Stockchase Opinions

Eric Nuttall Calfrac Well Services Ltd CFW-T COMMENT Jul 19, 2017

This operates in Russia, Argentina, US and Canada. Fracing demand, in both Canada and the US, exceeds available supply. As pricing has been going up, this has been a beneficiary. What keeps him from investing in this is their balance sheet. They simply have too much debt, and it removes their strategic flexibility.

$3.150

Stock price when the opinion was issued

oil gas field services
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HOLD

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.

HOLD

Along with everyone else in the space they had a very difficult time for a couple of years and they will likely continue. The companies around today will be the survivors. We are some away from a robust drilling sector.

RISKY

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 $2 over the near term you might make a lot over the next few years. However, this requires more risk tolerance than he is willing to accept in his own investing. (Analysts’ price target is 8.65$)

COMMENT

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.

DON'T BUY
It does better in the springtime before summer driving season. This year's it's seen lower-lows and -highs. It's below its 200-day moving average. Oil price has plunged. Can CFW benefit from current $53 oil?
DON'T BUY

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.

HOLD
CFW vs. TCW Issue has been the balance sheet. Lots of debt. Concerns about solvency. Upswing in the sector is helping them. Whereas TCW has a clean balance sheet with rising fundamentals that's all going to equity holders. TCW is a safer blue chip.
DON'T BUY
It has lagged a strong sector so not a good one to buy. If you want the sector try OIH or XES.
HOLD
Not as bullish on energy services (not as much drilling). Good job at paying down debt. Capital allocation will ensure less activity in drilling services.
DON'T BUY

Oilfield services firm that has big fracturing technology presence. Horizontal drilling and shale boom not as strong. Very dependent on energy prices. Lots of assets that must be carried on the books. Not investing at this time.