Is This The Future of Fracking?
Last week, we briefly touched on the debate over natural gas hydraulic fracturing, more commonly known as fracking. Responsible for generating over $80 billion in revenues annually, the fracking industry is seen as a godsend by hydrocarbon enthusiasts, and a menace by environmentalists. This energy removal process is performed by shooting a chemical-laden fluid into underground, gas-bearing rock formations. As its name suggests, the rock layer is fractured, allowing for natural gas and petroleum to be removed from previously unattainable areas. Unfortunately, this process can have adverse effects on nearby water tables, as fracking chemicals such as methanol and isopropanol have been known to show up in homeowners’ tap water. Here’s a list of some of the most carcinogenic chemicals used in the fluid; it’s definitely worth skimming through.
From an investing standpoint, this industry is entirely dependent on the prospect of a fracking moratorium. While a nationwide ban is still years away, individual states such as California and New York are debating legislature that would prevent existing fracking fluids from intermingling with their residents’ groundwater. Interestingly, some companies have explored the possibility of avoiding these traditional methods altogether by using so-called “non-frack” techniques like the ones mentioned here.
Casedhole Solutions, one of these innovative organizations, was acquired by C&J Energy Services (NYSE: CJES) earlier this summer. Originally purchased for $272.5 million in cash, it is expected that Casedhole will expand C&J’s presence in the U.S.’s most active oil and gas basins, in addition to providing more than $150 million in revenue per year. This will give an undoubted boost to the company’s revenue, which total $870 million in the past twelve months. Since the recession, CJES has grown its annual top line (399.5%) at a far more impressive rate than the industry average (5.4%), or peers like Schlumberger (NYSE: SLB) at 12.4%, Halliburton (NYSE: HAL) at 10.8%, National Oilwell Varco (NYSE: NOV) at 3.0%, and Tenaris SA (NYSE: TS) at -6.0%.
With operating (33.3%) and net (20.9%) margins that are more than double the typical industry norms, C&J has been able to translate this superior revenue growth to its bottom line, as it reported 2011 earnings of $3.29 a share after reaching just $0.67 a year earlier. By the end of 2012, the Street is expecting the company to hit an EPS of $3.65, a jump of 10.9%. The company reports its second quarter earnings after the bell on Wednesday, August 8th.
In terms of valuation metrics, shares of CJES look to be oversold at current levels, trading at a Price-to-Earnings ratio (5.6X) below the industry average (16.8X), SLB (18.1X), HAL (10.0X), NOV (14.6X), and TS (16.3X). When growth is factored into the equation, it appears that investors have yet to catch up with the company’s otherworldly EPS expansion, as it trades at a paltry PEG ratio of 0.2; typically any figure below 1.0 signals undervaluation. Moreover, this PEG is also below the likes of SLB (0.7), HAL (1.4), NOV (0.8), and TS (0.8). Interestingly, the same can be said about C&J from a cash standpoint, as it is currently valued at a Price-to-Cash Flow ratio (4.5X) way below the industry average (13.3X) despite having grown its operating (580.6%) and free (266.7%) cash flows at remarkable annual rates post-recession.
Assuming that the company can hit analysts’ year-end earnings consensus, fairly valued shares of CJES can eclipse $25 by Christmastime; they currently trade in the $19 range. WealthLift’s Sentiment Index rates C&J Energy Services as a buy, with the overwhelming majority of the community’s users placing an “overperform” rating on the stock. For more trading ideas in today’s uncertain market environment, check out WealthLift INSIDER.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.