Posts from the ‘Oil Stocks’ Category

Jul 24

Leader Energy Services – Finally a Move in the Stock

I had large moves over the last couple of days in 2 stocks that I own, Leader Energy Services and Prophecy Coal. I want to talk about one of them, Leader Energy Services (lea.v), in more detail in this post.

To be perfectly honest I’ve been pissed off with myself for buying as much of this stock as I did. Its affected my decision making in other stocks and that has cost me. Because I didn’t want to be too leveraged to the Oil Services sector, owning so much of Leader has kept me from feeling comfortable holding on to Open Range. When the market looked like it was going to tank because of Europe, I went to lighten up on some stocks. Because Leader was illiquid, it was difficult to sell without cratering the share price. Open Range has lots of liquidity, so rightly or wrongly I dropped Open Range and held onto Leader.

Well now Open Range is almost $7 and Leader was, until Friday, languishing under a $1. I had clearly made a bad choice and it was discouraging. Fortunately Friday’s move of 20% in the stock helped wipe away some of those frustrations.

Leader is the small (~$20M market cap, $35M EV), illiquid little stock of a oil services company located here in Calgary.

The Oil Services Leader Provides

Leader provides the following services:

Coiled Tubing: you put coiled tubing down the well generally with the intent of pumping some sort of fluid thru the tubing down into the wellbore. There are a whole bunch of reasons you might do this, and they are actually described in good detail on wikipedia. Calfrac also has a good description.
Nitrogen Services: One of the reasons you put coiled tubing downhole is to pump a fluid down. Nitrogen is sometimes pumped down to either flush out unwanted materials trapped in the wellbore or to lighten the fluid coming out of the formation, making it easier to flow more readily.
Fluid Pumping Services: This really goes part and parcel with the tubing. After you have injected the coiled tubing, you need a pump to get the fluid down the hole

The coiled tubing operations are more and more in demand. Raymond James recently described the market as extremely tight. The tightness is also mentioned anecdotally here , here and here. Xtreme coil explained the usage in horizontal multi-frac wells succinctly with this snipit from their Q1 release:

“[There is] robust demand for coiled tubing services, especially in developing complex resource plays where long horizontal wells are the norm. Since these wells are completed with multiple-stage fracture treatments, they require cleaning out after all the stages of treatment are completed. The application of coiled tubing can dramatically improve the outcome of this complicated work scope.”

A Growing Business

Leader has been growing their business. Below is the quarterly EBITDA for the company for the past 3 years. Note that the cyclical nature of drilling in Alberta (spring break-up) always leads to a weak second quarter, but ignorning that the trend is clearly bottom left to upper right.

Margins have held up well too. Below is gross margins over the same period.

Too Much Debt

The biggest problem that Leader has is the amount of debt on its balance sheet. There is about $14M in debt right now, which compares to a company Enterprise Value of $31M, making the company fairly leveraged, particularly for a tiny company in a cyclical business.

I think this is why the stock performs so poorly every time there is a worry about European debt. When you have a lot of debt you are a slave to the underpinnings of the debt market. I have heard the company expects to devote cash in 2011 to reducing the debt load. I think this is a good idea; investors will be a lot more confident in the long term performance of the stock if it isn’t so leveraged.

The debt load used to be worse. Going into 2008 the company have over $31M in debt. This was obviously not a great position to be in when the debt markets seized up. To deal with the problem at the time they had to issues convertibles at a low price and restructure and it got messy. Hopefully Leader has learned their lesson that debt is ok if its done in moderation. The commitment to using free cash to reduce debt instead of to fund growth suggests they have.

And they should be able to reduce debt quite quickly. Leader had operating cashflow of about $6M in 2010. They generate $4.5M of operating cashflow in Q1 alone. By the end of the year they should be able to make a good sized dint in their long term debt.

Peer Comparison

Leader compares well to its peers. Below I have provided a comparison I did a while ago of a number of the oil services companies that (in most cases) specialize in coiled tubing and/or pressure pumping. You can see that Leader is at a discount to most of them.

For all the EBITDA calculations I tried to ex-out any one time charges or non-operating effects. Note that of the above companies that are listed, that Technicoil Group was taken over by Essential and so the stock price is TEC is as of the takeover date. Open Range is difficult to value because of the natural gas business, so I used Canaccord’s EBITDA estimate for Poseiden (the name of Open Range’s services business) for 2011, and I subtracted a simple $40,000/boe flowing using the 2011 estimate of production to ex out the exploration business).

Dalmac is the only company cheaper than Leader. They might be worth a look themselves.

There is a pretty decent report put out by some firm called eresearch that has a similar comparison done.

Conclusion

So I guess that my investment thesis is two-fold. The company is undervalued compared to its peers, and I suspect that valuation gap will close as the company brings down its debt. Second, as the company pays down debt that enterprise value should move from the debt into equity. And third, the company is in a business that is experiencing growing demand and so margins should stay high for at least the short and medium term, allowing the company to generate a lot of cash and potentially begin to grow their business in 2012 once the debt load has been reduced. The stock has been slower to move than many of its larger peers that have brokerage attention (ie. Open Range), but hopefully Friday’s move is evidence that the move is upon us.

Jul 21

Arcan Shows some Good Results at Ethel

In other news last night, Arcan came out with an operational update that showed some excellent IP30 results. The news release detailed the following:

Two wells drilled at Ethel (1-04 and 5-35) showed IP30 of 732 and 681 boe/d. Ethel was thought by some to have thinning net pay, and so there was some concern that results would be poorer then the Deer Mountain unit wells. So far those folks have been wrong.
Arcan provided a comparison of the two new Ethel wells with another older Ethel well drilled last year (10-27). The two new wells highlighted in this NR had about double the cumulative production that the 10-27 had in the first 30 days. The wells are quite close to one another, so this could presumably be attributed to the new frac design that Arcan is using. It is good news that the new fracs are making such a difference.
The implementation of waterflood is now scheduled for Q4. This had previously always been somewhat vaguely scheduled in 2012. Great news that they can bring on waterflood sooner.
Current production is 4,400boe/d. This is up 500 boe/d from their last news release in early June.

In all it was an all good news report. Good for Arcan, and good for Second Wave by association. I am glad that Arcan is my largest position (by far) and that I have been adding to Second Wave. I may add more to Second Wave this morning if it opens flat on the news.

Jul 21

Reshuffling the Deck on the Jaguar Miss

The miss by Jaguar yesterday was disappointing. If you had wanted to look at the bright side you could have focused on the June production number and the performance of Turmalina and Paciencia. But I have learned enough to know that when a “dog” digs a deeper hole, the market will be more than willing to push him down it.

Therefore I really lightened up on Jaguar yesterday. I cut my positions in half in all accounts. One benefit of knowing a company well, and knowing just how good or bad the results are, is that you can sometimes act before the market fully prices in those results. Yesterday I sold a lot of Jaguar above $5 (Canadian) in the first few minutes before the market took the stock down into the $4.80s. Once you have decided to sell, I do not believe you should hold out hope for a better price. Just get out – and that’s what I did.

Here is what I sold and here is what I decided to jump into with some of the proceeds (note that as shown I did lighten up a little on Jaguar on a couple days before the release – call it a premonition but I wasn’t comfortable with the risk I had on the table given the track record of the company).

As the order list shows, I added to OceanaGold, Mercer International, and I started a position in Novus Energy. I wish that I had owned a little more of OceanaGold and a little less of Jaguar to begin with. There was a time when they had equal weightings but I liked the upside of a Jaguar turnaround story better. Unfortunately that story is still on hold, at least at Caete. Now, my positions in Jaguar, OceanaGold and Lydian are all comparable.

I will probably wait and see what Jaguar management has to say on the conference call in August before I make any more moves with the stock.

I plan to talk about both Mercer and Novus more in separate posts.

Jul 15

Big News for Arcan (and Second Wave)

I’ve owned Arcan Resources (ARN.v) since November 2009, when Sculpin2, an Investors Village poster, introduced me to the company. Its been a love, hate relationship, with the hate culminating during the second half run last year when pretty much all stocks went up but Arcan did nothing.

Now, I am rarely so patient but in this case I was, and I held on to Arcan through it all, increasing my position in the stock until it was (and is) the largest in my portfolio. Why? Because it was clear that the Beaverhill Lake formation had a lot of untapped oil, I was confident that clever reservoir engineering now equipped with the new weapon of horizontal mult-fracs would eventually figure out how to tap that oil is a consistent and profitable way (being one of these myself I may be biased in my enthusiasm here), and it was clear that Arcan had a wonderful land position to take advantage of that success.

Well it looks like that investment is really beginning to flower now. Last night Crescent Point Energy released this news release.

Identified the Beaverhill Lake formation around Swan Hills as an emerging oil resource play that they have taken a large position in
Announced the “acquisition of ownership and control over 16,750,000 common shares of Arcan, representing approximately 19% of the issued and outstanding common shares of Arcan”
Announced three recently successful wells in the area producing well above their expectations, “with average first-month production rates exceeding 1,000 bopd gross.”
Significantly expanded their capital budget to drill wells into the Beaverhill Lake, saying they “could spend up to an additional $100 million on capital expenditures in the play this year”

This is all great news. The evidence is suggesting that Crescent Point may eventually take Arcan out. But maybe not. I’m not in Arcan for a short term takeover so I would be equally happy to let the company continue to drill out their land and increase production. I suspect there will be more surprises (like these recent 1,000+bbl/d IP wells) as the engineers and the geologists figure out better ways to optimize getting the oil out.

Second Wave is looking better and better as well. I’m glad I bought what I did a few days ago, but I do wish now that I had been even more aggressive. Oh well, that’s how it goes.

There was also a good post on Seeking Alpha about Arcan that came out last night, discussing the possibility of a takeover.

Update

I caved and bought more Second Wave this morning. It probably sounds stupid to buy a stock up 10%. Maybe. But this is a case where there are good well results coming out, where the stock is still trading within the range it has traded at before the news came out, and you should start to see more investors take an interest in the story as they hear about the Crescent Point interest in the play. I am betting this 10% is the first of many.