Oil Services Sector: Should Investors Buy or Sell?

Should investors buy the oil services names in anticipation of pricing power in 2014?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

A few weeks ago, I reviewed Mullen Group (TSX:MTL) and Precision Drilling’s (TSX:PD)(NYSE:PDS) fourth quarter results, where we saw a return of revenue momentum and renewed optimism about next year. Let’s check in with some other oil services names and their fourth-quarter results.

Trican (TSX:TCW) reported a 14% increase in revenue for the quarter, and Calfrac’s (TSX:CFW) revenue increased 26%, while EPS was flat. Activity is strong but we have yet to see the pricing power that comes with strong activity levels.

These results echo the struggles that Mullen Group reported in its fourth-quarter results. Results were below expectations due to margin pressure. Operating costs were higher than normal, thus driving operating margins 6% lower versus last year. Productivity was lower than usual and operating expenses such as wages, fuel, and repairs and maintenance were higher than expected.

Weakness in pricing and increased costs also weighed heavily on the results of Trican and Calfrac. Trican saw pricing decreases and increases in costs that ate away at the company’s margins. EBITDA margins in the fourth quarter were 6.8% compared to 7.7% last year. Calfrac also saw a deterioration in Canadian EBITDA margins, but the strength in Latin America and Russia more than offset this.

Stocks move in anticipation of improving industry conditions

Calfrac shares have a three-month return of 17.8%, Trican shares have increased 10.85%, Mullen Group has decreased 2.3%, and Precision Drilling has increased 31%.

Foolish bottom line

Clearly, the highly competitive market in Canada is a concern. But there appears to be optimism with regard to the pace of development of unconventional resources and its impact on activity levels and ultimately, pricing. Remember, the oil service names are a volatile way to invest in the energy space. So timing is very important.

These stocks have seen great increases in good times, but the reverse is true in bad times. Looks like with the anticipated increases in drilling activity and the renewed strength in natural gas prices, these may be the good times.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas holds shares of Precision Drilling.

More on Investing

energy oil gas
Dividend Stocks

2 High-Yield Energy Stocks to Buy as Recession Approaches

Energy stocks such as TC Energy and Canadian Natural Resources allow investors to generate income even in recessionary times.

Read more »

green power renewable energy
Dividend Stocks

3 Top Dividend Stocks to Drive Your Passive Income

These three high-yielding, safe dividend stocks could boost your passive income.

Read more »

Dial moving from 4G to 5G
Tech Stocks

TFSA Investors: 2 Canadian Stocks With Unbelievable Staying Power 

Amid economic uncertainty, investors look for stocks that can thrive in any crisis and grow long term. Here are two…

Read more »

protect, safe, trust
Dividend Stocks

TFSA Wealth: How to Earn $363 in Monthly Passive Income for Life

Canadian investors can harness the power of the TFSA to generate steady tax-free passive income for decades.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Millionaire: How to Turn $40,000 Into $1.2 Million for Retirement

Here's how TFSA investors are using the power of compounding to buy top Canadian dividend stocks to build retirement wealth.

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Superb Income and Growth Stocks for Every Portfolio

The market is full of superb income and growth stocks, but not all belong in your portfolio. Here are three…

Read more »

stock market
Stocks for Beginners

Worried About Stagflation? 2 Canadian Stocks for All Market Cycles 

Stagflation delays economic recovery. You can keep your portfolio stagflation ready with these Canadian stocks that are suitable for all…

Read more »

exchange traded funds
Stocks for Beginners

Why BMO’s Global Infrastructure ETF Is the Only TSX Stock You Need

BMO Global Infrastructure Index ETF (TSX:ETF) is the only TSX stock you need for passive income, solid cash flow, and…

Read more »