Canadian energy services stocks – the drillers, fracing companies etc. – are red hot now, at a time when they are usually reporting their worst quarter of the year.
But the huge trend towards deeper, more technical and more expensive horizontal wells is driving revenue, cash flow – and stock prices – for these companies.
The second quarter in Canada (April-June) is usually the slowest of the year, as provincial laws say the heavy equipment used by the industry can’t be on the roads, as the roads thaw.
Trican Well Services (TCW-TSX) just reported a 125% increase in revenue in Q2 2010 over Q2 2009, and a profit vs. a loss for Q2 last year. Most Canadian services companies are not – year in and year out – profitable in Q2. Its stock is up 50% in just 3 months.
Calfrac Well Services (CFW-TSX) and Canyon Services Group (FRC-TSX) also reported cash flow numbers well ahead of market expectations.
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The US major service companies have already issued their second quarter numbers, with rapidly increasing activity in both oil and gas shale plays across the US driving big revenue jumps for Weatherford International (WFT-NYSE), Halliburton (HAL-NYSE) and Schlumberger (SLB-NYSE).
In Canada, it’s the new Cardium and Viking oil plays, and the Montney & Horn River gas plays driving revenue growth for the service companies.
Not only is the well count expected to be up 35% in Canada this year to over 11,000 (still very low compared to the last decade) but the wells are getting deeper – an average 1756 metres (just over a mile), according to the Daily Oil Bulletin, and that’s the deepest since they started tracking statistics in 1988.
As wells get deeper and more complex, targeting more varied and complex formation types than ever before, service companies will continue to increase their revenue per well – good news for investors.
The horizontal drilling/multi-stage fracing revolution will give the services sector strong growth for years. The number of horizontal rigs is increasing steadily in North America, now accounting for more than 40% of all activity.
The best service companies have transformed into hi-tech operations, driven by science and engineering and are no longer a commodity business, based on just manpower and labour.
My next stock pick for subscribers is a fast growing, profitable services company that uses its patented hi-tech procedures to not only increase revenue AND reserves for producers, but also eliminates one of the biggest environmental problems facing the industry. I will be releasing it to subscribers within the next two weeks – mid August.
My last pick is up 20% in three months, and is paying me 7% a year dividend.
It has been 12 years since the Barnett shale in Texas started producing, which opened the door worldwide to get hydrocarbons out of rock, not just the tradition sand. And the producers and service companies are still finding new oil and gas basins in the well-drilled North American continent – thought to be a no-growth area a decade ago.
The international potential for shale plays, which use horizontal drilling and fracing, has barely been scratched.
Retail investors are just waking up to the long term potential of this industry, and the trends driving it.
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