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After the flood

Also: Why John Stephenson still likes pipeline stocks, and why Michael Mazar thinks good times are ahead for the pressure pumpers

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Jun 25, 2013

by Max Fawcett

Like the rest of Calgary, Alberta’s energy companies are struggling to get back on their feet after a historic flood washed over the city late last week. But savvy traders were given a gift Monday morning, as shares of Inter Pipeline Fund (TSE:IPL.UN) tumbled nearly 40 per cent down to an intra-day low of $14.21 before recovering substantially to higher levels. Inter Pipeline shares haven’t traded that low since late 2010, and trading in the company was immediately halted. It’s not clear yet whether the TSX will reverse the few trades that did take place at that level or not, but if they don’t there are a few people out there who scored a major bargain. The stock closed the day back above $22.

Enbridge (TSE:ENB), meanwhile, is a buy – a table-pounding one, practically – for First Asset Management’s John Stephenson. He did a quick hit with BNN’s Andy Bell this morning, who noted in his usual colourful style that Enbridge shares have been “taking it in the neck” of late. Stephenson thinks that’s an overreaction. “I think it’s absolutely time to get back in,” he said. “It used to trade at a premium multiple to, say, Inter Pipeline, and now it’s trading at a discount to Inter Pipeline and Pembina Pipeline. You’ve got growth of earnings for the next five years of 10 to 12 per cent, and similar numbers on the dividend. Yes, the dividend isn’t as hefty as it is on some of the other names, but I do think this is a great name, it’s a benchmark name, and it’s one that has great visibility to increased revenue, increased earnings, and increased dividends.”

TransCanada (TSE:TRP) is an even stronger buy for Stephenson, who described it as a “must-have” stock. “They’re doing everything right,” he said. “They’re moving more towards energy infrastructure, whether it’s liquids rich drilling, oil from oil sands, terminalling or moving it. You’re not taking commodity price risk, and that’s the beauty of it – you get paid fee for service. That’s an attractive, stable model.”

In the energy services space, BMO’s Michael Mazar thinks pressure pumpers like Trican Well Service (TSE:TCW) and Calfrac Well Services (TSE:CFW) have an easier road ahead of them than the drillers. “What we like about them is this secular trend towards more frac intensity per well,” he said. “Our view is that there’s only small pockets of activity where we’ll see drilling activity increase, but the pressure pumpers don’t really need that as much as they once did because we do so much more fracturing per well and it’s such a much bigger part of the overall ticket of drilling and completing a well. And that frac intensity trend is not going away.”

The challenge is that while activity levels remain strong, pricing has not. That’s the product of overly optimistic forecasts from a few years back that produced a glut of equipment. “What that’s done is it’s just crushed pricing for those types of services,” Mazar said. “The activity’s there, but it’s being done at a much lower price, at much lower margins and it’s really impacted the profitability of these companies.” The U.S. market is oversupplied by 20 per cent, he estimated, while Canada’s surplus sits at 15 per cent.

The good news is the push to develop and export LNG in northern British Columbia could soak that up in no time. Mazar said that while the companies could trade sideways for a while, the end of 2013 and particularly 2014 are shaping up to be good for the pressure pumpers. And in the interim, he thinks they’ll easily be able to continue paying out the generous dividends they implemented in 2012. Both dramatically cut back their capital expenditure programs in 2013, and he thinks the combination of that austerity combined with continued positive free cash flow means the dividends are safe – even, he suggested, capable of being increased.

Mazar isn’t alone in his bullishness on the space, either. Last week, RBC Dominion Securities analyst Dan MacDonald upgraded Calfrac from “sector perform” to “outperform” because of the increase in gas licensing activity in northern British Columbia, and bumped his price target for the company’s shares up from $30 to $42.


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