Calfrac Well Services Ltd (CFW-T)

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.

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.

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

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.

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.

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.

He is interested in pressure pumpers at the moment, and is trying to position himself along the fracing value chain. He owns Trican (TCW-T) instead. This has much more US exposure, a much more competitive market.

Oil has come off the lows of a year ago. The trend line is broken and we are seeing higher highs and higher lows so you want to buy into a dip if you believe oil will get better, which he does not. Trim exposure if it does not break the $5 resistance.

This was on the edge of bankruptcy not long ago. Along with the entire service sector, they are benefiting from a massive increase in CapX this year, due to rising oil and gas prices. In Canada there are 3 fracers, and this is his least favourite. While they have done a pretty good job of avoiding covenant violations, they don’t have as much flexibility as he would like them to have. (See Top Picks.)

For companies like this, it is all about leverage to the upside. Clearly the cycle has turned. Gas companies are spending more money on fracing, so they will make more money. The issue is, how much more, and is the capacity still in surplus or not. If oil prices get to $60 plus, there is probably more upside for the fracers.

(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.