Superior Well Services, Inc.: Well positioned for growth
Warren Buffet once said that “if a business does well, the stock eventually follows.”
Superior Well Service, Inc. (Nasdaq: SWSI) is one company that literally does wells (oil and gas, to be specific) and its business appears extremely well-positioned for revenue growth despite stiff pricing competition and oil and gas price volatility.
The Indiana, Pa.-based company’s primary expertise lies in stimulating oil and gas extraction for its clients with high-pressure gas and fluids that fracture underground formations. Superior also offers high-tech “down-hole” surveying using special tools that transmit data (including rock type, porosity, well integrity and the presence of hydrocarbons) back to surface computers. Additionally, the company has well-cementing and perforation capabilities.
The company set up shop in 1997 with two service centers in the Appalachian region. From those humble beginnings, it has grown to around $465 million in market capitalization with 25 service centers in five regions serving 600-plus clients.
What distinguishes Superior from numerous smaller players is its high-tech capabilities and geographic spread. However, it is Superior’s competitive pricing and flexibility that have allowed it to chip away at the market share of much larger firms in the oil and gas service industry such as Halliburton Company (NYSE: HAL) and Schlumberger Limited (NYSE: SLB).
Take the third quarter of 2007 for example. Revenues jumped 29% sequentially in the Appalachian region and 16% in the Southeast region but fell in all three other regions because of drilling activity declines and pricing pressures. The quick-thinking management took advantage of the situation and halted some projects in the slowing Rockies and Mid-Continent regions to divert resources to Appalachia and the Southeast where activity had picked up.
This strategic reallocation undoubtedly forestalled larger regional revenue losses and benefited Superior’s overall revenues of $94.3 million in the quarter, a 40.3% year-over-year rise, and net income of $11.6 million, or $0.50 per diluted share.
Now, with very little debt, Superior is in a position to begin reaping the fruits of recent acquisitions and new service center and equipment additions in high-growth regions as drilling activity increases. Superior bought two small “wire-line” down-hole survey firms in 2007 — one of which immediately expanded Superior’s market presence to include North Dakota, South Dakota and Montana in early November.
Another major near-term boon for the company could come from the staged opening of the Rockies Express Pipeline. The pipeline opened its first section on Jan. 14 and will eventually deliver natural gas from the wells of Colorado and the Rockies all the way to Ohio.
RBC Capital Markets analyst Victor Marchon told SmallCapInvestor.com that many new wells were drilled in the Rockies in anticipation of the pipeline and that they will soon require the stimulation services of companies like Superior. In fact, RBC is currently expecting overall drilling activity in the United States to grow in the mid-single digits in 2008.
Even so, Marchon says that investors need a clearer picture of pricing pressures. Colder weather could drive natural gas commodity prices up but if service pricing does not improve, he foresees the possibility that the industry giants will start stanching the loss of market share from the host of newer players.
One way that could happen is with even more aggressive price competition on their part, Marchon says. Another scenario could see price pressures leading to industry consolidation — something that would likely benefit a company the size of Superior.
Despite the opacity of pricing pressures, KeyBanc Capital Markets analyst Jack Aydin is a believer in the stock and in a Nov. 9 report rated it a “buy” with a $30 per share 12-month price target, touting the company’s diversified business portfolio, increasing use of high-tech services that are less vulnerable to price competition and the fact that it is nearly debt free.
Aydin also believes Superior to be in position to benefit from activity increases in several regions and raised fourth-quarter estimates to $0.52 per share from $0.49 and full-year 2008 estimates to $2.40 per share from $2.30 in the note.
RBC Capital Markets, on the other hand, has the stock rated “sector perform” because of gas price uncertainties. In a Nov. 7 note, RBC analysts lowered both fourth-quarter 2007 and full-year 2008 earnings per share estimates to $0.50 from $0.53 and $2.23 from $2.31, respectively, and dropped their 12-month price target to $27 from $28.
The five analysts surveyed by Thomson Financial expect average earnings for the fourth quarter 2007 and full year 2008 of $0.52 per share and $2.17 per share, respectively. In the past year, the stock has traded between $17.10 and $28.02 and closed trading on Tuesday at $19.82.
Even if pricing pressures continue to be the major headwind for Superior, it still has a leg up on many of its competitors and appears ready to keep up the hard work of fighting for clients in each of its service regions. And if pricing does improve, Superior’s (SWSI) strong business fundamentals and solid market presence could eventually make its stock a superior long-term growth play.
About the Author
Matt Bierce previously served as a news writer and bank and thrift sector beat reporter for SNL Financial, a niche financial data and news provider in Charlottesville, Va.
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