The oil and gas industry has been booming in North America. Production has grown substantially over the past 12 months, especially with the advent of newer and hotter shale plays. Oilfield services, therefore, are in big demand. But there is another huge opportunity that is waiting to be exploited, whose significance investors are yet to realize fully. Read on, since this could be a money-making opportunity.
The oft ignored segment
Upstream companies have been increasing production on a massive scale. To meet that demand, oilfield services and drilling companies have been scaling up in a big way. But there is a segment that gets overlooked and yet, has huge potential for growth -- thanks to various environmental concerns and policies that are being implemented.
Exploration and production involves a lot of waste generation. Along with the produced hydrocarbons come a lot of salt water, drilling fluids, drill cuttings, sands, and other solid contaminants. And sometimes, along come hazardous radioactive materials as well. All of these require expert handling, and this is where Newpark Resources (NYS: NR) comes to the fore.
This company's forte lies in specialized waste disposal and management. Through its receiving and transfer facilities, Newpark collects E&P wastes from drilling and production sites. These are either transferred to its Texas facility or sent to injection disposal facilities. Currently, the company operates a 50-acre injection facility in Texas. Additionally, Newpark also operates a 400-acre facility for waste disposal.
The company uses low pressure injection to dispose off E&P wastes into geological structures deep underground. This patented technology is what I'm banking on to boost business.
Whether the drilling site is onshore, off-shore, or deep-water, waste disposal services should grow exponentially. And here's the best part: Competition is pretty much fragmented. There is not a single major third-party operator, with the exception of unlisted U.S. Liquids of Louisiana. This is where I'm seeing a huge opportunity. The upcoming shale play of Eagle Ford and further drilling in the mature Barnett shale play provide excellent opportunity for the next few years.
Still more promise
Newpark's other segments should also see improvement. Its fluids systems and engineering business should no doubt see growth going forward. Fracking has especially opened up new avenues. Horizontal drilling and deep-water drilling in the Gulf are pretty much the best prospects coming up. Schlumberger (NYS: SLB) , Halliburton (NYS: HAL) , National Oilwell Varco (NYS: NOV) , and Baker Hughes International (NYS: BHI) are the major competitors in this segment and all of these stocks are touted for major growth. While cleanup isn't the biggest part of these companies' businesses, demand for the cleanup services Newpark provides is likely to grow alongside the rest of the industry.
Well-site services like mat rentals to E&P customers are another part of Newpark's business. Again, competition in this segment looks weak. I'm expecting this segment to contribute more than the current 10% of the revenues in the future.
The numbers look promising
But the overall market seems to have missed out on Newpark. This $700 million company looks the cheapest at the moment. With a price-to-earnings of 12.6, the stock is cheaper than Schlumberger at 21.0, Halliburton and National both at 15.6, and Baker at 18.6. Foolish investors should definitely take note.
While operating income has skyrocketed 207% to $103 million from $33 million in the last 12 months, the low earnings multiple indicates that the market is yet to fully factor in this development. The stock looks absolutely cheap. I believe that earnings will see further growth given the prospects for its services.
The Foolish bottom line
The Great Recession did see a drop in the average North American rig-count and overall drilling. However, things have picked up pretty well since. With natural gas demand looking to be promising, and higher global demand for energy, things should see significant improvement. Again, it doesn't really matter to Newpark whether a serious environmental issue has taken place. These concerns will be around as long as newer technologies like fracking keep coming.
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At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article.The Motley Fool owns shares of Schlumberger and National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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