BMO expects 'glory days' coming for oilfield services sector
BMO Capital Markets has raised its price targets on a number of Canadian oilfield services companies as North American drilling activity ramps up.
“We believe the sector is on the verge of a multi-year run in activity levels, while pricing continues to trend higher,” John Gibson, an analyst with BMO Capital Markets, wrote in a note to clients titled “Glory Days Ahead, but Expect Volatility to Continue.”
Gibson noted that oilfield activity was already improving as the world emerges from the pandemic, and now, Russia’s invasion of Ukraine has accelerated demand for equipment as the global crude market faces a potential supply shortage.
He said even if the attack on Ukraine subsides and commodity prices decline, he still views the longer-term outlook for the sector as being positive.
Gibson revised his adjusted profit estimates for the sector for this year and next, and now expects year-over-year increases of 40 per cent and 20 per cent, respectively.
He raised his price targets for a number of companies in his coverage universe including AKITA Drilling Ltd., Calfrac Well Services Ltd, Precision Drilling Corp. and Trican Well Service Ltd.
His top picks in the sector are CES Energy Solutions Corp, Pason Systems Inc., Precision Drilling and Secure Energy Services Inc.
“CES, Pason and Precision each exhibit high market share across North America, leverage to rising activity levels and strong free cash flow generating capabilities,” Gibson said.
“Secure also remains a top pick given its dominant position in Canada, stable business lines and exposure to improving activity levels.”
Despite the bullish outlook, he cautioned that finding workers is still problematic in the sector.
“Labour and supply chain constraints remain a key challenge for adding equipment and could limit the pace of activations going forward, although this is allowing for additional pricing leverage from contractors,” Gibson said.
“Cost escalation does remain a risk as well, although we believe contractors are largely able to pass through these increases (albeit with a slight lag).”