“Buy and Hold for 20 years” sounds like a dream come true for me — I don’t like trading in and out of stocks very often, I prefer to own good companies and watch them nicely compound for a long period of time (not that I don’t speculate on stuff from time to time for short-term gains… or losses).
So when readers started sending me this ad from Keith Schaefer for his Oil and Gas Investments Bulletin, well, my ears perked up… not just because he’s hinting about one of his two core stocks that he thinks you can buy and hold, but because, well, it’s obviously something to do with the oil business. And that means it’s almost certainly going to be a lot cheaper than it was a couple months ago.
What, then, is Schaefer pitching? Well, I should tell you up front that he’s getting a bit wilier with his copywriting and his hints. The clues are getting more general, the tease less specific, so the Thinkolator has some serious chewing to do on this one. Let’s see what we’ve got to worth with… here’s the intro:
“I’m not a long term buy and hold guy.
“I like to find the next great growth stock in the market, ride it higher and then cash out when the market catches on.
“But I’m also not a fool.
“I’m willing to make an exception for a truly unique opportunity.
“My latest subscriber stock pick isn’t just unique.
“And it is more than exceptional.
“My latest subscriber pick is a once in a generation opportunity.
“This company is one of two core stocks in my portfolio.
“And it will be for the next 20 years.
“Make no mistake.
“When you get a company with this kind of growth opportunity ahead of it–you buy the stock, and you hold it.”
I don’t know if he’ll end up being right about this secret company — but I will give him credit for not mincing his words, he’s certainly putting himself on the line with this pick.
Not that he’ll be eating out of a cat food tin if you happen to lose money on the idea, of course — but, well, he sounds awfully confident.
More from Keith:
“This company is really in the sweet spot.
“It is small enough that it can grow at high rates for years.
“Yet large enough to be a major player in its industry.
“This stock is so good I’m throwing out my normal playbook….
“For once I’m becoming a buy and hold investor.Are you getting our free Daily Update
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“This is a buy it and leave it alone story.
“And this is a story that is all about water….”
You can review the full ad presentation here if you like, but I’ll give you the shorthand version:
This company does water handling — including both supplying water for frackers, and handling and recycling the water used by and procuced by wells. Schaefer says that they are on an inevitable growth path, not only because there is going to continue to be a lot of drilling but because drilling is becoming more water intensive… and the oils drilled over the past couple years of serious boom time production growth are maturing, which will amplify water handling needs even more because maturing wells produce more water… and many of them will also be water-flooded as the years go by, to enhance production from aging wells.
That’s the basic spiel — it’s a substantial player, it’s small enough to grow, it handles all aspects of water for oil and gas companies, and I interpret the pitch to mean that they have a substantial exposure to Canada, particularly Canadian gas production that’s expected to grow to generate natural gas for the LNG Export terminals planned in British Columbia.
There are a handful of decent-sized companies in oil services who are substantial players in water and drilling fluids and might be considered “pure play” ideas on water handling — particularly if you include environmental work, water disposal, etc., which Schaefer seems to. If you narrow it down to Canada that shrinks the number of substantial companies a little bit, but there are still several.
Any other clues for us in this long but not terribly specific spiel?
Well, we do get one:
“There Is More, This Company Has A Second World Class Growth Market
“One man’s misery is another man’s fortune.
“For my #1 water stock the environmental issues surrounding fracking and water handling are a blessing.
“For the oil and gas producers they are a cost.
“Likewise, for oil and gas producers the roadblocks being put in front of pipeline construction are a problem.
“But for my #1 water stock those roadblocks are an opportunity.
“Because this company isn’t just in the middle of the water boom that is hitting North America.
“It is also front and centre in the booming oil by rail movement that is still accelerating.
“Especially in Canada….
“My #1 water stock… made a shrewd investment in the oil by rail business and is going to be a major beneficiary of that growth”
So who is it? Thinkolator sez this secret “buy and hold” stock is almost certainly: Secure Energy Servcies (SES in Toronto, SECYF on the pink sheets).
There are really three companies who come up as reasonable matches when you’re looking for a strong provider of water and associated environmental services to the oil industry in Canada, with the other two being Tervita (a private company) and Newalta (NAL in Canada, NWLTF on the pink sheets). Newalta I’ve actually written about before, but that was years ago when Roger Conrad was pitching it in the Fall of 2011 as a “clean up” stock — and that is indeed a large part of what they do, cleaning up pollution in the oils ands and at industrial sites as well as handling water. It’s a solid company, benefiting from most of the same trends as Secure Energy, but it’s not growing as fast — and it doesn’t have a specific focus on “oil by rail” in the way that Secure Energy does following its acquisition of Predator Midstream’s rail terminals in August.
And, of course, Newalta and Secure Energy and pretty much every other oil services stock has taken a beating since October — so SES is down close to 40% from its highs of late September, and the stock price is right around where it was 18 months ago before it took a huge run. NAL and SES have pretty much traded identically this year, as you might expect for a year with big commodity and sentiment moves that have been much more important than any company-specific news — but SES has grown dramatically faster than NAL over the last five years, in part because they’ve grown through acquisition.
SES now has a market cap of just under $2 billion (Canadian), and their balance sheet is pretty solid — they do have some debt, but they also have several hundred million available on their current credit facility, and they’ve been generating cash from their operations over the last couple of years. My quick look at the company leads me to be a little bit concerned, but I don’t know them particularly well.
Why concerned? Well, they’ve only really been a substantial company for three or four years, so we don’t have much of an idea how they’ll handle the shock in the energy markets. Some of their weaker customers will be closing up shop, and that will hit everyone but it’s hard to know how a company will react when they were born at the bottom of a downturn — they really started up in late 2007 with one disposal well, and have been issuing new equity to make accretive transactions, which means that to some extent they have been relying on a nice premium valuation (selling expensive stock to buy relatively inexpensive assets to grow, which keeps the stock expensive).
By most metrics, on earnings or cash flow or whatever, they have been quite expensive for several years — without growth, that premium valuation goes away and they lose the nice, pricey currency (issuing new stock) that they had enjoyed in their growth binge.
That’s not a unique problem to Secure Energy, of course, and I do like the businesses they’re in — environmental services, water handling and production fluids and services, mostly in Western Canada and the Bakken, with lots of disposal wells and terminals. I also like the fairly new focus on freight and full-service rail, which I think will remain a large part of oil transportation (NIMBY sentiment about new pipelines grows ever stronger, despite the fact that shipping oil by rail is far, far more dangerous to communities and the environment). So I think I’ll spend a little more time digging in to this as I’m able, but it’s hard to get excited about a stock trading at a lofty valuation in the oil services sector these days — even if the valuation might be deserved because water treatment will continue to be a growing business, as Schaefer pretty persuasively argues.
Analysts are still quite positive on Secure Energy, their estimate of 60 cents or so in earnings in 2015 gives them a forward PE of about 24 right now, but they’re also penciling in 60% growth for the next five years — that’s really hard to see if this oil price washout causes a bunch of companies to cut back on production and capital spending, as seems to be pretty likely if it continues on for much longer. And most analysts have no idea what to say about oil, because no one had room in their models and spreadsheets for oil to fall by almost 50% in two months. Secure’s last quarterly press release is here, and their investor presentation is here if you want to get more of a picture of the company.
The valuation for Secure Energy can be justified at about C$15 and 30X trailing earnings only because that number comes up right next to the “50% earnings growth in 2014” number — if the growth pauses or the company comes out and says that they’re cutting the forecasts for next year, causing analysts to cut their estimates, well, I have no idea what will happen. They are pretty strategic, they offer core services that oil companies can’t really opt out of, and their rail services might be a nice growth driver, but they are priced for growth and dependent on growth to justify their pretty aggressive capital spending and expansion. I’d have to look at this one a lot more closely to justify it as a “buy and hold for 20 years stock”, but who knows — maybe Keith Schaefer is right. It doesn’t really matter what I think, though — it’s your money, so take a look and let us know what you think… will Secure Energy take good care of your money for the next 20 years? Let us know with a comment below.