We’re sharing another “Thoughts from Myron” piece this week as well, so I’ll keep my Friday comments a little briefer than usual. You can catch that latest piece from Myron here, hopefully you’ll find the different perspective he brings to be useful or illuminating in some way.
I had Seadrill on the mind earlier this week, following up on their latest earnings release and dividend hike, and that made me want to go take a look at some other oil services names — I have a substantial amount of North American oil and gas exposure in my portfolio even outside the service company stocks, with my holdings in Dorchester Minerals (DMLP), MFC Industrial (MIL) and Sprott Resource corp (SCP.TO SCPZF), and all of those are priced as if natural gas will be staying here at $4 per MMBtu or going lower, which means I think they’re still quite reasonable to hold in my portfolio for that part of my energy exposure … but oil service stocks don’t get to have a base asset value that sits in the ground and rely on the eventuality that it will be worth more — they have to generate cash flow and earnings now, or hope for more activity to generate it in the near future, to keep investors interested.
Seadrill is certainly doing that, demand for their ultra-high-spec deepwater drilling rigs continues apace, and while they continue to take on a lot of risk, particularly in terms of their large debt position and leverage to those historically high rig rates, I think that’s a good risk to take and I’m pleased that they reward shareholders by borrowing to pay for new rigs and spitting out much of their cash flow as dividends. It’s not a “forever” stock, because that leverage is bound to catch up or the market get oversupplied at some point, and it can be quite volatile, but it’s in a great position right now (and priced for it, arguably — given the volatility, you can probably get it cheaper at some point if you’re patient)
But the picture for the land-based service company I bought a couple years ago, Canyon Services Group, is less compelling and clear. I still own the shares, and the company has been able to pay a solid dividend over the past year and has a good balance sheet, but the latest quarter really ...