Neglected Value? 3 Low-Priced Energy Turnarounds

02/20/2020 5:00 am EST

Focus: STRATEGIES

George Putnam

Editor, The Turnaround Letter

To the extent that high-priced stocks indicate successful companies, perhaps low-priced stocks indicate struggling companies, suggests turnaround specialist George Putnam, editor of The Turnaround Letter.

Investors tend to dismiss stocks with basement-level prices, so we explored this maligned group in search of neglected value.

The three stocks below — each in the oil services sector — have real businesses with substantial operating assets and capable managements, and with shares that trade on either the NYSE or Nasdaq. These companies also have appealing fundamental changes underway that could lead to much higher share prices.

Like most energy companies, the fortunes at beaten-down Comstock Resources (CRK) will rebound with any meaningful recovery in oil and gas prices. The company is the largest natural gas producer in the prolific Haynesville region in eastern Texas and Louisiana. Comstock recently acquired nearby Covey Park Energy, offering the potential for drilling and overhead synergies.

An interesting twist is that Jerry Jones (owner of the Dallas Cowboys, who made his first fortune in the energy industry) is the majority shareholder.

He recently added $650 million to his Comstock Resources stake to help fund the Covey deal. While Comstock carries some leverage, it has no maturities until 2024, providing time to allow commodity prices and operating efficiencies to help boost its profits.

One of the world’s largest helicopter operators, Era Group (ERA) survived the sharp decline in the offshore oil and gas industry, although its shares remain well-below the $33 peak of 2014. The company recently announced a merger with competitor Bristow Group (which recently emerged from bankruptcy) in an all-stock deal.

The deal concentrates capacity in fewer hands even as industry conditions may be improving. To be renamed Bristow Group, the new company will own about 82% of its fleet, and its much stronger cash flow should help it repay its moderately elevated debt. Era CEO Chris Bradshaw will lead the new company.

Spun off from premier offshore rig components maker National Oilwell Varco in 2014, NOW, Inc. (DNOW) is a major distributor of energy industry consumable products and related parts and tools. While the company continues to struggle with declining revenues and profits, its execution remains exceptional.

Cost efficiencies have helped bolster profit margins, while diligent cash management has allowed it to repay its long-term debt to zero. Now will likely continue to make selective acquisitions as quality assets become available at beaten-down prices.

Last November, the CEO abruptly departed, so the company is currently searching for a replacement. The valuation appears elevated due to the depressed EBITDA. Yet, the profits and share price would likely rebound sharply in an industry recovery.

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