Some interesting comments from Cannacord this morning. Last year there were some comparisons being made to Ryan Energy (Cannacord rates as a buy). I am not sure how WRN compares directly since WRN appears to have more diversity, if I am reading the company correctly.
Yes indeed some positive earnings should (anticipating and praying) propel WRN to much higher levels.
Gene
From Cannacord:
Westrend Nat Gas WRN 591,200 .76 +.11 US newsletter writer
predicts $0.47/sh profit from oil rig building business with further
earnings from well logging and carrier business.
* Canadian Oilfield Services-Industry Outlook
After advancing strongly over the past two years to reach a high of
4318 in early October, the TSE Oil and Gas Services (OGS) Index
declined by 44% to 2412 on January 12/98. This sell-off came on the
heels of a similar decline in the Oil and Gas Producers Index and a
sharp decrease in commodity prices. As set out in Brent Woyat's
January 20/98 technical comment in the TSE Expresso and Today's
Technicals, we beleive that market prices have re-adjusted to the
point where the sector is oversold and are set to stage an
intermediate rally. Below we provide an overview of our near and
longer term industry forecasts. We also set out the fundamentals of a
number of companies in the sector and have ranked them in the order
they appear here in terms of relative attractiveness
Near Term
The short-term outlook for the Canadian oilfield services sector
remains highly volatile. The oil and gas sector is in a period of
flux. Weak commodity prices for both oil and natural gas persist as
fears about OPEC's recent 10% increase in production, the possible
ramifications of the Asian "flu" on world demand, and the expected
arrival of El Nino continue to depress the market. Industry sources
believe that the CAODC's estimate of 16,600 wells is optimistic in
light of current commodity trends. Although drilling activity remains
strong through the winter drilling season, if low commodity prices
persist, producers will likely decrease their capital programs,
resulting in lower levels of drilling activity. As a base case,
assuming a 10% decline in 1997 activity levels, we believe that
14,000-15,000 wells will be drilled this year, representing a 10%
decline from 1997 but a 14% increase over 1996 and a 32% increase over
1995 drilling levels.
Market reaction to this decline in drilling has been overplayed.
Although we will likely not see the same degree of growth in 1998, the
majority of the larger service companies can operate at full
utilization at drilling levels of 14,000 wells per year. A decline
from 1997 drilling levels will primarily impact small players that
have not formed alliances with producers and that do not have the
critical mass to bargain effectively. A slowdown in drilling activity
will also have some positive effects on the sector. Oilfield service
companies have been running at full capacity throughout 1997, creating
shortages in both equipment and qualified operators. Even without a
slowdown in drilling activity, the growth levels seen in 1997 are not
sustainable due to the lack of available equipment and personnel.
In the short term, companies will grow through acquisitions and
related synergies created through integration rather than through
activity-related growth. Activity levels will be strong in Q1, but
will likely fall off through the remainder of the year, and
sustainable rate increases are unlikely until the demand/supply
balance comes more into line. Although we still like the oilfield
services sector, we recommend selective buying of industry
outperformers over the short term. Our focus has shifted away from
the drillers with their commodity-like services to companies with a
more specialized, value-added focus. We favour companies with an R&D
focus and our top picks in the sector include Tesco and Ryan.
Medium to Long Term
We believe the oil and gas sector should start to stabilize towards
the end of 1998. Natural gas prices should improve as the increase in
pipeline capacity created by the Northern Border project (coming
on-line in November 1998) causes prices to converge with US levels.
Crude prices are more uncertain, dependent on the balance between
demand and supply determined by the Asian crisis on the one hand and
the increase in OPEC production and other supply sources on the other.
We may see a slight shift in drilling activity towards natural gas if
light crude and heavy oil prices remain depressed.
The long-term fundamentals of the industry, including declining
reserve to production ratios, increasing energy demand in both Canada
and the US, and the expected increase in net exports to the US,
indicate that drilling activity levels of 14,000 wells per year are
sustainable over the longer term. Drilling activity in each of the
last two years has increased 15-20%, yet production levels have
increased only imperceptibly. As the North American basins continue
to mature, this trend will become more pronounced. In response to
declining reserve to production ratios, industry research and
development projects geared towards more efficient production have
been on the rise. Companies levered to advanced technologies, such as
3D seismic, underbalanced drilling, and directional or horizontal
drilling, are becoming a new focal point for the industry. These
technologies have gained market acceptance and will increase in usage
as the realization of both lower costs and lower exploration risks
come into play. And technologies developed for the extreme conditions
found in the Western Canadian Sedimentary Basin are suitable for use
anywhere in the world, providing Canadian service companies with a
platform for international growth.
We believe the OGS sector will continue to outperform the TSE 300 over
the longer term. Companies levered to specialty drilling services and
the development of new technologies will be the leaders in this
growth, followed by companies diversified into the international arena.
Tesco Corporation (TEO : TSE : $20.55 : Issued 30.3M)
* TEO is a growth oriented, technology driven, international company
with a focus on developing new technologies that improve drilling
efficiency and reduce costs. It has a history of successfully
developing revolutionary products, including the hydraulic top drive.
* TEO operates a highly successful top drive rental and sales business
with its proprietary, hydraulic top drive systems. The hydraulic
nature of the top drives allows for a smaller, portable system that
can be utilized economically in considerably more drilling
applications than traditional electric drives.
* The top drive business is insulated against industry slowdown
through its highly mobile, international focus.
* TEO recently introduced a highly mobile, integrated, underbalanced
drilling (UBD) system that will increase operational efficiency and
lower the cost of UBD by as much as 35%. No existing UBD system
offers the level of integration and related synergies offered by TEO's
new system.
* An important R&D initiative to develop a revolutionary casing while
drilling tool is underway. If successful, this project will
fundamentally change the drilling process, as wells will be cased as
drilling takes place, resulting in significant time and cost savings.
* TEO has virtually no debt and almost $40.0M or $1.30/share in cash
stores.
* We project growth in earnings of 50% in f1998 (Feb. 28 YE), 35% in
f1999, and 24% in f2000. With its strong R&D focus and international
diversification, we believe TEO will be an industry outperformer. BUY.
Ryan Energy Technologies Inc. (RYN : TSE : $9.70 : Issued 20.1M)
* RYN is a leader in horizontal and directional drilling technology
services, including measurement while drilling (MWD, measures
direction) and logging while drilling (LWD, measures geological
characteristics).
* RYN operates 18 MWD/LWS systems in Canada and 10 in the US with
leverage to both natural gas and light crude.
* RYN recently introduced its revolutionary, geological steering
instrumentation tool that adds a three-dimensional component to its
existing MWD/LWD tools.
* RYN has successfully developed an electromagnetic (EM) communication
technology that provides an enhanced platform for the collection and
transmission of a new generation of down-hole information.
* RYN acquired IDL, Inc. in late 1997 to gain access to the Tru-Vu
hardware and software system, which adds key, date-acquisition
capability to Ryan's product offering.
* RYN has a clean balance sheet, positive cash flow, and $7.5M or
0.38/share in cash.
* We project growth of 74% in 1998 and 37% in 1999. With its focus on
specialty drilling, leading-edge technology, and diversification into
the US market, we believe that RYN will outperform its industry peer
group. BUY.
Canadian Fracmaster Ltd. (CFC : TSE : $18.00 : Issued 42.9M)
* CFC is a leader in supplying cementing, acidizing, fracturing, and
coiled tubing products, services, and technologies.
* North American earnings will continue to grow throughout 1998 (30%
in 1997) with the Company's purchase of the remaining 50% of American
Fracmaster it did not already own, and with planned US expansion.
* North American operations are highly leveraged to gas. A decline in
overall activity levels will be at least partially offset by the
expected increase in the proportion of total gas wells drilled.
Expansion into the large US market also provides diversification
opportunities.
* Earnings from Russian operations (70% in 1997) are insulated against
a decline in the price of WTI as only one-third of total production is
sold on the world market (with two-thirds sold domestically).
Drilling activity levels are correlated to Russia's internal policies
and are influenced heavily by Russia's need for hard currency.
* International expansion into China, Indonesia, and the Middle East
will continue based on positive economics created by the tax structure
of these ventures.
* We project growth of 100% in 1997, 19% in 1998, and 16% in 1999; CFC
has a clean balance sheet with virtually no debt and positive cash
flow.
* We believe CFC will match or outperform its peer group and
represents a good buying opportunity for those investors willing to
bear the inherent risks of the Russian operating environment.
ACCUMULATE.
Ensign Resource Services Group (ESI : TSE : $28.00 : Issued 20.6M)
* ESI providers drilling and well servicing services. It is a leader
in specialty drilling, including underbalanced and horizontal
re-entry, and is recognized for its servicing of heavy oil wells.
* The Company's strong history of acquisitions was all funded through
internally generated cash flow or debt (no equity dilution).
* ESI has exposure to the increasingly lucrative US market through its
Caza drilling division, the second largest drilling contractor in the
US Rocky Mountain region.
* We project earnings growth of 148% in 1997, decreasing only 2% in
1998 due to high leverage to drilling activity levels and exposure to
heavy oil in servicing operations. The decline in Canadian activity
should be somewhat offset by growth in the US Rocky Mountain region.
* Ensign is off over 51% from its 52-week high of $57.00. We believe
that Ensign will perform in-line with its industry peers. ACCUMULATE.
Artisan Corporation (ADR : TSE : $10.50 : Issued 13.96M)
* ADR's drilling fleet is leveraged to shallow- to medium-depth wells,
giving it the flexibility to operate in both shallow-gas and
shallow-oil environments.
* The service fleet is leveraged to heavy oil operations and
concentrates primarily on production work. Its focus on existing
wells will insulate it somewhat against the expected downturn in heavy
oil activity, although the fleet will likely experience greater
competition as other service rig operators shift emphasis to
production work.
* ADR recently acquired 11 coiled tubing units, providing it with a
critical mass in the rapidly expanding coiled tubing market. Upon
successful integration of this acquisition, Artisan will focus on
expanding its presence in this new business area.
* ADR diversifies operations through its OPSCO'92 division, which
focuses on equipment manufacturing, production testing, and wireline.
Expected revenues and earnings should be similar to 1997.
* We project growth in earnings of 115% in 1997, 16% in 1998, and 3%
in 1999. Debt/equity is 0.22 and cash flow is positive. We believe
ADR will perform in-line with its industry peer group. ACCUMULATE on
weakness.
Bonus Resource Services Group (BOU : TSE : $4.4 5 : Issued: 43.4M)
* BOU is a leading service rig operator in Western Canada and the only
pure play in the sector.
* BOU has a history of superior growth through acquisition, which is
expected to continue into the future.
* BOU's well-maintained, diversified fleet facilitates geographic
concentration and strategy.
* BOU recently entered the international arena with the acquisition of
seven rigs in Australia, which will serve as a stable base for future
expansion into SE Asia.
* We projected earnings growth of 124% in 1997 and 15% in 1998. BOU
has virtually no net debt and positive cash flow. ACCUMULATE on
weakness.
We are currently working on an in-depth industry report, which will be
available in February. A more detailed summary is also available in
the January issue of the Canaccord 100, available late this week.
Michele Weise, CA (604) 643-7372 |
