Oil Services Sector: Should Investors Buy or Sell?

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

Karen Thomas, MSc, CFA

Author Bio

Karen Thomas began her investment career in 1998 and spent more than a decade working as an equity analyst and portfolio manager at investment management firms, including a major mutual fund company and a major pension plan. After gaining extensive experience in the investment industry, she decided that individual investors deserved access to the same knowledge and insights to help them take greater control of their financial futures. After the birth of her second daughter, Karen left her investment management career to write for The Motley Fool, where she has been helping investors make sense of stocks and the stock market for more than 10 years. Her work focuses on identifying undervalued opportunities and helping investors take a long-term approach to building wealth. Outside of investing, Karen enjoys spending time with her family and staying active outdoors.

Education

Master of Science (MSc) in Finance
Bachelor of Commerce, major in Finance and minor in International Business
Chartered Financial Analyst (CFA) designation, earned in 2000

Areas of Expertise

Energy stocks, long-term investing, value investing, and contrarian investing.

Social Media Profiles

Favorite Investment Quote

"Be fearful when others are greedy, and greedy when others are fearful." — Warren Buffett

Published March 5, 2014 2:58 pm EST

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.