CET - Change of HeartI've recently reconsidered and re-evaluated my thoughts around CET. At the risk of Auburn throwing an 'I told you so' in my face, the recent run up of oilfield services stocks made me took a look at market participants that hadn't seen the same level of price appreciation. CET is one of these companies. Here is a couple of reasons why I think CET should be in a position to double or triple its share price in the next quarter:
1) It has not seen the same level of price appreciation as the OFS market and drilling peer group through the early stage of the recovery
1 year return for PHX is 1.53% vs CET -22.92%
6 month return for PHX is 157% vs CET 32%
3 month return for PHX is 79% vs CET 61%
YTD return for PHX is 5% vs CET 0%
Looking at a broader spectrum of North American land drilling exposed companies (HP, NBR, PD, ESI), we see more of the same:
YTD returns ranging from 1.5% to 26%, with an average of 13% (versus CET 0%)
3 month returns ranging from 28% to 117% (versus CET at 61%), with all except PD returning 70% or more (70%, 99% and 117% respectively). PD had it's run up start earlier.
6 month return ranging from 25% to 57% (versus CET at 32%). Only HP was lower than CET and HP is wildly undervalued. Largest North American driller, zero debt, 4% dividend yield.
Other drilling exposed names like CEU (who I was advocating for 3 months ago) have seen their share prices increase by 150% since November.
On the surface of this alone, there's meaningful upside on the current price today versus the peer group (30 - 50%), ignoring what's to come in the next couple quarters.
2) CET has meaningful exposure to increasingly improving markets and geographies
CET is probably the 3rd largest directional driller in Canada. Smaller than Pacesetter (owned by Schlumberger) and PHX, but likely larger than the remainder. Even so, they can provide motor assist for RSS jobs for Pacesetter (using a conventional motor to assist Rotary Steerable), but I digress.
In the US, from my research, CET is mostly exposed to the Permian and the Mid-Con. Mid-Con sucks right now (17 rigs in OK vs mid-50s in Q1 2020) but the Permian is seeing a bit of a recover in activity. From some historical research, estimates suggest that they might hold about 7-8% market share in the Permian.
Permian rig count in Q3 averaged 124 rigs for the quarter. Based on Baker rig count info, Permian rigs in Q4 averaged 153 rigs or 23% higher. Last week's rig count suggested 188 rigs working in the Permian, another 23% increase versus the Q4 average. Suffice to say, this should suggest that Q4 numbers out of the US should look improved relative to Q3. Historically, the US has been 60-75% of their business, depending on the quarter.
In Canada, the same is true only greater in terms of the percentages. Q3 average rig count was a measely 48, versus Q4 average of 88 (84% increase) and last week's Baker count of 171 (95% up).
While CET has often lagged its peers like PHX in translating revenue to the bottom line, with the subsidy programs in place and the amount of costs that have been removed from the business, and positive operating cash flow and/or free cash flow generates a pretty incredible yield on a $9 million equity value (market cap) today.
They will continue to benefit from government subsidy programs like the CEWS in Canada through Q1 and quite possibly realize an entirely forgivable incremental PPP loan in the US from the expansion of that program. The last go around, CET was able to access $1 million (CAD) of a forgiveable loan under PPP. If they are able to do the same this iteration, that's an 11% boost to equity value right there!
3) CET's multiples are lagging its peer group
PHX trades at 0.5x Last Twelve Months revenue and 4.0x LTM EBITDA and 0.8x Next Twelve Months consensus revenue and 5.3x NTM consensus EBITDA. PHX's price to tangible book value of equity is 1.1x.
CET does not have a great EBITDA margin track record but will be a benefactor of meaningfully reduced costs. With any positive EBITDA contribution from recovering activity and wage subsidies, these multiples support a higher Enterprise Value than $9 million. Similarly, CET's price to tangible book value is 0.2x, which suggests a meaningful opportunity to trade up while still being supported by hard assets in the business.
I still stand by the notion that they should trade at a discount to PHX given PHX's larger footprint, better technology (IMO) and their history of generating cash flow (supported by a dividend), but this level of value gap doesn't make sense. Not just against PHX, but against the broader energy services market as a whole.
There are going to be fewer wells drilled in 2021 than almost any other year, but there are going to be a lot of high value wells in Canada and the US that CET should have an opportunity to participate in with a much lower cost structure than they've had in the past. I still don't think this is a $2-$6 stock like Auburn may (at least not during the period that I expect to hold the stock), but this is easily an opportunity to double or triple your money and then some by the time Q1 financials are released in early May.
Do your own DD and GLTA. Full disclosure - I do now own shares.