by Travis Johnson, Stock Gumshoe | December 16, 2014 3:55 pm
“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[1] 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[2] 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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just click here...“This is a buy it and leave it alone story.
“And this is a story that is all about water[3]….”
You can review the full ad presentation here[4] 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[5] 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[6], particularly Canadian gas production that’s expected to grow to generate natural gas[7] for the LNG Export terminals planned in British Columbia.
There are a handful of decent-sized companies in oil services[8] 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[9] 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[10] 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[11], 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[12], and their investor presentation is here[13] 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.
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Afraid. Travis, that the P/E in the range of 25 to 30 for Secure Energy puts out of my consideration. With current P/Es that have generally have gone “nutso” with above 20 or more are not unusual, have not found to buy with my more or less solid 15 as an upper limit. The idea of a stock with P/E upwards of 25 as a hold for 20 years, I find ridiculous even a price of C$15 or so. My “two cents”.
YIKES! Shades of his biggest Boo Boo (he said he lost $400,000 in his wife’s retirement account at the time) POSEIDON. A water retention (aka very large swimming pools to hold fracking water). He recommended it as a “retirement account” grade stock. It went to nothing very very fast due company’s negligence and questionable accounting also. UGH. I lost a bundle also. So CAUTION. I would not touch it with a 10 kms pole!
Poseidon was indeed an adventure — but that one was propped up by unsustainable dividends, it looked at the time like it had to crash, but it sure was hard to predict when.
Some years ago I wasted $$ subscribing to his service. He wrote about tee-tineyes that I had never heard of, nor that I could find much about on the web. I do not like to shoot from the hip. Perhaps I am too conservative. I do not seek to hit home-runs.
I’m with chuck. P/E is to high for me. But as a low price oil play I’m looking at RIG P/E of about 6, dividends over 17%, lots of cash on books. Does anyone else think this wise?
Correction:RIG P/E according to yahoo fin. = 3.4
I was leaning RIG for the longest time but now I am leaning more towards ESV given age of fleet and contract expiries. Also, sounds like RIG may need to mothball some of their idle fleet. Wouid be interested to hear any thoughts on this sector
Best wait on buying any deep sea drillers until Chevron announces their capex plans for next year…a significant cutback is likely to whack the market even more than we’ve seen already.
Thanks, quincy.
Quincy, I’d say you’re right on the money for the whole patch… the stocks always tend to react slowly to the oil price movements and I would be picking away gradually and watching for those CapEx numbers; you are right, there will be cuts.
Travis, you incorrectly stated that the risks to communities and the environment were less with pipelines than with rail….This is the “common wisdom” promoted by pipeline and oil producers, but it isn’t true. There is an appearance of “safety” because, after the initial destruction of people’s properties, the damage from pipelines is often below ground…but being unseen does not mean it doesn’t exist. In fact, not having immediate surface damage can delay finding out and being able to control the damage.
The Keystone XL is horrible to communities and the environment, and not because the bitumen from the tarsands is so much worse than other petro products, but because it has to be mixed with admittedly highly toxic chemical solvents to allow it to move in a pipeline. One-third to two-thirds of the “dilbit” (pipeline contents) would be these toxic chemicals, not potential fuel. The dilbit chemicals, although the mixture is a secret, belong to a class of chemicals that is highly toxic to humans, plants and livestocks, and unlike oil, it does dissolve in water and it does also move into the air. In the air, it creates a serious public health threat. In water, it dissolves and moves easily through surface or groundwater, and it does not breakdown over time and is resistant to normal biodegradation and to other removal techniques. Pretty much, once it’s in the water, it stays there until it is drunk or used, at which time it poisons most animals and plants that ingest it. About the only way to remove it from water is to expose the water to air, at which point it evaporates….and moves into the air, where it stays until it is breathed or until it rains, at which time it dissolves and moves back the soil and water on land.
The second part of the KXL lies directly over areas of the aquifer that are close to the surface and unprotected by depth or confining soil or rock layers. There are thousands of known public drinking water wells in this area, but that doesn’t count all the irrigation and private wells in the whole aquifer….and although the bitumen will just sit and muck things up, this will travel throughout, and contaminate the aquifer…..which is one of the largest sources of fresh water on our continent, and almost the sole source of water for most of the mid-west and into the southwest. I think 16 states use water from this aquifer, and it provides the vast majority of drinking and irrigation water to the farm belt. Something like 20-25% of our country’s total agricultural output is dependent on safe water (without toxic poisons), and ranges from of course corn and wheat to cotton and cattle. It is considered “normal” for there to be some leakage from this pipeline, so one is looking, at best, for slow, undetected and unstopped poisoning of the drinking and agricultural water for middle America…..
And this doesn’t even talk about the dangers to the communities for building this. It requires taking a lot of land, including cutting up and destroying many farms, ranches and Indian lands. Proponents love to discuss the “jobs”, but when you look closely, there are less than 4000 one-year FTEs in construction, and the rest are mostly jobs that are already there….but won’t be if the KeystoneXL pushes out farmers and ranchers, who are now the source of income for entire communities. Once they are gone and the water and soil are no longer drinkable/workable, we would have a leaky pipeline amid a wasteland and nothing to show for it. Oh, the consultants did not include the job losses of people who are being forced off their land in the job count, so it is a huge gross miscalculation.
Is it better if there is a train wreck? Well, at least people would know where it was, and it would be easier to limit the ongoing damage. Better to leave it in the ground and focus on new non-fossil fuel energy….
We also place our country at a great economic risk….For surface spills, the tar sands product has proven to be many times more expensive to clean up than regular oil or gas, and spills that are from much smaller pipelines have proven to cost way more than the U.S. government requires an oil company to pay for….so any spills that can be cleaned up would probably end up being paid for the American taxpayer….This potentially and realistically makes the money spent on cleaning up prior spills and leaking underground storage tanks from last century look like pocket change…..
On top of that, TransCanada’s deal includes them not having to remove the pipeline and do any restoration once and if it no longer active. (Most pipeline agreements include language that includes company removal of the old pipes to limit the ongoing damage from corrosion and leakage of the last contents.). So, Canada and TransCanada are proposing that we move their poisonous dilbit for them, and take the risk from the first minute the faucet is turned on until …. forever.
Yes, it is a NIMBY issue, but what right does a Canadian company have to inflict something on our country that Canada will not built in their own country? What right does Canada have to expect us to sacrifice our land, water and people? We don’t need the product and we certainly don’t need to risk so much of our natural, agricultural, cultural and other economic wealth to turn U.S. into the cheap leaking underground pipeline from Canada to refineries (that don’t have the need for it) to end up on the world market. The consultant even admitted that the U.S. will get no preference for the final product if we allow the pipeline…..
So, tell me why we should even continue the conversation about this somehow being an environmentally safe, economically and common-sense thing to do….
Wow, LKH is not happy about the Keystone… Pretty good rant!!! Not real accurate but lots of passion… Most never see these oil crashes coming… Not to worry… The price of oil will go back up. After 35-years in the oil field I have seen this play out many times. The weak outfits go under or get bought out by the bigger players. The bigger outfits get bigger. Everything slows down and then slowly the cycle starts all over again. Now is not the time to bargain shop for cheap oilfield stocks. This crash is only just beginning. It will get way worse before getting better.
Thanks, LKH and Mac.
First, in all seriousness, I am not “calling you out”***. I know this is an old thread and not necessarily the forum but since LKH brought it up I would earnestly like to know where where he was inaccurate and if some of what he states is true, which part?
***My frame of reference is that I believe that climate science is more cabal than “science” and that global warming (or whatever name they give it by the time you read this that allows them to shed responsibility for making accurate catastrophic predictions like Theclimateis Whatwesayitis) is ultimately a money scam with lots of useful idiots parroting information handed down from on high either directly or via MSM. I was a peripheral one for years with a Surfrider Foundation chapter until I learned Steve McIntyre and Ross McKitrick exposed Mann’s hide the decline trick.
Don’t worry about Keystone.. the Canadians are well on their way to sending that oil East and from there to India, as well as China and Europe. That works a lot better than exporting the same oil via Texas.
This is not a political forum and it would be hard to argue that transport by rail is less risky when a derailed fireball is coming towards your town. You do realize that if the pipeline doesn’t run to the south it will run to the west where the potential consumers are potentially less friendly?
If TransCanada wanted to improve its prospects in U.S., it might consider taking on a U.S. pipeline operator as a partner. Many of the U.S. pipeline operators are larger than TC, far more influential in government, and far more knowledgeable about domestic regulations and laws.
If TC follows this scenario, it might also consider developing an MLP, which provide capital for company expansion and good dividends to investors. In that way, the U.S. would share in cost and profits, getting something back for allowing the pipeline to traverse the country’s heartland.
There is a Environmental Cleanup company in the oilpatch that should have at least been mentioned. Take a look At Nuverra. NES.. It’s been pounded like most oil service stocks but insiders are buying down here and they just announced a substantial contract win with XTO which is.. an exxon company.. If you wanna own the companies that green up Oil sites…
I had forgotten about them — Nuverra is the old Heckmann, a firm that was trying to essentially “roll up” water services for drilling companies in the hot shale areas around the country. It often seemed like a good idea, since the industry (they started out as mostly a fleet of water trucks with some disposal wells, I think) was and is quite fragmented, so there ought to be room to build a large player out of all the little pieces as Richard Heckmann has done in other industries in the past.
Unfortunately, Heckmann/Nuverra is very heavily leveraged — with the stock down by 90% since the days when it was a market darling in early 2012, the bondholders are getting nervous. According to the FINRA bond data info their $400 million of debt that’s due in 2018 is now trading at a 40% discount to par, meaning debt investors are demanding an annual yield of close to 30% to buy the bonds on the secondary market. If you think Nuverra will do great, you might check out the bonds (CUSIP for that tranche is NES3879264) — though the levered balance sheet does mean that if they do really well, it will be reflected quickly in the stock. It’s just that the performance over the past couple years doesn’t inspire much confidence, the stock was drooping down for much of the time that oil and shale investment was booming.
NES is about to go BK if they don’t get some positive cash flow going over the next QTRS.
I think LKH has more than a few important concerns. Oil pipelines cannot be assumed to be safer than railways transportation. Another point is rail lines should be far from communities, so any accident would have smaller effect. This needs urban planning.