CEO Interview: Value Priced Oilfield Services as the Cycle Turns

I interviewed the CEO of a high performing oilfield services business company

I interviewed the CEO of the oilfield services company that I first wrote about in Deep Value Oilfield Services Opportunity Near the Bottom of the Cycle. Since publication, the stock has performed very well relative to the broader oil and gas market, as measured by the XOP oil and gas ETF:

The outperformance appears to reflect growing market expectations that North American oilfield services activity will begin to rebound soon. In a recent article, I analyzed the historical relationship between higher oil prices and rig additions and found that rigs are typically added with a lag, then build gradually over time.

We’re still very early in the cycle, only about five weeks removed from the post-Hormuz closure rise in oil prices. If the historical rig-addition pattern holds, rigs should begin to be added over the coming weeks and months, improving utilization, day rates, and cash flow for oilfield services companies. The CEO’s comments in my interview were consistent with that pattern beginning to play out: conversations are picking up, and he is ‘pretty confident we will be at higher utilization by June.’

Improved utilization not only improves cash flow, but also signals a tighter oilfield services market, making existing equipment more valuable and pushing the stock closer to replacement cost, which is far above the current valuation based on management’s own estimate and relevant industry data:

There is a value investment saying, to “buy cyclicals at a discount to book value and sell on a multiple of earnings.” This appears to be one such opportunity, with the stock still trading very cheaply at the beginning of an apparent turn of the cycle. Yet it is also generating substantial EBITDA and free cash flow - an oddity that I am capitalizing on via large position sizing.

For more color and a more in-depth discussion of the company’s history and operations, I’m pleased to share the interview below. I also show a chart illustrating the historical path of oil prices and rig activity - they say that history doesn’t repeat, but that it does rhyme.

Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance is not indicative of future results.