When most people think of Canada’s energy sector, they probably think of big names like Suncor or Encana first. However, not all the best buys are large-cap producers—there are a lot of smaller operations to consider too. Some of the most interesting companies are in the energy services sector. These are businesses that offer a service or product to the companies doing the drilling. They’re often high growth operations in uncompetitive markets and, while they can be risky plays, these companies are the ones that can add that extra kick to a portfolio.
One business to look at is Calgary’s Secure Energy Services Inc. (TSX: SES). It’s a mid-cap company that offers a variety of services to the oil sector. Some of its offerings include cleaning contaminants from crude oil, disposal of dangerous oilfield waste and storing oil. Analysts love this business with 91% of them saying it’s a buy.
On Apr. 2, a number of analysts reiterated their buy or outperform ratings after the company announced that it was purchasing Frontline Integrated Services, a private Calgary company that services the energy, resource and construction industries. Sara Elford, an analyst at Canaccord Genuity, points out that Frontline generated $27 million in revenue in 2012 and has a normalized EBITDA of $4.8 million. That values the transaction at less than 5 times EV/EBITDA, which is pretty cheap.
The complimentary acquisition will also certainly enhance Secure Energy’s product lineup, wrote Scotia Capital analyst Vladislav Vlad in an Apr. 2 report. “It should allow SES to expand its environmental business line, while leveraging off existing assets,” he said. “Furthermore, SES’s balance sheet will allow Frontline to compete for bigger jobs.”
There’s more to like about this company than its Frontline purchase, though. Elford points out that Secure Energy has a track record of “substantial” growth on an absolute and per-share basis; it has a relatively clean balance sheet and it’s in an industry with high barriers to entry. In a February report, Vlad wrote that the company “offers relatively stable earnings predictability, non-cyclical exposure to the oilfield services space and growth prospects over the next five years.” Scotia is forecasting 2013 and 2014 cash flow per share growth at 24% and 33%, respectively, which is better than the group average of 5% and 19%.
The stock is trading at about $12.40 cents, but Elford thinks it can reach $14 over the next 12 months. Other analysts have target prices of between $13 and $15. Energy companies are somewhat risky—if oil prices fall and producers cut back, this business will suffer—but as long as the sector stays steady, Secure Energy is a solid bet.
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