Opinions
Mason Granger
Calfrac Well Services Ltd
CFW-T
DON'T BUY
Mar 17, 2016
Stock price when the opinion was issued
You might be interested:
The hang-up on this is debt. That’s been restraining their ability to grow. He was optimistic that they may be able to monetize their Russian or south American operations, or even their US operations in order to pay down debt. Unless they are able to monetize their US operations, he can’t see how they will get a re-rating of the story. If you own it, he would just let it ride, as the backdrop in pressure pumping is very strong in Canada.
Calfrac is the high beta choice in this market space. Its problem is its balance sheet. They did well in the 4th quarter but they have a debt at the end of $984 million against a total equity of $477 million. That’s the balance sheet of a utility, not an energy service company. He expects a multi-year bull market in oil after Q2. If that happens, this company will generate a lot of free cash and will be able to pay down its debt. In the last bull market, 2014, this was a $21 stock, so if you are willing to take the gyration of $1 or $2 over the near term you might make a lot over the next few years. However, this requires more risk tolerance than he is willing to accept in his own investing. (Analysts’ price target is 8.65$)
Last time it hit $8 was July 2015, then dropped to just over $1. Today saw a turnaround and reached an important point; yesterday, he would have sold it, but there could be a turnaround after today's gain. If this falls below $5.35 , it's an exit point. There's not much support now. It could increase 50 cents in the short-term.
He won't buy any service stocks today. It just isn't profitable; the market isn't rewarding drilling. Stop drilling and buy stocks, is his message to the oil industry. He'd rather buy Trican who are buying back stock.
There are 3 pressure pumpers in Canada and are involved in the hydraulic fracturing of reservoirs as part of the completion process after the well has been drilled. This company has struggled with the debt and has been selling their US business. At this point in the cycle, he wouldn’t be too constructive on this type of a service name because he feels the pricing power is not going to come back. You do better on owning E&P stocks at this time.