By guest writer Michel Massad,
publisher of Beating The Index.com
Energy stocks across the board have been hit hard in the last
quarter -- both producers and service companies. Stock charts have
been laid to waste. Neither sexy resource plays nor respected
leadership were enough to stem the bleeding.
But shareholders of three energy services companies -- Gibson
Energy (
GBNXF
), Black Diamond Group (BDIMF.PK) and Horizon North Logisitics
(HZNOF.PK) -- are laughing all the way to the bank, as their stock
charts are at or near all-time highs. (See OGIB story on Black
Diamond
here
.)
And strangely enough, they are all oil sands related. I say
strangely because analysts have not been kind to the producers,
warning investors that lower Canadian heavy oil prices could stay
for a couple years, impacting profitability. And there is no close
resolution on increased pipeline capacity to handle any increased
oil sands production.
On the services side, Canadian securities firms like National
Bank and Raymond James have been telling their clients to sell
oilfield services stocks for weeks.
The first two oilfield services companies are Black Diamond
Group and Horizon North Logistics, which derive a substantial
percentage of their revenue from business related to Alberta's
oilsands.
They provide a turnkey-style camps and catering service
offering, including manufacturing, transportation and installation,
servicing, as well as catering. These companies basically make
money from renting beds to oil sands workers, including charging
them for management and catering. The work camps are equivalent to
small villages with a population exceeding 3,000 souls in some
instances.
(click images to enlarge)
Black Diamond Group
Horizon North Logisitics
But oil sands stocks have been even worse performers than the
energy sector, so why do these two oil sands-related stocks have
the best charts in the North American Energy sector?
Because the market pays for certainty.
The catering/camp management business enjoys a side the market
loves, and that's the predictability of the recurring revenue base.
When a contract is signed, it's typically for a 2- or a 3-year
period. This means that the market sees the current weakness in
commodity pricing as temporary, since these companies will be able
to weather any violent storms in the near term as they continue to
grow.
There's also another way to see things. According to the
Canadian Association of Petroleum Producers' annual forecast,
Canada could emerge in the top three producers in 2030. Bitumen
will dominate production growth, and is expected to more than
triple to 5 million bopd by 2030 from 1.6 million bpod in 2011.
The market is clearly looking towards billions of dollars in
capital expenditures required to add more than 4 million of barrels
of oil in production. More barrels require more manpower, which
equals more work camps. Just imagine how many beds will be required
to accommodate this growing workforce!
Welcome to the bed business. And it's a huge market, judging by
the number of beds in the Ft. McMurray/Conklin region, which
currently stands at 58,499 beds -- with 12% of these beds greater
than 15 years in age (replacement coming up). To put it bluntly,
these companies are building cash flow by increasing the number of
beds they rent.
Horizon North Logistics estimates new oil sands project capital
spending in this market could exceed $100B through 2016, with
future additions totaling more than 21,000 new beds.
This business is not limited to the oil sands industry.
Accommodations are in demand for infrastructure projects,
unconventional oil and gas operations and mining camps, all of
which diversifies the customer base.
Black Diamond estimates more than 50,000 beds will be needed
over the next five years between oil sands, Northern BC, NW
Territories and Eastern Canada. What's not to like about a visible
pipeline of beds? It's more like a visible pipeline of profits.
Besides the camp business, both companies are active in the
oilfield services, selling anything from matting to a full array of
nuts and bolts required on a drill site.
Horizon North Logistics pays an annualized $0.20/share (payout
ratio of 19%) and has recently posted an all-time record quarterly
EPS. Its 2012 capex program has been increased by $20mm to $120mm,
with $85mm dedicated to expanding its bed rental fleet by 1,800
units. Analyst targets vary between $8.25 and $9.50.
Black Diamond pays an annualized $ 0.72/share (9% increase in
2012 with a payout ratio of 25%). Its 2012 capex program has been
increased by $25mm to $95mm. Analyst targets vary between $24.00
and $27.50.
Our third stock is Gibson Energy (GBNXF.PK), which went public
on June 15, 2011. Gibson is an integrated energy infrastructure
company with five business divisions: truck transportation,
terminals & pipelines, processing and wellsite fluids, propane
distribution, blending and marketing of crude oil, NGLs and refined
products.
Gibson's business segments allow the company to earn revenue --
several times -- from a barrel of crude oil during its life cycle.
I would say it's THE most vertically integrated company in North
America that is neither a producer nor a refiner.
Its terminals at the heavy oil hubs of Hardisty and Edmonton,
which have lots of room to grow, give it a big touch to the oil
sands.
Its marketing segment purchases the crude from the producer at
wellhead, transports the barrel via truck transportation and stores
it in a Gibson Terminal. Gibson has one of the largest trucking
fleets in Canada, and one of the largest for-hire independent
trucking fleets in the US. And the truck market has become tight,
with pipelines out of Canada and the Bakken basically full.
Analysts are expecting rate increases here.
Revenue is received from selling condensate to blend the barrel
(a heavy oil barrel has to be blended with condensate in order to
meet pipeline specification as it makes the oil easier to move --
less gooey). The product is then moved downstream to a refinery --
such as Gibson's Moose Jaw refinery -- to be processed.
And when the company is not "touching" a barrel of oil during
its lifecycle, it is making money from the volatility and widening
differentials in Canadian oil prices as a marketer. Contrary to
E&P companies that suffer due to lower realized price per
barrel sold, widening differentials present Gibson with an
opportunity to capture higher marketing margins.
Its pipelines segment also profits from capacity constraints due
to fast production growth. In order to capitalize on rising
production volumes across North America, Gibson is working on
several projects, including terminals and refinery expansions. The
market loves organic growth which, when coupled with opportunistic
acquisitions, results in a growing cash flow and a higher
dividend.
Gibson shares have risen 30% on the back of meeting or exceeding
expectations on a quarterly basis since the company's IPO. The
company reported record quarterly revenue for Q1 2012 and increased
its dividend 4.2% to $1.00/share, paid annually. Its diversified
asset base across North American oil basins forms a balanced cash
flow stream and offers leverage to liquids infrastructure rather
than natural gas.
While oil and gas producers and field service companies adjust
to a shrinking cash flow, a few continue to deliver a strong
performance from their base business. It's a business that doesn't
have much sex appeal (renting everything from toilets to high speed
Internet to oil sands workers?), but that sure has contributed to
forming great-looking charts.
HNL Consolidated Revenue
GEI Profit Breakdown
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
Warren Buffett's Latest Moves: Two Significant
Shifts In Strategic Focus
on seekingalpha.com