Investors stock up on small players in the oilpatch
Two debut this week
The Financial Post, June 30
By IAN MCKINNON
CALGARY - Three small service companies have gone public this month, showing investor appetites have increased for smallcap players in a sector expected to profit from a new oilpatch boom.
Large players such as Precision Drilling Corp. and Ensign Resource Service Group Inc. are expensive compared with smaller rivals.
Newcomers include Collicutt Hanover Services Ltd. (COH-T) , Command Drilling Corp. (CDZ-T) and Drillers Technology Corp. (DLR-T) . Drillers Tech debuted yesterday, a day after a strong debut by Collicutt.
Drillers Tech ended the day at $1.65 after trading as high as $1.90. Collicutt closed at $9.70, up 20c, after rising $2.50, or 36%, in its first day of trading Wednesday. Red Deer, Alta.-based Collicutt makes compressors for natural gas production and its IPO, which sold 3.3-million shares at $7, was substantially oversubscribed.
Analysts attributed the flurry of activity to a combination of factors in addition to high price-to-earnings ratios for Precision and Ensign. The two firms are trading around 15 to 20 times this year's estimated earnings.
"You have the confluence of oil and gas prices being strong and people are looking at the service sector as perhaps one of the best plays on commodity prices without the reservoir risk," said Sebastian Orsi, service analyst with Dundee Securities Corp. "People are looking down the chain at smaller companies, which are trading in some cases at five or six times earnings, and are saying: 'There is a good value play here and ultimately there will be some consolidation.' "
But the financing window is only half open because concerns about liquidity and business prospects are holding back the price of some players with a market capitalization of less than $250-million. While stocks of companies such as Trican Well Service Ltd. have soared 80% this year, others like Ryan Energy Technologies Inc. have seen the value of their equity erode 20% or more.
Miles Lich, analyst for Peters & Co., said strong oil and gas prices -- particularly the latter, which are expected to stay high for several years -- are giving investors confidence that drilling, key to the financial health of the sector, will be sustained for several years.
"Right now and for the foreseeable future, being 2001, activity looks extremely strong and I expect to see both margins and [equipment] utilization up toward record levels," he said.
Peters is predicting that at least 17,400 wells will be drilled this year and in 2001. The brokerage is carrying "strong buy" recommendations on Bonus Resource Services Corp., Request Seismic Surveys Ltd. and Trican.
Several firms have tapped retail and institutional investors hoping to jump on the bandwagon, collecting money that will mostly go to expanding their businesses.
Command completed its IPO earlier this month and raised $31.1-million by selling 15.5-million units at $2 apiece. Each unit of the Calgary-based drilling contractor consisted of one share and half a warrant. Each warrant can be exchanged into one share for $2.50 until June 21, 2001. Its shares closed yesterday at $1.83.
Drillers Tech, another Calgary-based player in the drilling niche, is a spinoff from established rig-maker Tesco Corp. Drillers Tech sold 5.7 million units for $1.75 apiece. Each unit consisted of one share and half a warrant, with a full warrant exerciseable into one share at $2 for 18 months. The proceeds will be used for the construction of additional drill rigs and for working capital. The company's prospectus also qualifies for distribution nearly 12.2 million common shares issuable from earlier special warrant offerings.
John McAleer, the service specialist at FirstEnergy Capital Corp., is forecasting 18,000 wells this year and 19,200 in 2001. He said service firms will be hard pressed to keep up with demand.
However, it's not all good news for the sector. Firms in certain niches, such as directional and horizontal drilling in Canada, are fighting for business and companies dependent on overseas sales are suffering as activity in other parts of the world has not rebounded as strongly as in Canada.
Mr. McAleer, whose top picks include NQL Drilling Tools Inc., Mullen Transportation Inc. and Pason Systems Inc., said investors should be selective in their choices. "We still have to see an attractive evaluation on the IPO or financing and we have to see a company that is in a specific growth niche or poised for market share expansion," he said.
The chance to make a healthy profit from takeovers is also drawing investors. For example, Precision last week offered $10.75 cash a share for Plains Energy Services Ltd., a 62% premium to the target's price before it was put in play in early May.
Mr. Orsi of Dundee said consolidation could be accelerated because the frantic pace of drilling here is drawing attention from U.S. competitors. U.S. firms can use their shares, which usually trade at higher P/Es than Canadian companies, or the strong U.S. dollar to finance acquisitions.
His favourites include CenAlta Energy Services Inc., Pason, Tetonka Drilling Inc. and Trican.
The Toronto Stock Exchange oil & gas subindex has risen 48% this year and 212% in the past 18 months. Mr. Lich of Peters said the index gained almost 675% in the bull market of 1993-97. It now remains more than 25% below the peak reached in the fall of 1997.
"There is still ample room to go up," he said. "Liquidity will always be an issue but the difference this time is that a lot of the companies don't need money, so if you want to buy the stock there won't be equity available. You'll have to buy in the market because there won't be an equity issue."
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