Last week, Basic Energy Services (NYSE:BAS) announced a $50 million increase in capital spending for 2014 that shot the company's stock up 4% on the day. The news didn't have much of a ripple effect on other smaller oilfield services firms, probably due to the lack of appreciation for the scope of the increase.
Most investors probably missed the company's run from only $12 back in October to the current level of $27. The quickly-changing dynamics in the domestic land-drilling sector have analysts forecasting the company earning $1.14 in 2015 after producing a large loss last year. At the same time, other oilfield services firms aren't seeing the same gains. Superior Energy Services (NYSE:SPN) is up solidly from February levels, but its stock has gained nowhere near the increases of Basic Energy. Key Energy Services (NYSE:KEG) has seen its stock price pull back to levels last seen in October.
Significance of $50 million
While $50 million doesn't sound important compared to some of the giants in the oilfield industry, it is a significant amount for a firm with a previous plan of capital spending for the year in the range of $235 million.
The new plan calls for a 21% increase in capital spending to $285 million and more importantly the expansion project budget was increased by nearly 50% to now reach $155 million. The goal is to add approximately 60,000 hydraulic horsepower (HPP) of frac equipment to reach production by September. The project will bring total HPP to 400,000 by the end of the year. The company plans to deploy these assets to the Permian Basin and Mid-Continent operations.
Clearly, the increased completion activity and improvement in pricing mentioned in the April update improved even further in May. Other small players in the sector like Key Energy and Superior Energy should see similar benefits.
More valuation bumps ahead?
With Basic Energy Services' stock up roughly 150% in less than a year, valuation questions have to pop up for any current or new investor. The company's stock now trades at 24 times its rapidly rising 2015 earnings estimates, and concerns have to exist about overpaying for a business that is very cyclical after generating a loss in 2013. Analysts only forecast an 8% increase in revenue for 2015 prior to this project, so the rebound in the stock was more about improved pricing and strong cost controls versus a booming turnaround.
Key Energy Services might have more upside, where a shift out of Mexico is having a meaningful short-term impact to revenue and especially profits. The stock only trades at 18 times forward earnings, and the forecasts haven't improved for 2015 despite the large improvement in the sector. The earnings multiple could quickly decline if estimates start creeping up.
Though Superior Energy Services suggested in the first-quarter earnings report that business is improving and the company is positioned to benefit from onshore drilling in the U.S. and even Gulf of Mexico, the analyst community isn't increasing estimates for 2015 earnings. Estimates continue to sit around $2.45 per share, and the stock only trades at 12 times this figure.
The improving domestic land drilling market will benefit all of the oilfield service providers in a different manner, but ultimately the gains won't be as disjointed as the recent stock action suggests. In fact, analysts forecast similar revenue gains for 2015 for all three companies. This suggests that the market multiples shouldn't be spread this far apart. The run in Basic Energy Services appears to have already priced in the improvements in the drilling environment, while shares of Key Energy Services and especially Superior Energy Services have more potential gains ahead.
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Mark Holder has no position in any stocks mentioned. 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.