As Oil Rises, Buy From the Oil Services Sector for its Massive Returns Potential

Companies such as Pason Systems Inc. (TSX:PSI) are seeing a more than doubling in cash flows amid increasing activity levels.

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Here we are again: we had another day of oil price gains on Friday, and with the price of oil currently at just under $59, we have to think not only about the oil producers, but also about the companies that the producers hire to drill and extract that oil, namely oil services companies.

With Western Texas Intermediate (WTI) oil prices having risen from lows of below $30 in January 2016 to current levels of just shy of $59, for an almost doubling of the commodity, producers will eventually respond with even more drilling when they think this price is sustainable.

So, is oil above $50 sustainable?

Well, oil was above $50 for a while back in February of this year, and at today’s prices, it has hit highs not seen since 2015. Oil has consistently traded above $50 since the end of September.

Oil services companies and their stocks are historically more volatile, which means higher upside and higher downside. We have arguably seen the downside in this cycle. And the longer that oil prices are sustained at these levels, the more we will see the upside.

Precision Drilling Corporation (TSX:PD)(NYSE:PDS) has good leverage to a North American recovery in drilling. Its shares got killed in the last two years and fell to approximately $3 from well above $14 in 2014, and they are now trading at $3.44. That’s a fall of 79%.

While the company reported a loss per share in the third quarter, the loss was smaller than expected, and it was 44% better than last year (a loss of $0.07 versus $0.16 last year). Revenue increased 47%, and the company generated $37 million in cash flow.

The company had more than double the number of rigs working than it had last year, and pricing remained firm, as the sector continued to ramp up.

Precision has high-grade rigs to offer as a result of recent capital investment, and this should enable the company to thrive if the market is, in fact, recovering.

As a more geographically diversified name, with a more differentiated product offering, Pason Systems Inc. (TSX:PSI) represents a lower-risk way to get exposure to this sector. The shares have been volatile, but relatively less so.

Pason’s shares fell from $35 in 2014 to just over $16 in 2016. Shares have hovered in the $16-18 range since then. That’s a fall of 54%.

The third quarter saw a 67% increase in revenue, a 118% increase in funds from operations, a 150% increase in free cash flow to $11 million, and with no debt on its balance sheet and a dividend yield of 3.8%, the stock is a good choice in this group for a little less risk.

So, as we can see, this is a highly volatile sector, but, if we are now on the road to a recovery, we can get a big boost to our portfolios in the months to come.

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 owns shares of Precision Drilling Corporation. Pason is a recommendation of Stock Advisor Canada and Dividend Investor Canada.

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