It is never fun to arrive at a party to discover it has already ended. Excited investors who've been looking to wager on a rebound in the US energy sector may start to feel a little bit deflated when they check the share prices of the once bombed-out oil services companies. Shares in Halliburton have almost doubled over the last 12 months as high oil has, in the words of Halliburton's chief executive this week, meant that the animal spirits have broken free and they are running. But for those who feel left behind, there is still a bit of hope, but it will require digging around some of the more obscure parts of the US stock market.
A number of smaller American oil services companies entered into chapter 11 bankruptcy over the last three years, having run up too much debt when the energy market took a tumble. Some of these are now quietly re-emerging from bankruptcy and relisting on the New York Stock Exchange, having restructured their debts. They're barely followed by any Wall Street analysts and they trade at deep discount to peers. And in some ways, can be seen to offer a way to bet on recovery in US domestic drilling whilst avoiding being swept up in the irrational exuberance on display in the wide oil services sector.
One of these companies, which is the Houston based Key Energy, entered into chapter 11 in October and re-emerged from the process just over a month ago. It was one of the largest US onshore rig-based well services companies, and Key's restructuring involved all about wiping out the shareholders and slashing its net debt from a previous eight $168 million to now $142 million. Since getting out of Chapter 11 in mid-December, its equity has traded out a total value of around $700 million giving an enterprise value of $840 million.
If Key Energy Services' business recovers to anywhere near where it was before the oil slump-- so for example in 2012, it made over $400 million in earnings before interest, taxation, depreciation, and amortisation, then that would imply the shares trade today on an implied future enterprise value over EBITDA of just about two times. So if you then assign Key a fairly conservative multiple of five times EBIDTA. We have to remember that Halliburton, a far, far larger peer, trades on a two-year forward multiple of 10 times more than double-- then Key share price more than doubles itself. A return like that would certainly help ease any disappointment at missing out on last year's recovery.
