James C. West
is Barclays' lead oil services and drilling analyst. James joined
Barclays in September 2008. Prior to that, he was at Lehman Brothers
beginning in October 2000. His broad coverage universe includes
large-cap, diversified oil services companies, niche technology
providers, offshore and onshore contract drillers, supply vessel
providers and energy capital equipment companies. Prior to joining
Lehman Brothers, James worked at Donaldson, Lufkin & Jenrette. He
earned a Bachelor of Arts from the University of North Carolina at
Chapel Hill.
The Energy Report: James, welcome. What were the most significant takeaways for you from the Barclays Capital Conference in September?
James West: There
were five major takeaways. Four of those were very positive. One was
negative. The first was that the outlook for North America in 2014 has
improved. We're getting some tailwinds from commodity prices, of course,
but the oil companies that previously were gas companies have now
arranged their drilling programs for 2014–2016 and are relaying that
visibility to oil service companies that have been operating in North
America in a fairly volatile environment for the last two years.
Companies are much more optimistic on the outlook for 2014 in North
America.
Number two, the Eastern Hemisphere is booming at this
point. Both Southeast Asia and the Middle East are growing very rapidly,
as is Russia, and then there are good trends in East and West Africa.
The only market not doing well, for obvious reasons, is North Africa,
but I think we'll see far-reaching effects of that strength in the
Eastern Hemisphere as companies report results in the near term.
The
third takeaway was the bullishness around Mexico, mostly for 2014 and
beyond, because Mexico is a slight headwind for the industry right now,
but should turn into a tailwind as we go into next year. There are two
parts to Mexico: Number one, PEMEX (Petróleos Mexicanos) has ten tenders
outstanding, which are being referred to as mega tenders by the
industry, for integrated project management (IPM) work that would start
early next year. The tenders are out, the bids are due soon. Those
should start up pretty quickly in the first quarter of 2014 (Q1/14) and
that should be a very nice boost to overall activity level. It
represents about 50-plus rigs going to work.
Second, most company
managements and all the consultants and people that we speak to believe
that there will be constitutional reform in Mexico that will break the
monopoly on the oil and gas business and allow private capital to flow
in. That could take a little bit of time, and there's a congressional
vote expected at some point in October and, of course, a change to the
Constitution has to be ratified by the leaders of the various states in
Mexico. That should be done by year-end or early next year. Following
that, we'll see private capital coming to the market, probably to go
after the five shale plays in Mexico and deepwater activity, but it may
take several quarters.
The fourth takeaway was a lot of
bullishness on China, both because of recent deepwater discoveries in
Bohai Bay and the South China Sea, and because of the potential shale
opportunity in China. That's a market that's been for the most part
closed off to western service companies. The service activity is done
primarily by the service entities of the Chinese oil companies, but
shale and deepwater activity are things that are going to be done by the
traditional western services companies because many Chinese service
businesses lack the capabilities and expertise.
The last takeaway,
as I mentioned, is a slight negative: Rig rates for floating rigs are
starting to moderate. We're starting to see some rigs that are coming
down in the $25,000–50,000/day range as they absorb new capacity.
TER: Were any of those surprises?
JW: I
would say that the increased optimism on North America was a surprise
and so were the rig rates. More CEOs talking about the declines in
offshore rig rates was a surprise. It's pretty rare for drilling
companies to expect their rigs to drop. They're usually all very
optimistic about rigs moving higher.
TER: Did the conference's presentations change your thinking on any of the companies you cover?
JW: We came away feeling more positive of the near-term prospects for Schlumberger Ltd. (SLB:NYSE)
given the bullishness around the Eastern Hemisphere, where Schlumberger
is the largest international company. We also came away feeling better
about some of the recent changes we had made. We upgraded Key Energy Services (KEG:NYSE). We launched coverage of C&J Energy Services Inc. (CJES:NYSE).
Both are U.S. land-focused companies, so the cautiously bullish outlook
for U.S. land should be a good tailwind for those two companies.
TER In our last interview,
you said North American oil services was a market of haves and
have-nots. You included some small-cap and midcap companies among the
haves. What makes a company one of the haves?
JW: The
companies in the haves group are those that are currently able to
service larger E&Ps and major oil companies. That means
sophisticated supply chains, higher technology content, better
equipment, better crews and typically multiple service lines rather than
the mom and pops or the one-product-line companies that exist in North
America.
TER: You have a number of small-cap and
midcap companies under coverage. Can you talk about how some of them are
positioned to succeed in the strong and sustained upside market trend
that you forecast?
JW: We do have a lot of small-caps under coverage.
We think several are poised to succeed very nicely, especially in North
America. A lot of these smaller ones tend to be North American-focused,
given that it's the largest market in the world. Superior Energy Services Inc. (SPN:NASDAQ)
is one the companies we're recommending. Then we like some of the
companies that are exposed to the Gulf of Mexico because that's one of
the fastest-growing markets in the world today. Hornbeck Offshore Services Inc. (HOS:NYSE) is our preferred supply vessel company followed by Gulfmark Offshore Inc (GLF:NYSE),
which actually has exposure both to the Gulf and to the North Sea.
Right now the North Sea is extremely tight in terms of vessel
availability.
TER: Your return on Key Energy Services has been modest, but your return on Global Geophysical Services Inc. (GGS:NYSE) and ION Geophysical Corp. (IO:NYSE) both have been very poor. Why are you rating them Overweight?
JW: We
just upgraded Key three or four weeks ago, so it hasn't been that long.
Key really is a call on 2014, both the U.S. land market and the
tailwinds in Mexico because it does have exposure to Mexico. You're
right about Global Geo and ION Geophysical. Global Geophysical has
suffered from some liquidity concerns. Those should be going away with
this next quarter as it gets its revolver credit facilities in order and
also starts to generate more cash. ION Geophysical has had several
quarters of earnings misses. We think that's coming to an end. The
company's been in transition and we think shareholders will be rewarded
as that transition is finalized and the earnings trajectory is better
understood and growth returns.
TER: Why has Global Geo had liquidity problems and why do you think they'll abate soon?
JW: The
company had focused up to 2012 on multiclient data library shoots in
North America, and those are very capital-intensive. It spent a lot of
capital on that and was not getting a return on that investment. The
company brought in a new CEO at the end of last year. His focus is on
cash generation and on shifting more into proprietary surveys, which are
cash-generating surveys. That's ongoing right now. Q1/13 showed some
good progress. In Q2/13, I think people got concerned because the cash
balance dropped. That was more of a timing issue, in our view. I think
you should see the cash balance rise once again for Q3/13.
TER: How has Key's share-repurchase program affected its share price? You said it's been 12% of its market cap since 2008.
JW: It
hasn't done a lot. Because of some poor earnings results and lack of
recovery in some of its businesses, along with the slowdown that we saw
in Mexico this year that caught everybody by surprise, the stock has
been punished. Although it was certainly helpful to buy back stock, it's
not being reflected in the share price because of some of the other
fundamentals in the business.
TER: Your target
price for Key Energy is $10 right now, but the last time it was there
was May 2012. It's now around $7.50/share. What does the company need to
do to make that target?
JW: It needs better
traction in North America, for which the fundamentals are supportive of
that happening. Number two, the earnings-revision cycle has ended for
the company. In fact, starting about 12 months ago, if you look at 2013
estimates, they are down about 40% from where they were. We thought that
was the bottom. That's one of the reasons we upgraded. As we see
revisions higher, or at least holding their place, that will cause a
valuation rerating. In addition to that, Mexico should be a very good
market next year and that's going to be a nice tailwind for the company.
TER: You're pretty sure that Mexico is going to make constitutional changes. What's the basis for your confidence there?
JW: The
coalition government wants to make the changes. It publicly stated as
such and it's holding a vote in late October and writing the law right
now. Since that coalition government controls Congress, it looks like it
will pass. We think it will be ratified. This is probably the best
chance we've had for this constitutional change since Mexico's industry
was nationalized 70-plus years ago.
TER: What will enable Global Geo to reach your $6/share target from the $3 range, where it is now?
JW: I think continued transition toward proprietary
surveys, generating cash and bringing the leverage down will help boost
performance. It's a fairly simple strategy—maybe harder to execute than
we thought at first, but the stock's trading like a distressed company
right now. We think as cash builds and leverage comes down, we'll see a
rerating of that stock much higher.
TER: Global has been in that range for a number of months. What's changed to give you hope for now?
JW: We
have spent a lot of time with the company about the situation. It's
confident in re-signing its credit facility and it's confident in its
capabilities to generate cash, and we're confident in the management
team. The new CEO has a very strong background in seismic; we're
impressed by the CFO as well. We think they're making the right
decisions and the right moves to put the company back on track.
TER: The
ION CEO at the conference announced a transformation. How is that
transformation going? Why is it doing the transformation in the first
place?
JW: ION is trying to position itself more
as a provider of services, in particular services to the oil
companies—surveys, multiclient data libraries, data processing, things
of that nature—and getting away from its legacy as an equipment
manufacturer that sold to seismic companies. That transition has been
bumpy, but we're getting closer to the end. That's why we're still
recommending it. We think as that transition finalizes, there will be
upside for shareholders.
TER: What other small-cap or midcap companies look promising to you here?
JW: We
like Hornbeck Offshore because it's mostly a pure play on the deepwater
Gulf of Mexico vessel market; that's probably the tightest market in
the world right now. Utilization is full for its assets. I think that
Hornbeck has the best supply vessels in the market. Its fleet is
entirely high-end, so it doesn't have an old-vessel issue. It has a
forward-thinking management team.
With Superior Energy Services,
you have a CEO who has very good market understanding and is formerly
the COO at a company called BJ Services, which was acquired by Baker
Hughes Inc. (BHI:NYSE). It's had a long history in the industry and is
very much incentivized to drive growth internationally, in the Gulf and
in the U.S. markets. We really like management there. We like management
at both companies.
C&J Energy Services has done a good job
integrating some acquisitions that have put it in the camp of the
"haves" in North America. It also has leverage to two plays that we like
in North America: the Permian Basin, which we think is going to go more
and more horizontal over the next several quarters, which is good for
its business, and the Eagle Ford. I think C&J also is likely to
announce some international expansion in the next quarter or two.
C&J is newer to our coverage universe, but we've been very impressed
so far with the management team. It has good financial strength.
They've been disciplined about their overall growth trajectory its
geographic placement put it right in the sweet spots where we think most
growth will occur.
TER: Any other thoughts you'd like to share on investing in this market right now?
JW: The
group itself is still attractively valued. People should be increasing
exposure to oilfield services given the constructive commodity prices
and the constructive capex trends in the industry. We think we're in the
early stages of a recovery in North America and in the early stages of
good growth in the international markets. Our favorites on the large-cap
side, which we talked about in our last interview, are and remain
Schlumberger, Halliburton Co. (HAL:NYSE) and Cameron International Corp. (CAM:NYSE).
TER: You've given us a lot to think about. Thank you.
JW: You're welcome.
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DISCLOSURE:
1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) James C. West: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from HAL and CAM in the past 12 months.
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from SLB, SPN, GGS, HAL, and CAM within the past 12 months.
HAL is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
HAL and CAM are, or during the past 12 months have been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate.
SLB, SPN, GGS, HAL and CAM are, or during the past 12 months have been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) James C. West: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from HAL and CAM in the past 12 months.
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from SLB, SPN, GGS, HAL, and CAM within the past 12 months.
HAL is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
HAL and CAM are, or during the past 12 months have been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate.
SLB, SPN, GGS, HAL and CAM are, or during the past 12 months have been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
( Companies Mentioned: CJES:NYSE, CAM:NYSE, GGS:NYSE, GLF:NYSE, HAL:NYSE, HOS:NYSE, IO:NYSE, KEG:NYSE, SLB:NYSE, SPN:NASDAQ, )
http://theenergycollective.com/streetwiser/293606/james-c-west-positive-2014-outlook-oil-and-gas
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