Despite a weak operating environment for domestic oil services, C&J Energy Services (NYSE:CJES) undertook an aggressive expansion plan for 2013. That strategy culminated in several deals during the fourth quarter and further plans for 2014. The reported financials continue to disappoint due to higher costs for expansion, but the company might be set up to take advantage of suddenly sparse natural gas inventories.
The domestic hydraulic fracturing specialist has spent the last couple of years expanding the business line and, surprisingly, building new equipment. Now with natural gas inventories plunging to five-year lows, C&J Energy is positioned to take advantage of a market where utilization is already firming.
The earnings report contained some interesting nuggets, including global expansion to Saudi Arabia, bidding for projects in Mexico, and the purchase of coiled tubing equipment from a major competitor that is exiting the business. This compares to Key Energy Services (NYSE:KEG), which spent its earnings release discussing a retrenchment from Mexico. At least Key Energy sees an improvement in the U.S. market. The details corroborate the improvements seen at Basic Energy Services (NYSE:BAS) during January.
Typically companies facing pricing pressures and slack demand would curtail operations, but instead C&J Energy Services continues expanding in numerous directions. As mentioned above, the main news is the deal for coiled tubing work with National Oil of Saudi Arabia on a test basis. The company hopes to use this deal to springboard an aggressive Middle East expansion plan.
A couple of other moves are further signs that C&J Energy is taking advantage of the consolidation that occurs during a downturn. The good news is C&J has the balance sheet to make moves that most smaller companies typically don't possess in these scenarios. The company recently purchased three coiled tubing units from a major competitor, and it bought a small manufacturer of pressure-control equipment.
In addition, the company continues to expand equipment in order to take market share with a primary benefit of replacing older equipment utilized by competitors. C&J in April plans to deploy hydraulic equipment with an additional 20,000 horsepower. The company added six new coiled tubing units and six new wireline units during 2013 and expects to add more in 2014. The initial plan is to add two wireline units and four more pumpdown units during the first quarter of 2014. Investors should not expect the company to stop with those moves, especially if the market returns to growth.
Natural gas positioning for a strong 2014
The weekly EIA report on natural gas storage levels again provided evidence that domestic drilling must increase during 2014. For the week ending Feb. 7, storage levels plunged to 27% below the five-year average.
While not directly stated as a reason for improved utilization and a soaring stock price, Basic Energy's utilization rates increased during January. In fact, the fluid service truck hours increased to 207,400 in January from only 185,700 in the same period last year. The bullish sentiment has led to the stock soaring from only $12 back in mid-October to more than $19 now.
Likewise, Key Energy suggested that first-quarter domestic revenue should increase sequentially by 3% to 5%. While some of the increase was due to a holiday-related slowdown in December, the weather in the U.S. wasn't ideal during the first half of this quarter.
The recent news in the domestic oil-services market suggests that C&J Energy Services' expansion plans were perfectly timed during the weak market. Most of the market expected the natural gas segment to languish for years, but the inventory levels in storage were depleted due to high demand during the polar-vortex winter and a general lack of drilling for the supposedly abundant resource. The expansion plans C&J Energy Services put into place during 2013 should benefit the stock in taking market share gains during what is setting up to be a robust 2014.
Despite all its spending on expansion, C&J Energy remains a solidly profitable company and trades at a reasonable valuation.
An oil services company that has the smart money hooked
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!
Mark Holder and Stone Fox Capital clients own shares of C&J Energy Services. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.