Oil and natural gas prices have been showing renewed signs of life. But they are still down sharply from their respective highs. Not surprisingly, oil and gas producers have slashed their capital spending budgets compared to 2008. This, in turn, has reduced demand and pricing at oil and gas services firms, including Trican Well Service Ltd. (TSX: T.TCW, Stock Forum).
When Trican reported its results for 2008 earlier this month, these challenges showed up in the firm’s outlook for 2009 as well as its earnings statements for the fourth quarter and full year ended December 31, 2008. That said, Trican has a strong record of managing its balance sheet, capital and cash flow and has delivered solid asset, revenue and earnings growth over the past decade. Still, although we like Trican Well Service’s business and longer-term prospects, we rate the stock a hold due to still challenging current conditions.
Calgary-based Trican’s core operations are in western Canada, where it provides cementing, deep-coiled tubing, nitrogen and fracturing services at new and producing oil and natural gas wells. Fracturing involves pumping liquids into a well to break through rock to stimulate or prolong production. This is a key growth business for hard-to-reach pockets of oil (in areas such as the Bakken formation in southern Saskatchewan) and, especially, natural gas in both Canada (particularly in northeastern B.C.) and the U.S. (including parts of Texas and Louisiana). Trican also provides acidizing and intermediate-coiled tubing services, for stimulating and reworking existing oil and gas wells.
Trican’s growing international operations include fracturing services in the U.S. and pressure pumping, fracturing and cementing services in Russia and Kazakhstan. Since the fall of 2007, Trican has also been providing coiled tubing, nitrogen and acidizing services in North Africa from its new regional base in Algeria.
For 2008, Trican reported a net loss of $70.4 million, or 56 cents a fully diluted share, versus a net profit of $111.8 million, or 91 cents a share, in 2007, despite higher revenue. Revenue rose 21% to $1 billion, with double-digit increases at each division (Canada, U.S. and “Russia,” i.e. international). The swing to a loss mainly reflected unusual items, together with higher operating costs. Unusual items included a $179.8-million charge for writing down goodwill for a U.S. acquisition made in 2007; a smaller charge related to a loan; and, compared to 2007, a much smaller gain on foreign exchange.
Excluding these and other unusual items, adjusted net profit totaled $73.3 million, or 58 cents a share, down 41% from 2007. Softer adjusted earnings reflected lower operating profit in the U.S. and Russia, partly offset by stronger earnings in Canada. U.S. results were hurt by sand supply problems (since resolved) for its fracturing operations and increased competition, which squeezed prices. Russian earnings were affected, in part, by inflation.
Over the first half of 2008, Trican used its cash flow as if the economy and commodity prices would remain strong -- and fell far short of the amount of cash it generated. But with the third quarter, it got back to spending within its means. For the full year, cash flow from operations -- up 27%, to $167.2 million -- covered net capital expenditures, acquisitions and dividends. Hold Trican Well Service, mainly for long-term gains.