Is This the Best Oil Service Growth Stock in America?

The US Energy Boom keeps breaking new records. This article highlights a fast growing oil service small cap to see how it compares to bigger cousins like Schlumberger and Baker Hughes and whether it holds the key to cashing-in on the largest energy boom in history.

Adam Galas
Adam Galas
Jul 16, 2014 at 2:13PM
Energy, Materials, and Utilities

America's energy boom continues to break records. For example, the US recently set a new oil production record of 11 million barrels/day (bpd) to become the world's largest oil producer. That growth is from hyper-prolific shale oil formations such as the Eagle Ford, Bakken, and Permian Basin. 

In fact, the Bakken formation of North Dakota has grown production by 31% annually over the last seven years to achieve a record 1 million bpd. 

Meanwhile, the Permian Basin is estimated to hold 75 billion barrels of recoverable oil, an estimate that is up 50% from just last year and could single-handedly supply the US's record oil production for 18.75 years.

Meanwhile, US gas production, also at record highs, is expected to grow 56% by 2040 on the back of the Marcellus and Utica Shale, whose combined output is expected to grow 34-fold from 2007 through 2035. 

All told, $890 billion is expected to be invested into US energy over the next 12 years. 

A great way for long-term investors to profit from this historic bonanza is by investing in the pick and shovel providers of this gold rush. That means oil services firms such as Baker Hughes (NYSE:BHI) and Schlumberger (NYSE:SLB). However, sometimes smaller companies can out grow their larger cousins, and this article highlights one such company to see how it compares to the big boys.

C&J Energy Services (UNKNOWN:CJES.DL) is a small but fast-growing independent, domestic oil and gas services company that has two key growth catalysts.

The EIA recently reported natural gas inventories 40% below five year averages, which can be attributed to the 12.4% decline in gas rigs operating in the US. With just 311 rigs drilling for gas (a near decade low), a cyclical turnaround is likely, and when combined with the 12% increase in oil rig count, demand for domestic oil and gas services is likely to grow sharply over the next few years.

C&J Energy Services is well positioned to take advantage of this growth after its $2.86 billion acquisition of Nabors Industries completion and production business. Thanks to this deal, C&J Energy Services is now the fifth largest fracking service company in America, with 1.2 million fracking horsepower, 683 rigs, 11,483 fluid trucks, and 5,266 frac tanks. It will operate in the Bakken, Eagle Ford, and Marcellus shales as well as the Permian Basin. This will ensure C&J Energy Services cashes in on America's continuing oil and gas production growth.

C&J Energy Services' management is confident that it can achieve $100 million in synergies by 2017, raising EBITDA margins to 20%. With C&J's revenues expected to balloon to $3.2 billion due to the merger and grow 31% to $4.2 billion in 2015, earnings will soar and are likely to continue to grow strongly for many years to come. 

However, as impressive as C&J Energy Services' potential is, dividend growth investors may want to consider alternatives such as Baker Hughes and Schlumberger. 

Company Yield 10 Year Projected Annual Dividend Growth 10 Year Projected Annual Earnings Growth 10 Year Projected Annual Total Returns
C&J Energy Services 0 na 20% 22.70%
Baker Hughes 0.90% 15.29% 26% 25.20%
Schlumberger 1.50% 17.46% 18.20% 16.50%

Sources: S&P Capital IQ, Yahoo Finance 

As this table shows, Baker Hughes and Schlumberger offer small but rapidly growing dividends and sport projected growth rates similar to, if not superior to, C&J Energy Services. How is that possible for larger companies to grow as fast or faster than smaller competitors? The answer lies in economies of scale, international expansion, and superior technology. 

Baker Hughes, for example, makes 50% of sales from domestic operations but is growing its international exposure by 14% annually into key markets such as Argentina, which has the world's second largest shale gas reserves -- larger even than the US

Baker Hughes is also striving to become the largest oil service provider in Africa, where major oil finds are being discovered. 

Meanwhile, Schlumberger has the largest international exposure, in both Argentina and China. China's shale gas reserves are 68% larger than America's, and it's is aiming to increase gas production nine- to fifteen-fold from 2015 through 2020 to as much as 37% of 2013 US production. 

A second key advantage for larger companies such as Baker Hughes and Schlumberger is technology. 

Only 10%-15% of shale oil is recoverable using standard techniques, and costs have been climbing. This has resulted in returns on investment for shale drillers declining by 40%-67% since 2004. 

This year Baker Hughes acquired Performix, makers of software to help oil companies analyze pressure and oil flow data in real time.

Combined with Baker Hughes' new Fasttrack and ShadowFrac plug products, which are projected to bring in $1 billion in 2014 sales alone, Baker Hughes is positioning itself as one of the premier well productivity service providers. Meanwhile Schlumberger is accelerating its patent applications and has both the R&D resources and cash to make massive acquisitions to keep up with the well productivity technological arms race. An example of this is Schlumberger's $11 billion purchase of Smith International.

Foolish takeaway
Oil service providers are a great way to profit from the global energy boom. C&J Energy Services represents a solid mid-cap growth play in the sector but for dividend growth investors I recommend Baker Hughes or Schlumberger for their strong international growth catalysts and promising dividend growth prospects.