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Desjardins slashes price targets on energy services firms

Expected strong start to drilling season fails to materialize

Globe and Mail Update

14:04 EDT Thursday, May 31, 2012

Depressed natural gas prices have kept energy services firms out of favour among investors, but one small positive was expectations that there would be an early start to the drilling season this spring.

Well, scratch that, says Desjardins Securities analyst Jamie Murray.

This winter’s relatively light snow base in key drilling regions, thanks to the warm weather, was to translate into much more favourable ground conditions than last year for drillers to move their rigs and start up activities.

“However, as we approach June, we see no signals that activity will meaningfully exceed last year’s levels,” Mr. Murray said.

Activity this quarter has so far trended well below Desjardins’ forecasts and are even slightly below last year’s low levels.

According to Nickle’s Energy Group, rig activity has averaged 166 rigs through the first eight weeks of the second quarter. That represents only a 21 per cent utilization rate and compares with the average of 174 active rigs in the first nine weeks of the second quarter of 2011. Rig drilling data from another group, the Canadian Association of Oilwell Drilling Contractors, also backs this up, notes Mr. Murray.

This has prompted Desjardins to reduce its active rig forecast to 205 for the second quarter, from 250, and cut its price targets on all the energy services firms it covers. The changes are smallest for companies that are the most levered to U.S. and international activity.

Mr. Murray notes that drilling has been trending higher in recent days - but he doesn’t believe the rebound will be strong enough to offset the weakness experienced to date. On the bright side, he points out that the second quarter only represents about 10 to 12 per cent of annual Canadian rig activity, so the impact is not huge in the longer term.

As David Milstead wrote
in today’s Globe and Mail, energy services firms are trading at depressed levels that could make for long-term value plays.

Mr. Murray still fully supports that view.

“Despite reducing our second quarter 2012 estimates, we maintain our value-oriented view on the Canadian oil services sector,” he said in a research note.

“Equities are pricing in the challenges of low natural gas prices and economic risk (particularly on the light oil side). However, activity remains robust by historical standards the mid-term outlook continues to be quite favourable. Valuation remains attractive and free cash flow yields should be strong in 2013,” he said.

His ratings, therefore, remain unchanged.

Changes in price targets were as follows:

Cathedral Energy Services . To $8 from $8.25. Rated “buy”

Enseco Energy Services $1.75 from $2.20. Rated “buy”

Essential Energy Services $3.20 from $3.25. Rated “top pick”

PHX Energy Services $10.75 from $11. Rated “hold”

Precision Drilling $13 from $13.50. Rated “buy”

Savanna Energy Services $10.75 from $11. Rated “hold”

Trinidad Drilling $8.75 from $9. Rated “buy”


Given limited cash flows and a tight balance sheet, there is limited breathing room left for Torquay Oil Corp. to further pursue operations at its key exploratory property, Lake Alma in Saskatchewan, said Desjardins Securities’ Tim Murray. “We continue to believe that the prudent -- and only -- move is to farm it out, but Torquay has yet to find a joint venture partner and there does not appear to be a high level of interest for the asset,” Mr. Murray said. He speculates that the next step may be to sell the entire company.

Downside: Mr. Murray cut his price target to 40 cents from 85 cents but reiterated a “buy” rating.


Clarus Securities analyst Nana Sangmuah is recommending investors buy Iamgold Corp. given its unhedged near-term production growth that will come from existing mine expansions, new project development and potential acquisitions. It has a solid balance sheet to fund growth and its yield of 2.3 per cent is within the top quartile of dividend-paying gold producers, signalling management’s confidence in the future, he said.

Upside: Mr. Sangmuah initiated coverage with a 12-month price target of $26.


Canaccord Genuity analyst Jeff Rath has upgraded Coinstar Inc. to a “buy,” citing continued market share gains in its Redbox DVD services as well as new business ventures that could positively impact financial results by the end of next year. “We continue to see sources of upside,” Mr. Rath said after management presented its strategy to analysts.

Upside: Mr. Rath raised his price target by $1 (U.S.) to $71.


All aspects of construction of Thompson Creek Metals Co. Inc.’s Mount Milligan copper-gold project in central British Columbia are on schedule to allow production start-up in the fourth quarter of 2013, Desjardins Securities analyst John Hughes said after taking a site tour this week. “There are no metallurgical concerns as ore has been extensively tested and a high-quality, saleable copper-gold concentrate is expected,” he said.

Upside: Mr. Hughes maintained a “buy-average risk” rating and $9.10 price target.


Descartes Systems Group Inc. reported “robust” fiscal first quarter results on Thursday that largely beat expectations while announcing a major contract win with Brink’s Inc., noted Versant Partners analyst Tom Liston. The deal with Brink’s, the world’s largest secure logistics company, will have a significant impact on profitability growth rates, he said.

Upside: Mr. Liston raised his price target by 25 cents to $11.25 (U.S.) and maintained a “buy” rating.

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