Trican Well Service Ltd. (TSX: TCW) is a market leader in oil well services in Canada, with a 37% share of total Canadian fracturing capacity
SmallCapPower | August 30, 2017: Trican Well Service Ltd. (TSX: TCW) provides comprehensive equipment and services for the exploration and development of oil and gas reserves in Canada. Its recent merger with Canyon Services has made Trican the largest driller in Canada with a 37% share of total capacity. Continued demand for fracturing and other services coupled with scale post the merger have resulted in a strong 2Q17 performance, with revenue up 322% and adjusted operating income coming in at $12.2 million compared to a loss in the prior year quarter. Notwithstanding strong fundamentals, the share price of Trican Well Service is down more than 20% over the past three months, which offers an attractive entry point for investors.
Investment Thesis
- Market leader in oil well services in Canada, with a 37% share of total Canadian fracturing capacity
- Recent merger with Canyon Services significantly expands its scale
- Upside potential in the U.S. market recovery through Keane ownership
Trican merger with Canyon Services creates the largest driller in Canada
The recent (closed in June 2017) merger with Canyon Services has significantly expanded the scale of Trican Well Service. Post merger, the Company has become the largest oil driller in Canada, operating a fracturing fleet of 680,000 HP for a 37% share of total Canadian capacity. The merger has also expanded scale of Coiled Tubing, Acid, and Nitrogen businesses of Trican. Of the estimated $20- $40 million in annual synergies post the merger, Trican Well Service has already realized $18 million as of July 30, 2017.
Canadian Fleet and Revenue Contribution by Segment
Geographically, Trican Well Service has presence across Western and southern Canada, covering key oil plays including Montney Shale, Deep Basi, Cardium and Bakken Shale, among others.
Trican’s geographic coverage in Canada
Upbeat demand for fracturing services driving utilization
Trican Well Service has been experiencing strong demand for fracturing and other services over the past nine months, intensifying in 1Q17, which carried into 2Q17. As a result the Company is currently operating at ~70% of total fracturing capacity and 60% of other pressure pumping equipment. Fracturing intensity increased significantly (4x more proppant pumped in 2Q17 vs 2Q16) and represented the highest quarterly volume of proppant pumped in Canada by Trican Well Service. This strong demand coupled with the merger with Canyon resulted in revenues quadrupling to $137.2 million.
The Company’s equipment has been fully booked in major service lines though 2018 and Trican Well Service plans to reactivate two fracturing crews (75,000 HP) in 3Q17 to meet the rising demand for pressure pumping market. Pricing has also been up in 1H17 and is expected to continue in 2H17 (20-25% up vs 1Q levels), which should augur well for margins.
Improving operational efficiencies
Trican Well Service has reduced fixed costs by $140 million per year since the start of the oil price downturn, and currently account for 25% of costs compared to 50% pre-downturn. The cost reduction has been possible through a combination of size and scale as well as patented fracturing technology (MVP FracTM, CleanTrack™).
Strong balance sheet
As of June 30, 2017, Trican Well Service had a net debt of $149 million (net of $21 million cash and currency swaps) post Canyon merger. The Company has revolving credit facility of $227 million, of which $121 million is undrawn and should be sufficient to fund the $25 million capex planned for 2H17. The Company’s meaningful operating cash flows will also be used for any capex requirements.
Upside potential in U.S. market recovery through Keane ownership
As of June 30, 2017, Trican’s minority (6.5%) ownership interest in the U.S-based Keane was valued at $137 million, down significantly from the December 31, 2016 figure of $231 million. This was due to the initial distribution of $38 million to Trican as well as a 16% fall in the share price of Keane. Trican Well Service believes there is significant value in the remaining common stock of Keane, and measurable value is dependent on timing and share price of any further liquidating events.
Financial analysis
Canyon merger coupled with strong operational performance drove the revenues 322% to $137.2 million in 2Q17 from $32.5 million in the prior year quarter. Rising fracturing prices and continued operational efficiencies improved margins, with adjusted operating income coming in at $12.2 million compared to an operation loss of $19.1 million in 2Q16. Net income for the quarter was $8.1 million, or $0.03 per share, compared to a net loss of $40.4 million, or $0.26 per share, in the prior-year quarter.
Outlook
Trican Well Service expects continued momentum in the fracturing and other services in 2H17 along with price improvements of 20-25% over 1Q17, which should drive its top line and bottom line for full year 2017. However cost inflation should partially offset margin improvements due to higher prices. The integration of Canyon is progressing well with $18 million in annual synergies already achieved, out of the estimated $20-$40 million. Longer term, there exists significant potential for earnings growth for the combined entity assets. Despite positive developments and robust outlook for the rest of 2017, Trican Well Service stock has declined 23.48% over the past three months. Investors might consider entering the stock at current levels.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
The Content contained on this page (including any facts, views, opinions, recommendations, description of, or references to, products or securities) made available by SmallCapPower/Ubika Research is for information purposes only and is not tailored to the needs or circumstances of any particular person. Any mention of a particular security is merely a general discussion of the merits and risks associated there with and is not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by SmallCapPower/Ubika Research. To read more of this Disclaimer please click on the button below:
