In response to higher crude prices and faster-than-anticipated rig count growth in both Canada and the United States, Raymond James analyst Andrew Bradford increased his financial estimates for both the Contract Drilling and Completions companies in his coverage universe on Tuesday.
“Completions EBITDA tends to cycle with more amplitude than for drillers whose equipment tends to benefit from much greater contract coverage,” he said in a research note. “The median upward revision for the Completions group was 55 per cent vs 19 per cent for contract drillers.
“Similarly, our EBITDA estimates are above consensus across the board, but our Completions estimates are more substantially above consensus than for the Contract Drillers. The median difference between our estimates and the consensus is 60 per cent for Completions companies and 12 per cent for the Contract Drillers.”
With those increases, Mr. Bradford upgraded six of the seven companies in his coverage universe.
Three of those changes were by two levels:
* Precision Drilling Corp. (to “strong buy” from “market perform” with a $40 target, up from $20. The average on the Street is $29.66.)
“In PD’s case, the stock has somewhat lagged the group while it has concurrently gained market share. In addition, we find a multiple discount to its nearest peer where one hadn’t previously existed,” he said.
* Calfrac Well Services (to “outperform” from “underperform” with a $5.65 target from $4. Average: $14.57.)
* Trican Well Service Ltd. (to ”strong buy” from “market perform” with a $2.30 target from $1.20. Average: $1.65.)
“For TCW, the consensus doesn’t reflect the degree of fracturing demand expansion we expect in Canada (the highest rig count growth region in North America since 3Q), nor does it reflect its redoubled emphasis on cost efficiency,” he said.
He added: “We conclude that Precision Drilling and Trican Well Service represent the best buying opportunities within these two groups - both rated Strong Buy.”
Mr. Bradford also upgraded:
* Essential Energy Services Ltd. (to “outperform” from “market perform” with a 50-cent target, up from 25 cents. Average: 28 cents.)
* STEP Energy Services Ltd. (to “outperform” from “market perform” with a $1.75 target from 45 cents. Average: 66 cents.)
“Micro caps ESN and STEP also screen as highly attractive buys in this environment, though trading liquidity is a likely constraint for some investors,” he said.
* Ensign Energy Services Inc. (to “outperform” from “market perform” with a $1.25 target from 45 cents. Average: 89 cents.)
He maintained an “underperform” rating and 10-cent target for Western Energy Services Corp.
“Given recent stock performances, we perceive valuation risk in WRG and to a lesser degree ESI,” he said.