Calfrac Well Services a Shale Co. With Moat, Trading at 5x EV/ EBITDA


As a contrarian investor I look for opportunities to identify companies whose likely future will be better than their perceived future. It’s that simple. In this light, pressure pumpers are key to the changing face of resource development. Despite this, because of some short term supply/demand dynamics in the industry, I believe the long term stream of cash flows which will accrue to owners of CalFrac Well Services (CFW) is currently being profoundly undervalued.

Calfrac Well Services Ltd. (TSE:CFW)  is an owner-operated provider of specialized oilfield services in Canada, the United States, Russia, Mexico, Argentina and Colombia, including hydraulic fracturing, coiled tubing, cementing and other well stimulation services.

Calfrac was founded in 1999 by Ronald Mathison (Chairman) and Doug Ramsay (CEO) who remain major shareholders today. They are a top 10 global and top 5 North American player in well stimulation, fraccing and pressure pumping deriving more than 90% of revenue from this secular growth industry.

Market Capitalisation $1.0bn
Price $22.75
Book Value $16.50
Dividend Yield 4.4%
2013 P/E 6.5x
2013 P/CF 3.5x


Extracting Energy from Shale Rock & Horizontal Drilling

It is not easy to extract gas or oil from shale rock – it is tough and uncompromising! The rock traps the gas and oil so tightly that it has never been economically viable to extract. Over the last few years technology has developed which has allowed the rock to be cracked enough to release its valuable cargo. is a video from The Weir Group website on the process of horizontal drilling and fracking.

David Yarrow of Clareville Capital described the process of horizontal drilling and hydraulic fracturing as follows:

“Horizontal drilling So as to tap the thin layers of shale, wells are drilled vertically to intersect the shale formations – often at depths of 10,000 feet. The well is then deviated to achieve a horizontal wellbore within the shale formation. These horizontal wells can now travel up to 2 miles along the shale seam in parallel with the ground 2 miles above. Hydraulic fracturing The poor permeability of the shale is addressed by hydraulic fracturing. A “perforating” gun is fed down the bore and gives off a string of explosives that blow holes the width of a fine knitting needle 18 inches into the shale. Then comes the genesis of the SPM story. At least a dozen trucks with pumping equipment generate enough horsepower to blast a mixture of fine sand, water and lubricant chemicals into the bore. The sand blasts into the piercings in the shale and jams open crevices so that the gas can find its way into the bore. As much as 10 million gallons of water and 10 million pounds of sand can be pumped into a single well during the fracturing stage. It is a fluid intensive process….

The recovery rate in aggressive and unwelcome shale formations will depend less on skill and more on the power and pressure of your pumps. Furthermore the pumps are going to take a hell of a beating in an intensive programme of trying to smash the gas out of the shale. In this underground battle zone, horsepower, precision and durability are key variables. It is intuitively comfortable to contend that operators will not then compromise on the integrity of the pumps or the quality of the after service. After making the well, there would seem no point in cutting corners in well stimulation in a rock that doesn’t really want to “play ball”. Those that build wine cellars, don’t tend to fill them with too much Bulgarian red.”


Energy Independence in the US

“You can always count on Americans to do the right thing – after they’ve tried everything else.” Winston Churchill


“Energy independence is the best preparation America can make for the future.” President Ronald Reagan, 1982


“Our goal should be, in 10 year’s time, we are free of dependence on Middle Eastern oil. And we can do it. Now, when JFK said we’re going to the Moon in 10 years, nobody was sure how to do it, but we understood that, if the American people make a decision to do something, it gets done. So that would be priority number one.” President Barack Obama, 2008

The US drive for energy independence is ongoing. The Shale energy story is an exciting one because it offers light at the end of the tunnel to potentially hundreds of thousands of American citizens humbled by unemployment and impoverished by high oil prices.

Shale Oil offers highly attractive break-even levels estimated at around $50 per barrel, by both insiders and industry consultants, with increasing recovery rates driving significant growth in the industry. This healthy cushion between current spot of north of $100 and these breakevens gives a margin of safety to anyone planning projects of this type.

The US EIA predicts that Shale Oil production growth will be 12% per year out to 2035, a clear indication of the US appetite for self sufficiency. The International Energy Agency forecasts that growth in Shale Oil production in the US of 265% from 2010 to 2016.

The chart below demonstrates the scale of the boom we are currently experiencing, US shale gas production has increased by a factor of 12x of the last decade and now that focus is switching to Shale Oil due to the current pricing differential.

Horizontal wells require longer laterals, more frac stages/pumps and increases the service intensity – Halliburton Company (NYSE:HAL) have estimated that this means revenue per well could be 1.4x to 1.8x higher for the service companies than for that of a dry gas well.

Some estimates suggest that just the Bakken in North Dakota could be producing 1m barrels per day by 2020 which is circa 1% of global production from one US state. Some have suggested that the Bakken has more crude than Saudi with an estimate of 300 billion barrels of oil. The main reservoir occupies around 200,000 square miles deep underground.  Even today North Dakota produces more oil than Ecuador which is an OPEC member!

How much of the 300 billion barrels is actually accessible is dependent on the extent to which technology and expertise continue to advance. What was once impossible is now practiced widely. The recoverable percentage is likely to go up and the breakeven on the extraction may well fall. As an example, in 1995 the recovery rate was estimated at 0.1%, in 2008 it was estimated at 1.5% and now it is gravitating towards 3%.


Horizontal Drilling – The Game Changer?

Horizontal Drilling has been described by former BP plc (NYSE:BP) (LON:BP) CEO Tony Hayward as a “game changer” and by Sir Ian Wood, founder of The Wood Group, as “the most significant development in the industry in a generation”.

The dynamics of the industry are extremely attractive for CalFrac. There is growth on top of growth here. Increased expertise and advancements in technology have led to the fracking process becoming increasingly more intensive. More wells being drilled, lateral lengths increasing, greater horsepower requirements and increasing frac stages per well leads to higher

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