Recovery Time
Wall Street Knows There’s a Shale Rebound Underway

You know America’s energy future is looking rosy once again once the investors start coming back, and that’s exactly what’s happening to the stocks of some of the shale boom’s biggest drilling services companies. As the FT reports, “Shares in Halliburton have almost doubled in a year as higher oil prices have, in the words of its chief executive this week, meant the ‘animal spirits have broken free and they are running’.”

These services companies have pulled through a tremendously difficult time period, as oil prices plunged from a June 2014 high of more than $114 per barrel down to a January 2016 low of less than $28. But now that petrostates are cutting production, there’s a new hope that the market might soon be balanced, and the glut of crude that precipitated this price collapse might be erased.

That’s good news for anyone in the business of producing oil, and that includes companies like Halliburton that were forced to discount their prices (and take on a load of debt) over the past 30-odd months in order to keep the oil flowing. The bigger companies seem to be past the worst of it, and the FT has some advice for those looking to make a buck on the resurgence of some of the smaller services firms:

Some of these are now quietly re-emerging from bankruptcy and relisting on the New York Stock Exchange after restructuring their debts. Ignored and unloved by Wall Street analysts, these companies trade at deep discounts to peers and offer a way to bet on a recovery in US domestic drilling while avoiding being swept up in the exuberance on display in the wider oil services sector.

One of these, Houston-based Key Energy, entered into Chapter 11 in October. Key’s restructuring involved all but wiping out its shareholders and slashing net debt from $868m to $142m. After emerging from Chapter 11 in December, the company is trading at a market value of about $700m. […]

If Key recovers from its lossmaking recent past to anywhere near where it was before the oil slump — and, in 2012, it made more than $400m in earnings before interest, tax, depreciation and amortisation — then the company would trade today on an implied future enterprise value over ebitda multiple of just over two times.

This could potentially be good news for savvy investors (we’ll leave that sort of advice to the professionals), but it’s undoubtedly a good sign for the health of the American shale industry. Production has been surging since October, and has jumped more than 500,000 barrels per day over the past three months. The number of active rigs has grown, and the financial footing of many of the companies involved is looking much steadier these days.

It will be interesting to see how these companies price their services over the coming months, especially if oil prices were to continue to climb past $60 per barrel. Their willingness to take on smaller profit margins for the sake of the show going on was a big part of the surprising resilience shale producers showed over the past two and a half years, but as the shale industry starts to once again regain momentum, you can be sure they won’t be satisfied with continuing those discount prices.

Meanwhile, U.S. shale is looking mighty hale once again.

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