Oil States Just Unlocked Huge Shareholder Value

The company recently completed the spinoff of its accommodations business. Here is what you need to know:

Jun 6, 2014 at 8:24AM

A "boomtown" is a community that experiences sudden and rapid population and economic growth, often due to the discovery of some type of natural resource (think gold, oil, etc.) However, a sudden spike in growth can sometimes occur too quickly to support the local infrastructure, and everyone needs a place to sleep. The Bakken oil boom happening right now in North Dakota has resulted in the lowest unemployment in any state at around 2.6%. The region is experiencing an extreme shortage of available accommodation, resulting in the highest rents in the country. A decade ago, who could have predicted that rent in Williston would be higher than New York City? Employees working for the oil companies operating in the region can make a tremendous salary, as long as they are willing to sleep in a trailer community or in the back of their truck to do it.

Oil States International (NYSE:OIS) is a diversified energy company, which primarily operates in three segments: accommodations, offshore products, and well services. The accommodations business is the one that investors should be the most interested in. It is a niche market that the company has capitalized on, and it is performing extremely well. While the company doesn't have much of a presence in North Dakota, its services are needed all over the world in other boomtowns that don't have the infrastructure in place to accommodate thousands of employees. So let's dig deeper into the accommodations business to see if investors are sleeping on a pile of money.

Everyone needs a place to sleep
The accommodations segment operates in three regions: Canada (67%), Australia (24%), and the U.S. (9%). Canada has the oil sands and several LNG projects lined up, Australia has significant coal and mining operations, and the U.S. has shale oil and natural gas. Despite each region serving a different part of the energy business, all three need accommodation for their employees, and Oil States provides it. The company believes that the life of these assets is between 30-40 years, providing investors some reassurance that their services will be needed for a while.

So how's business these days? In the first quarter of 2014, revenue was flat. That doesn't sound too encouraging, but let's examine the reasons for the weakness in the quarter: Demand was soft in Australia amid declining met coal prices, combined with currency fluctuations. But Canada, while also dealing with a weak currency, is growing at a nice clip with significant expansion plans down the road. The U.S. is also performing well, thanks in part to booming natural gas production. Because of the brutally cold winter, propane costs were higher, reducing margins.

The accommodations business  has more than 21,000 rooms in its portfolio, at a cost of around $94 to $98 a night (revPAR). The company believes an additional 16,000 rooms can be built to support their existing service sites, allowing for significant upside.

The spinoff is complete
Oil States believes that spinning off the accommodation business will unlock significant shareholder value. The new business is named Civeo Corporation (NYSE:CVEO), formed from two Latin words, meaning "community" and "to be well." Oil States successfully completed the spinoff and Civeo began trading as a new stand-alone company on June 2. Oil States is dedicating a larger portion of the 2014 capex to the accommodation business, and sees significant growth in the second half of the year, when the McClellan Lake Homes project is completed in Canada.

Will Civeo turn into a REIT?
To enhance shareholder value even further, Oil States has mentioned that at some point, the company will begin to explore the possibility of applying to become a REIT. Real Estate Investment Trusts (REITs) provide investors with dividends and moderate to long-term growth appreciation. Lately it seems everyone wants to convert into a REIT, from Corections Corp to Weyerhauser. There is a lot of paperwork and approvals that need to happen first, and it's best not to rush the process.

Regardless of whether Civeo goes down the REIT path or not, the spinoff looks like a win for investors.

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Mike Fee 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.

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