A small energy stock aims for a big turnaround
A little oil services stock is making dramatic changes and looks like it could be on the verge of a big turnaround, says this Calgary analyst.
It’s not very big and it has a bit too much debt.
It’s trading at about 28¢ a share and its market capitalization isn’t all that impressive either.
Oh, and it just turned over its management team.
Doesn’t sound all that appealing at first glance, does it?
Yet this small oil services stock gets a firm recommendation from an analyst who knows the oil patch inside and out.
Ms. Joanne Hruska, a VP of Portfolio Management in Calgary, believes Enesco Energy Services (TSX/V-ENS) is ripe for a big turnaround.
She tells us why she likes it in the latest issue of Investor's Digest of Canada. For one thing, this “wee” stock, as she calls it, is due to get bigger — and more attractive to bigger firms.
Changing dramatically
This is not the first time we’ve heard from Ms. Hruska on the subject of up-and-coming energy stocks. A month ago, she explained why she had a buy on Twin Butte Energy (TSX-TBE), a junior oil and gas producer. (See Daily Buy-Sell Adviser, January 26).
At the time, Twin Butte was trading at $1.22 Today the price is $1.29. The analyst liked the stock because it hadn’t made its move yet. It is still holding steady, more or less mirroring the pattern of crude oil prices.
So what makes Enesco a good buy at a dollar less? First, let’s deal with the debt, which is higher than Mr. Hruska would like.
“Having said this, it is in the middle of some acquisitions that should increase its revenue substantially,” reports this analyst. In short, the money coming in should surpass the money going out.
And those acquisitions are under way because there are new faces in the boardroom. The new president and CEO, Mr. Lane Roberts, has a reputation as a troubleshooter of sorts.
“He has a strong background turning around energy-related service companies,” says the analyst. In his previous stops, he made acquisitions, promoted internal growth and then sold to larger companies.
And he and his team haven’t been sitting still. “Management changed only recently, but already Enesco has changed dramatically.”
Directional drilling
The company has tossed off some old lines of business and turned to directional drilling. Ms. Hruska explains.
“Directional drilling is used when a well purposely deviates from vertical,” she says. “Horizontal drilling is becoming much more frequent with the advent of new technology. Therefore we see directional drilling as a high growth area in the future.”
This should earn Enesco added revenue from resource plays in North America. And Ms. Hruska doesn’t mean pie-in-the-sky resource plays.
“Resource plays, in our definition, are plays that have repeatability over many quarters and years.”
That would include the most-talked-about shale fields in the industry like the Bakken in Saskatchewan, the Cardium in Alberta, and the Montney region in northwest Alberta and northeastern British Columbia.
Or, the Barnett, Marcellus, Haynesville, Fayatteville, Woodford and Antrim fields found from Pennsylvania to the American southwest.
Many oil and gas producers are devoting “much of their capital expenditure” to these plays, says the analyst, and service companies like Enesco are bound to reap the benefits.
Enesco’s revenue from directional drilling should multiply from 20 per cent to 50 per cent, and it should also be drawing more revenue — as much as 50 per cent — from the U.S. this year.
“These two factors should transform the company in the eyes of the market and therefore should allow it to trade at a higher multiple,” says the analyst. So should the reduction of debt.
Right now, Enesco trades at a hefty discount to its peers, Ms. Hruska tells her readers in Investor's Digest of Canada. She stresses, too, that you must be comfortable with the risks that come with small service firms.
She and her colleagues are comfortable with the risk. They have bought the stock and expect it to “successfully continue its turnaround.”
What you’re looking for with a stock like this is a takeoff or a takeover, or both. You need to have a very clear picture of the company and its prospects, and accept the possibility that it may not strike it rich.
But if it does, you’ve acquired a very big gusher at a very low price.
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