Calfrac Well Services Ltd (CFW.TO)

(Market Call Minute.) Not for the faint of heart. A leveraged business model. Has a tailwind in the form of improving service sector activity with rising oil prices, but is definitely not a blue-chip stock.

Fracking is still going to continue, but they are leveraged to the price of oil. There is a massive glut in unleaded gas. CFW-T should retrace almost to the February lows earlier this year.

A business of fracking wells and there are not a lot of wells being done that way. FRC-T is a better bet as they have lower debt.

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.

Trican (TCW-T) or Calfrac (CFW-T)? This is a better company operationally and geographically. Less debt, although they do have a lot of debt as well, so everything is not rosy. His preference would be Canyon Services (FRC-T).

Average down? You could, but it is not a mainstream oil or gas producer. The patent on that stock price is the same as all the service companies. He doesn’t think there is a sense of failure. There is a pulling back in expenditures in the oil patch and a pulling back in the usage of rigs. This has happened since time immemorial. You have a price advantage. He is just simply holding onto most of these companies, but is not increasing them.

These are great names to get leverage to the oil space, but the first names you have to be out of when you see a crack in energy. The fracers, servicers and drillers get hit first. In his opinion, we are not at the bottom of oil yet.

Energy service names were very strong in the beginning part of the year, and then they pulled back with energy prices. This is on her watch list. She is not buying energy in general, as she feels there could be another pullback in crude oil prices.

The oil/gas industry has gone through a structural shift. Basically, from an old world of higher risk/high return of drilling and finding, took a long time. Today it is mass manufacturing with a very high probability of success. Going forward, it is less likely that the price of oil is going to have big moves higher, much above the cost of production. May and June are very tough months for service and exploration companies.

He has eliminated all his service exposure except for two companies, two days ago. CFW-T’s margin expansion will not happen and budgets will not be as aggressive as they would have been two months ago. The whole thesis for buying these names has evaporated. Prefers producers who have hedging.

Likes the drillers and frackers better than ENPs. But these are stocks you don’t want as core holdings. Just hold small amounts. She thinks they will get hurt on margins in the third quarter because fracking sand prices have increased significantly. Q4 and Q1 will probably look better. You can probably enter these stocks a little lower.

With everything selling off the way it has been, this is one that he has been looking at. With all the activity in the Western Canadian sedimentary basin and the US, this is one that looks pretty interesting from an earnings & revenues standpoint. He is doing some work right now to see where his entry point will be. The best seasonality for a lot of these energy and service names tends to be Jan-May and then get out when the snow melts.

One of the premier pressure pumpers in North America. Balanced in the US and Canada. Also, have assets in Argentina and a little bit in Russia. Right now you are seeing better utilization rates. There is some pricing power as well. Bringing on new capacity over the next 12 months. Earnings potential is tremendous. He sees 20%-40% growth in earnings going into next year. Dividend yield of 2.51%.

From a valuation, growth, suite of assets point of view, she thinks this will do better than Trican Well Service (TCW-T).

Loves oil service industry. Pressure pumping sector has more upside from here. These guys specialize in it. They are at the international level. There will be increased utilization that should lead to pricing power in 2014/15. Don’t go by ‘Sell in May’ on this one. You might be okay waiting until the end of June.