This isn’t the first time bankruptcy fears have pummeled Trican Well Service (TSX: TCW). In 2008, shares fell 80% amid a global recession and collapsing oil prices. Then, in 2016, Trican stock fell 90% from its highs, bottoming at just $0.45 per share.
Recently, shares have taken a turn down yet again, currently trading around $1.40. After losing roughly $13 million last quarter and armed with just $22 million in cash, then end appears close for Trican. But it’s certainly not guaranteed. The last time it avoided insolvency, shares rallied more than 1,000%.
Is Trican a 10-bagger, or will investors lose everything?
Scrambling for cash
Trican’s management team is doing everything in its power to shore up the company’s capital strength. In December, it announced that it would be selling its 5.25 million share stake in Keane Group. This move alone will clear up nearly $50 million in cash.
But this was a move clearly made out of desperation. Keane Group shares are trading at their lowest levels in history, and Trican had to forfeit some of the proceeds to an underwriter. Selling depressed assets at fire-sale prices typically isn’t a path to long-term wealth.
Limited debt provides critical breathing room
Fortunately, the company has under $100 million in debt and should be able to access the debt markets. For that, management deserves major kudos. In 2015, Trican’s debt-to-capital ratio was around 50%. Every quarter since, Trican has reduced its leverage, with a current debt-to-capital ratio of just 12%.
But with quarterly losses, weak pricing, and rising interest rates, it’s difficult to forecast just how long Trican can use this lifeline. If operating conditions don’t improve, it doesn’t matter how savvy Trican’s management team is.
According to Jefferies analyst Brad Handler, the duration and magnitude of today’s industry challenges are “too apparent” to ignore. Even higher oil prices haven’t stoked more business. On the most recent conference call, Trican’s CEO noted how higher oil prices “did not result in urgency from our customers to increment nor get second-half capital programs activated early.”
Trican will survive, but can it rise 1,000%?
Trican’s management team continues to be confident in the company’s future — so much that they are using funds to buy back shares at historically low prices. “At current share price levels, we expect to make significant repurchases on commencement of a new program,” CFO Robert Skilnick recently said. Management even indicated that they would take on debt (by utilizing their outstanding credit line) to repurchase shares.
Their bullishness hasn’t always rewarded shareholders. In 2018, the company repurchased millions of dollars’ worth of shares for an average price of nearly $4. Shareholders have experienced a 70% loss on that investment.
Judging by the company’s ability to take on more debt and sell assets, it’s highly unlikely that Trican will go bankrupt this year. Due to management’s decision to de-lever the balance sheet since 2015, the company likely can withstand many years of losses.
But survival doesn’t guarantee another massive increase in share price. According to a survey by the U.S. Federal Reserve, oil executives think U.S. crude prices will end 2019 at US$60. Production growth also seems possible this year. But, notably, utilization of equipment by oilfield services like Trican continues to fall from 43 points to just two points in the fourth quarter. If utilization falls any further, the industry will enter a period of net contraction.
A report from GlobalData highlighted that as oil and gas companies rationalize production in light of lower energy prices, “the number of market opportunities declined considerably for oilfield service providers” like Trican, which lead to an industry-wide consolidation. Long term, Trican can capitalize on industry consolidation considering its strong financial position, but this could take years to play out.
Trican isn’t facing bankruptcy, but don’t count on a 1,000% return stemming from its survival.
