange, supplies horizontal and directional drilling services using proprietary technology as well as state-of-the art well-logging measurement tools.
ÿWhile the company's stock has fallen from its high this year of $3.60, King believes the firm's earnings will rise from 11› a share in 1996 to 17› in 1997, and 25› a year after that, with cash flow rising to 50› a share.
ÿAlthough many of the drilling and service stocks are hitting highs they are still not highly valued by Canadian investors.
ÿHowever, they are cheap by U.S. standards. Canadian investors on average pay 22 times current earnings for an oilfield service stock. U.S. buyers have no problem paying 38 times earnings for a similar U.S. operation.
ÿThe differential means Canadian companies look cheap to U.S. companies looking for a way to get into the Canadian market.
ÿ"If the U.S. was to become bullish [on Canada] some of the large drillers could make acquisitions here and do it on the cheap in comparison for what they would pay in the U.S.," King says.
ÿ"But after one or two high-profile moves, eyes would open and it will become much less economical."
ÿThere are other differences between the oilfield service sectors of the two countries. While U.S.-based Halliburton Co. (HAL/NYSE) and Schlumberger Co. (SLB/NYSE) are worth tens of billions of dollars, Precision has a market capitalization of just $500 million. That means many Canadian companies do not have the necessary size to attract much institutional interest.
ÿ"Some of these stocks don't show up on the radar screen," McCracken says. "They're micro-caps."
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