Commodities prices are becoming top-of-mind around the globe. November contract West Texas Intermediate crude closed today at $87.34. Brent closed at $91.74, according to Bloomberg. Earlier in the day Oil & Gas 360® spoke to Jason Wangler, Wunderlich Securities Equity Research, discussing some of the points in his research note sent to clients today. Wangler covers E&P/Onshore Oilfield Services.

OAG360:  In your note today, you said, “I guess we are contrarian because we like the $90/bbl oil and $4/mcf natural gas levels.” Why do you...

Analyst Commentary

Jason Wangler - Wunderlich Securities Note - (10.8.14)



$90/bbl Oil Sure Keeps the OFS Names Rather Busy Too...Where We Want to Be



Following our piece yesterday about the E&Ps and how their growth profiles, at least at this point, are seemingly unchanged we thought it would be helpful to also discuss what those activity levels mean for the oilfield service (OFS) companies. These stocks have had an equally interesting, and recently depressing, run in the last 10-12 months as the industry cycle has continued to improve out in the field, but lately the stocks have told a very different story. Much like with the E&Ps we think this presents a nice opportunity for investors if they can get comfortable in the world of $90/bbl WTI oil and $4/mcf NYMEX natural gas (the world we live in today), given that most all of the E&P companies are running their programs on this level and that provides a considerable amount of work for the OFS names. As such we remain bullish on multiple names as we feel the revenue, EPS, and EBITDA growth should continue as the workflow continues to be robust. Below we walk through a few industry data points and the companies we like in this environment.

Key Points



Activity hasn't skipped a beat as the shale plays (specifically the oil and liquids regions) continue to run hard. Believe it or not the actual activity levels in the oil patch remain strong and frankly unaffected from the recent declines in oil price. Natural gas markets remain muted given the price but oil/liquids plays are still running strong as evidenced below in the rig count. We feel this shows the OFS companies continue to generate high utilizations that should grow revenues, EPS, and EBITDA in 3Q14 and beyond, assuming oil and natural gas remain at these levels or press higher.



Even with all the efficiency gains in the oil patch the drilling rig count is at 1,922 currently, which is up 166 rigs (or 9.5%) from last year, up 171 rigs from YE13 (or 9.8%) and only slightly off the two-year high of 1,931 counted just two weeks ago. The activity level can possibly be summed up best by the fact that in late September the rig count reached 1,931 which was the highest since August 2012. Since then it has fallen all of just nine rigs and is still about 10% higher than where it was when we started the year. What is even more impressive is that the count is growing so nicely even with the efficiency gains for OFS equipment/services really pushing the activity levels higher on a per-rig basis as well.



Channel checks indicated pressure pumping is getting healthier and is further evidenced by higher build-outs and acquisitions of late. The last few years have been tough for the pressure pumpers given the fact that there was so much supply in the market and not even increasing demand was able to swallow it up. That seemingly has started to change as our channel checks indicate strong utilization rates for most of the pressure pumpers and even slight upticks on price (though admittedly as of now that's mostly to account for higher costs). Additionally, market transactions like recent deals by Patterson-UTI Energy (PTEN-$29.14, Hold) to buy assets in the market as well as many players contracting for new horsepower could indicate an improving market.



The need for infrastructure remains apparent and should lead to ample announcements and workflow for the companies with oil and gas construction capabilities. The continued discussion of the US having ample and growing oil supply (we don't want to hear about oversupply given our import figures) only puts a bigger need on the transportation of oil as well as natural gas from where it is produced to where it is refined, consumed, exported, etc. The high differentials for oil of late in the Permian or for gas in the Appalachian regions are examples of regional oversupply and the need for more gathering and processing systems as well as short- and long-haul pipelines. This bodes well for companies like MasTec, Inc. (MTZ-$27.82, Buy) and Primoris Services Corp. (PRIM-$25.72, Buy) given their construction capabilities as we enter a potentially multi-year cycle of build out.



Despite all of these bullish data points the OSX chart looks like basically the opposite as sentiment toward energy has a dramatic downward bias. The OSX started 2014 at about 280 and shot up to the 310 level by mid-year before falling to the current 255 level. That would mean the oilfield space rose about 11% before falling about 18% from the peak and now sits down about 9% on the year despite all the bullish data explained above. As such, we think there is ample value in the space. Below we highlight names with compelling valuations.



I guess we are contrarian in that we like the $90/bbl oil and $4/mcf natural gas levels and continue to like names with high-spec equipment as it garners strong pricing, good margins, and high utilizations. We believe there is ample value in names like Pioneer Energy Services (PES-$12.02, Buy) and Seventy Seven Energy (SSE-$22.22, Buy) at these levels; given the drop in the stock due to macro factors believe Patterson-UTI Energy is becoming more compelling. These names have high-spec drilling rigs and completion crews (except PES), they provide other oilfield services that are vital to the industry, and they are seeing high utilizations today.



Additionally, names with a technological advantage or unique structure also give us confidence in their value. We like differentiated stories like Superior Drilling Products (SDPI-$5.64, Buy) given its Drill-N-Ream technology that could become a force in the industry; Natural Gas Services Group (NGS-$23.30, Buy) due to its strong presence in the compression market, growing revenues, and EBITDA and unique C-Corp structure in the space; and TETRA Technologies (TTI-$10.17, Buy) as its recent acquisition at the MLP level could drive strong gains due to its GP ownership and Maritech is finally nearing an end.  


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