Friday, July 05, 2013

Hydraulic Fracturing Added to Energy Index

It is gratifying to see one of the stocks in our Crystal Reports coverage group included in the exchange traded fund Power Shares S&P Smallcap Energy (PSCE: Nasdaq).  Shares of C&J Energy Services represent the eight largest holding for the fund  -  approximately 5% of total assets.

C&J Energy Services (CJES:  Nasdaq) provides hydraulic fracturing and coiled tubing services for the oil and gas industry as well as a full range of services for oil and gas wells from initial drilling to plugging and abandonment.  The company also sells fracturing, coiled tubing and pressure pumping equipment.  C&J now operates six separate service fleets.  Its footprint in the U.S. has been expanding and now serves customers in twelve separate oil and gas fields from the Bakken Shale in North Dakota down to the Eagle Ford Shale in Texas and across to the Utica and Marcellus fields in the Appalachian basin.

At the current price level CJES shares represent a market value of $1.0 billion.  However, in February 2013 when CJES was first added to the S&P Smallcap 600 Index and its energy sub-index, it was a much heftier $1.3 billion in market capitalization. C&J disappointed investors with lower than expected earnings in both the December 2012 and March 2013 quarters.  Since these two reports investors have trimmed 20% off the stock price.  Analysts have moderated their expectations for the June and September 2013 quarters, providing the company with easier hurdles.  Unfortunately, reduced expectations have also trimmed valuation sentiment.

CJES shares were first included in the S&P Smallcap 600 Index when another member was acquired and had to be replaced.  To remain in the index the market cap is considered in the context of its short- and medium-term historical trends.  A stock must trade at a reasonable price and demonstrated adequate liquidity, the latter of which is measured as the ratio of annual dollar value traded to float adjusted market capitalization.  Liquidity should be 1.00 or greater.  Additionally, average trading volume should be a minimum of 250,000 shares over the most recent six months.  The company must demonstrate financial viability through at least four consecutive quarters of profitability.

Reconstitutions of the S&P Smallcap 600 index can come along at any time.  Companies that substantially violate one or more of the addition criteria can be booted out of the index and therefore the Power Shares energy ETF.  The index is also rebalanced every quarter with the most recent rebalance in June 2013.  The Power Shares Smallcap Energy ETF that is the subject of this current series follows suit. 

C&J Energy Services has had some headwind in its markets.  Competition is keen in the hydraulic fracturing market.  That said, the company is probably going to remain profitable and has a decent moat around its customer base and market share.  It is not likely to lose its berth in the index without further erosion in its financial performance.  The company delivered $158.1 million in net income or $2.91 per share on $1.2 billion in total revenue in the twelve months ending March 2013.  Operating cash flow in that period was $247.5 million, representing 20.6% of sales.  The Street may have been disappointed in the two recent quarters, but that rate of sales to cash conversion demands some respect.

 
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research currently has a buy recommendation on CJES shares.

 

 

1 comment:

Bruce Hammerson said...

Don't know what are benefits to add hydraulic fracturing to energy index?

Thanks
Bruce Hammerson

Hydraulic Hammers