Looking for undiscovered and under-followed home runs in the energy sector, I have been watching Total Energy Services Inc. (TSX:TOT) since late 2012. Total is involved in contract drilling services, rentals and transportation services and the fabrication, sale, rental and servicing of natural gas compression equipment. Due to a painful first half of 2013, the company has been evaluating several investment opportunities in order to stop this situation from getting worse.
There is a growth problem here
Look no further than the company’s second quarter results released earlier this month. The company’s EBITDA dropped 21%, operating cash flow plunged 65% and net income decreased 37% compared to 2012. The decline in oil and natural gas drilling and completion activity in Western Canada negatively impacted the Contract Drilling Services and the Rentals and Transportation Services divisions, which was not offset by the growth in the Compression and Process Services division.
Total Energy Services Inc. (TSX:TOT) was severely hit by the fact that it operates exclusively in Canada, where cash flows are more seasonal and the business is more cyclical than in the US or internationally. Despite this worrisome weakness, Total isn’t in the emergency room yet. It has still a debt-free balance sheet, a decent cash tank and positive cash flow to fund its operations during the remainder of 2013.
A few days ago, the company increased its 2013 capital expenditure budget in order to construct an AC electric telescopic double drilling rig complete with top drive. The construction of this specialized rig represents the company’s entry into the AC electric drilling rig market. Total Energy Services Inc. (TSX:TOT) believes that this segment of the drilling market will represent an area of potential significant future growth for its Contract Drilling Services division.
Is this specialized rig the right pill to cure Total Energy Services Inc. (TSX:TOT)’s lack of growth and weakening bottom line? To me, this growth initiative is a drop in the ocean. One swallow does not make a summer, but Total’s growth can come from its international expansion.
The international appeal
Many oilfield service companies go looking for international business to smooth out their business cycle in Canada, where busy winters are followed by the lull of spring breakup. There are select oilfield markets with year-round activity that helps these companies plan better for their equipment and grow their revenue stream. The drilling activity in these markets is less volatile than in Canada, and does not incur persistently low gas prices or wide oil differentials.
One of the diversified companies of the sector is Precision Drilling Corp (USA) (NYSE:PDS). Precision’s CEO has noted that subdued activity levels in North America continue to disappoint many in the industry.
The company’s drilling rig utilization days in Q2 2013 decreased in North America compared to the second quarter of 2012, as a result of wet weather in Canada, continuing low natural gas prices and lower levels of customer activity.
The plummet in gas directed drilling activity in North America, which began in late 2011 and continues in 2013 has put pressure on industry utilization and dayrates. Precision Drilling Corp (USA) (NYSE:PDS) has partially offset this pressure by growing its international contract drilling business. After selling its international drilling business to Rutherford in 2005, Precision has again been building up an international presence, validating the potential of the international drilling markets.
Do it like Schlumberger
Precision Drilling Corp (USA) (NYSE:PDS) isn’t alone in taking the international expansion pill. Schlumberger Limited. (NYSE:SLB) soars on global drilling activity that hits a three-decade high. Schlumberger’s strength in the international markets insulates it from the uncertain oilfield market in the home country of rivals Halliburton and Baker Hughes over the rest of 2013.
Schlumberger Limited. (NYSE:SLB) makes more than two-thirds of its revenue outside North America, and witnesses an exploration and drilling boom in Saudi Arabia, China, Australia and several other international markets. This has helped Schlumberger repurchase over 105 million shares of common stock thus far, for a total purchase price of $7.8 billion and the remaining balance of $187 million will be exhausted in Q3. Last July, Schlumberger Limited. (NYSE:SLB) approved a new share repurchase program of $10 billion to be completed by June 30, 2018.
After all, Total Energy Services Inc. (TSX:TOT) doesn’t need to re-invent the wheel. If Total doesn’t want the operational downtrend to stick around, it needs to make a deliberate choice to expand in emerging petroleum basins internationally. These basins (i.e. Llanos Basin in Colombia, Reconcavo Basin in Brazil, Amazon Basins in Peru and Ecuador) have been undergoing rapid growth in exploration spending. The game is also less competitive there than in North America where the supply often exceeds the demand, leading in pricing pressure.
The international drilling projects aren’t risk-free. There is no such thing as a free lunch, right? The international business bears country’s risk, currency risk or repatriation of income and capital risks. However, there are emerging markets with political stability where all these risks can be significantly mitigated.
Foolish Take Away
The low natural gas prices along with competitive pressures and weather related delays in the post break-up season are significant headwinds for any oilfield service company that focuses in Canada. Meanwhile, the booming drilling activity internationally in conjunction with low competition and a favorable operating environment with lower seasonality and cyclicality, create a cocktail that Total needs to gulp in order to remain competent and return back to a growth trajectory.
The article The Pill To Cure Total Energy Services Is Not Found In Canada originally appeared on Fool.com and is written by Nathan Kirykos.
Nathan Kirykos has no position in any stocks mentioned. The Motley Fool owns shares of Precision Drilling Trust.
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