International Expansion Can Help Total Energy Services Grow

Looking for undiscovered and under-followed companies in the energy sector, I have been watching Total Energy Services (TSX: TOT) since late 2012. Total is involved in contract drilling services, rentals and transportation services and the fabrication, sale, rental and servicing of natural gas compression equipment. Due to a painful first half of 2013, the company has been evaluating several investment opportunities in order to stop this situation from getting worse.

There is a growth problem here
Total was severely hit by the fact that it operates exclusively in Canada, where cash flows are more seasonal and the business is more cyclical than in the US or internationally. Despite this worrisome weakness, Total isn't in the emergency room yet. It has still a debt-free balance sheet, a decent cash tank and positive cash flow to fund its operations during the remainder of 2013.

A few days ago, the company increased its 2013 capital expenditure budget in order to construct an AC electric telescopic double drilling rig complete with top drive. The construction of this specialized rig represents the company's entry into the AC electric drilling rig market. Total believes that this segment of the drilling market will represent an area of potential significant future growth for its contract drilling services division.

Is this specialized rig the solution to Total's lack of growth and weakening bottom line? To me, this initiative is a drop in the ocean. One swallow doesn't make a summer, but Total's growth can come from its international expansion instead.

The international appeal
Many oilfield service companies go looking for international business to smooth out their business cycle in Canada, where busy winters are followed by the lull of spring breakup. There are select oilfield markets with year-round activity that help these companies plan better for their equipment and grow their revenue stream. The drilling activity in these markets is less volatile than in Canada and doesn't incur persistently low gas prices or wide oil differentials.

One of the diversified companies of the sector is Precision Drilling (NYSE: PDS). Precision's CEO has noted that subdued activity levels in North America continue to disappoint many in the industry. The company's drilling rig utilization days in Q2 2013 decreased in North America compared to the second quarter of 2012, as a result of wet weather in Canada, continuing low natural gas prices, and lower levels of customer activity. http://finance.yahoo.com/news/precision-drilling-corporation-announces-2013-100000728.html

The plummet in gas-directed drilling activity in North America, which began in late 2011 and continues in 2013, has put pressure on industry utilization and dayrates. Precision has partially offset this pressure by growing its international contract drilling business. After selling its international drilling business to Rutherford in 2005, Precision has again been building up an international presence, validating the potential of the international drilling markets.

Do it like Schlumberger
Precision Drilling isn't alone in taking the international expansion pill. Schlumberger (NYSE: SLB) issoaring on global drilling activity, which is at a three-decade high. Schlumberger's strength in international markets insulates it from the uncertain oilfield market in the home country of rivals Halliburton and Baker Hughes over the rest of 2013.

Schlumberger makes more than two-thirds of its revenue outside North America and is witnessing an exploration and drilling boom in Saudi Arabia, China, Australia and several other international markets. This has helped Schlumberger repurchase over 105 million shares of common stock thus far, for a total purchase price of $7.8 billion, and the remaining balance of $187 million will be exhausted in Q3. Last July, Schlumberger approved a new share repurchase program of $10 billion to be completed by 2018.

After all, Total doesn't need to reinvent the wheel. If Total doesn't want the operational downtrend to stick around, it needs to make a deliberate choice to expand in emerging petroleum basins internationally. These basins (i.e. Llanos Basin in Colombia, Reconcavo Basin in Brazil, Amazon Basins in Peru and Ecuador) have been undergoing rapid growth in exploration spending. The game is also less competitive there than in North America where the supply often exceeds the demand, leading in pricing pressure.

The international drilling projects aren't risk-free. There is no such thing as a free lunch, right? The international business bears country-specific risk, currency risk or repatriation of income and capital risks. However, there are emerging markets with political stability where all these risks can be significantly mitigated.

Foolish Takeaway
The low natural gas prices, along with competitive pressures and weather-related delays in the post break-up season, are significant headwinds for any oilfield service company that focuses in Canada. Meanwhile, the booming drilling activity internationally, in conjunction with low competition and a favorable operating environment with lower seasonality and cyclicality, can help Total turn its ship around before it is too late.

The article International Expansion Can Help Total Energy Services Grow originally appeared on Fool.com.

Nathan Kirykos has no position in any stocks mentioned. The Motley Fool owns shares of Precision Drilling Trust. 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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