Cleaning Up in Energy Services
By Michael
Brush
May 13, 2005
No matter how you do it, drilling for oil and gas is complicated and messy.
The energy services company Newpark Resources (NR)
makes the task easier -- and a couple of patent-protected technologies at
Newpark should mean it will make a lot more money on the job in the coming
years.
At least that’s what insiders are telling you with their buying patterns. In
early May, two insiders bought $290,000 worth of stock for $6 to $6.40,
according to Thomson Financial.
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That’s enough at a small company like this to support a sell-side scenario
that projects Newpark stock could rise 25% to hit $7.50 in the next twelve
months. Newpark, which recently traded for $6, helps energy producers in
three ways.
Drilling fluids
Energy producers need specialized drilling fluids to do things like
stabilize drill bits at great depths, or carry debris back out of drill
holes. Many energy companies use fluids that are a mix of oil and salt. They
get the job done – but they wreak havoc with the environment.
In contrast, Newpark has specialized water- and glycerin-based drilling
fluids that don’t use oil or salt. So they are easier on the environment.
They also happen to make drilling easier and faster, says finance chief
Matthew Hardey, because they do a better job of stabilizing drill bits and
leaving drill holes in better shape for production. “So we have been able to
capture significant market share working against competitors,” says Hardey.
This might help explain why the company thinks drilling fluid sales will
grow 50% to $432 million in 2005. (Overall revenue for the most recent
quarter was up 24% to $129 million.) Newpark also has a lot of room to
expand abroad. Drilling fluids make up the biggest part of Newpark’s
business, accounting for over 50% of revenue.
Door mats for oil rigs
Because drilling takes place in harsh conditions and undeveloped locations,
production companies need to create temporary access roads and a stable
footing around sites for heavy equipment. To do so, they rent or buy
specialized wooden or plastic matting from Newpark. Use of matting is
growing in Canada especially, as producers move further north into tougher
terrain. This segment brings in over 20% of Newpark revenue.
Increased drilling has sparked healthy growth in both of these business
lines in the past year. But it also means Newpark can raise prices. Drilling
fluid prices were up over 5% in the past year, but matting prices rose by
more than 25%. Much of that extra revenue falls straight to the bottom line.
Waste clean up
This is the smallest part of Newpark’s business – at about 15% of revenue –
and growth has been disappointing. But all that could change, thanks to a
proprietary purification technology Newpark has licensed from a Mexican
company. The technology uses ultrasonic sound waves to tweak chemical
reactions used in the clean up of dirty fluids that are a byproduct of
energy production.
The technology will be rolled out at two sites in Wyoming this year. But
because the technology can clean up fluid without affecting its temperature
much, it could be a big hit at energy companies producing oil from Canadian
tar sands. In a process called “steam assisted gravity drainage,” energy
companies use steam injections to produce oil from Canadian tar sands. “With
our technology, we can make fluid reusable and put it back into their
boilers at high temperatures,” says Hardey. This makes the process faster
and cheaper. Down the road, the technology may be used by utilities to clean
up emissions at coal-fired plants.
Revenue from this technology wont really start to kick in until 2007 – but
it could be big in the long term. The company will learn more as it carries
out tests in Canadian tar sand production this summer. “It is hard to
project the path for the new water business, but it could be the most
significant driver of growth at Newpark for the next ten years,” says Hardey.
The bottom line: Caylon Securties has a 12-month price target of
$7.50 for the stock, or 22 times expected 2006 earnings of 35 cents per
share. Given the upturn in drilling activity and Newpark’s proprietary edge,
that could be conservative.
Insider update: In early May insiders at Chesapeake Energy (CHK)
bought $20 million worth of stock at around $20 per share. Insiders at
Input/Output (IO)
purchased $370,000 worth at $5.90. These purchases confirmed earlier bullish
signals at these energy companies, which you can read about here:
http://www.investorideas.com/insiderscorner/Articles/Four_Natural_Gas.asp;
and at this link:
http://www.investorideas.com/insiderscorner/Articles/Seismic_Imaging.asp.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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