We're pretty enthusiastic about oilfield services companies around these parts, but we're also cheapskates. It's never easy to pick up shares of a company within inches of its all-time high. We like to buy on the dip, and the likes of Schlumberger (NYSE:SLB) and Weatherford International (NYSE:WFT) aren't dipping -- they're ripping.
I'm always on the lookout for an affordable name in this space. That's why Tesco (NASDAQ:TESO), which has been clipped a fair amount since its July high, caught my eye.
Not to be confused with the British retail folks, Tesco has two main segments. The company sells and rents top drives, which are a core component of any modern drilling rig. It also provides casing services, which involve laying pipe in newly drilled wells.
In top drive sales, Tesco falls between National Oilwell Varco (NYSE:NOV) and Canrig, a division of Nabors Industries (NYSE:NBR). Even more impressively for its smaller size, Tesco leads the rental market. Top drives don't look like a huge growth area for the company, with the offshore market essentially saturated, but there is room to expand outside the Western hemisphere, where top drives are generally absent from land rigs. The top drive segment is a cash cow, however, providing more than 75% of operating income through the first half of the year.
Tesco projects significantly more growth in its casing services division, which is broken down into tubular services and Casing Drilling. The former hinges on a technology that substantially automates the running of tubing into the wellbore. I don't know if you've seen roughnecks handle drill pipe on a platform, but it's grueling, dangerous work. This hands-free casing running promises to cut down on completion time and injuries.
Perhaps more disruptive is Tesco's Casing Drilling. A well is normally drilled using one kind of pipe, and then cased with another. Casing Drilling combines these two steps into one.
Both of these technologies seem like logical, evolutionary innovations. So why couldn't NOV and Weatherford, the significantly larger market leaders, figure this stuff out? Actually, they did; they have competing products. Both NOV and Franks have sued Tesco over the casing drive system technology. Weatherford calls its comparable service Drilling with Casing, or DwC. I'm not aware of any legal spat there.
These innovations by Tesco aren't unique, but that isn't enough to scare me away. There's room enough for everyone in this sandbox. The company's recent operational stumbles are a greater concern, with plenty of corporate-governance red flags to boot.
In the second quarter, revenue fell sequentially and operating margin got hammered. The company had a long list of culprits -- the strong loonie, manufacturing disruptions due to a new planning system, and cost inflation, among others. Meanwhile, NOV had a blowout of a quarter.
In short, Tesco is struggling to manage its growth. That's not the worst problem in the world, mind you. It could be struggling to grow at all.
I'm willing to forgive these missteps, and I'll allow any company the delightfully ironic unplanned issues that stem from implementing a planning system -- once. I'm far less pleased by Tesco's restatement of financials and the departure of key executives, including the company founder.
I don't see quite enough pessimism surrounding Tesco to warrant a purchase today. But I'll be watching with interest, and looking for signs that this company can competently grow into the large market space it sees for its drilling technologies.
