American oil output has increased a staggering 25 per cent since 2008 and the International Energy Agency estimates it will increase by over a third by 2020 to 11.6m barrels a day as new and existing technologies continue to unlock supplies of hydrocarbons. UK investors can gain direct exposure to this long-term trend by buying shares in Aim-traded Enteq Upstream (NTQ), a small, North American focused oil services provider.
- Long-term growth in US oil services
- Proven 'buy and build' strategy
- Hefty cash pile for acquisitions
- Highly-rated management
- Unstable North American drilling market
- Thinly traded
Enteq's chief executive Martin Perry has form. He floated down-hole drilling technology company Sondex in London in 2003 and sold it to GE for nearly $600m four years later, delighting shareholders with a 4.5-fold share price rise from IPO to sale.
Mr Perry and his team plan to pursue the same 'buy and build' strategy they used at Sondex. Enteq will acquire and scale up a portfolio of complementary next-generation technologies to create strategic value. Enteq's first three acquisitions have been in the 'Measurement While Drilling' (MWD) equipment space - a fast-growing sub-segment of the $14bn a year direction drilling market that is benefiting from rising demand for longer horizontal wells producing shale oil and gas.
Admittedly, things have not gone altogether smoothly since Enteq listed in 2011 as natural gas prices plunged to a decade low shortly afterwards. Consequently, a few institutional investors who plumped for shares in Enteq's initial £15m fundraising at 100p, and the subsequent capital raise of £42m at 100p in 2012, have been selling, and Enteq's share price now sits well below the IPO price.
ENTEQ UPSTREAM (NTQ) | ||||
|---|---|---|---|---|
| ORD PRICE: | 49p | MARKET VALUE: | £29m | |
| TOUCH: | 48.5-5p | 12-MONTH HIGH: | 88p | LOW: 47p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 144¢* | NET CASH: | $21.3m | |
| Year to 31 Mar | Turnover ($m) | Pre-tax profit ($m)** | Earnings per share (¢)** | Dividend per share (p) |
| 2012 | nil | -3.3 | -13.4 | nil |
| 2013 | 15.4 | -0.4 | -0.8 | nil |
| 2014** | 27.1 | 1.3 | 1.8 | nil |
| 2015** | 36.9 | 5.6 | 9.0 | nil |
| % change | +36 | +331 | +400 | - |
Normal market size: 500 Matched bargain trading Beta: -0.1 £1=$1.64 *Includes intangible assets of $56m, or 95¢ a share *finnCap estimates, underlying PTP and EPS figures | ||||
As a result, Enteq's shares are looking cheap just as demand for US oil services returns. The number of land-based drill rigs in North America - a key indicator of demand for oil equipment and services - appears to have stabilised this year; in early October 2013, there were 2,117 rigs in operation, 92 lower than a year earlier but much higher than the 1,944 rigs operating in May 2013 (when there were 260 fewer rigs operating than the year before).
Against this challenging backdrop, Enteq recorded 9 per cent pro-forma underlying revenue growth in the six months to 30 September, indicating the company is successfully winning market share. Moreover, organic growth in the MWD market should soon be compounded by Enteq's looming expansion into the equipment rental market, its broadening international focus, expanded capacity through capital expenditure, product innovation, a new sales team and recently built demonstration centres across North America. A step-change in scale from an acquisition - financed by Enteq's $21.3m (£12.9m) stockpile of cash and $15m unused debt facility - could also significantly increase margins going forward.
