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The Smart Play for a Rising Oil Market

Jeff Nielson Jeff Nielson, Stockhouse
0 Comments| November 14, 2017

Click to enlargeOil prices are rising. Every investor who follows energy prices will be aware that crude prices have been steadily rising over recent weeks.

Today, the price of oil hit a two-year high. Brent crude has surpassed $62/bbl, while the WTI quote is now above $57/bbl. Oil producers are looking for even better prices.

OPEC Is Already Thinking About $70 Oil

As a recent Bloomberg article notes, price expectations for OPEC members have been rising at least as fast as crude prices. A glance at a 5-year chart for oil shows that current prices still look modest in relation to prices seen just a few years back. Put another way, there is still plenty of room for oil prices to run.

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[chart reproduced courtesy of]

For investors, this raises a question: how best to capitalize on a rising oil market? The dynamics of oil production are quite straightforward. Rising oil prices improve operating margins for producers.

These higher current prices are not a surprise for more attentive investors. Over the latter part of summer and early fall, analysts have been calling for continued strength in crude prices, with the expectation that this rising price trend will continue (at least) into early 2018.

Why are oil prices once again rising? Rather than there being a single answer, there are actually multiple factors involved. A modest increase in demand has led to a steady drawdown of inventories. U.S. inventories have declined by 126 million barrels since the middle of February, with declines in 26 of the last 32 weeks (as of mid-October). Further adding to positive sentiments has been a parallel decline in oil inventories across the OECD.

Then there is the “fear premium”, once again tied into geopolitical uncertainty and strife in the Middle East. The Gulf Council boycott of Qatar and the latest independence push by Iraqi Kurds have ratcheted up tensions across most of the Middle East.

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On the supply side, analysts talk about “overly optimistic EIA supply forecasts”, reflecting “the hyperbole regularly heard from shale oil executives”. In fact, U.S. oil output has flattened out in 2017, with the result that the EIA has now downgraded its production forecasts.

Demand is strengthening. Inventories have been falling. Supply has been exaggerated. Any one of these parameters would be enough to generate optimism with energy investors. Put all three factors together simultaneously, and it should be enough to get energy investors fully engaged.

As already noted, these rising prices have significantly improved operating margins for oil producers. What else results from rising prices? Drilling activity is stimulated.

If oil producers are now making more money with every operating well, one of their top priorities is to increase the number of operating wells. That means more drilling. The faster prices rise and the higher prices rise, the more that drilling activity in the oil patch will be ramped up.

Of course, drilling for oil is not a precise science. No matter how experienced the management team, or how prospective the oil field, not every well successfully hits oil (or gas).

Wouldn’t it be nice if oil investors could buy into a company that prospers every time a new oil well is drilled – whether or not the drilling actually strikes oil? In fact, they can. Aveda Transportation and Energy Services Inc. (TSX: AVE, OTCQB: PHNHF, Forum) is an oil services company. Specifically, AVE is the largest oil rig-moving company in North America.

Oil rigs don’t magically materialize in precisely the spots where oil companies want to drill. They must be loaded onto special transportation equipment, safely and securely hauled to their destination, and then expertly unloaded and set up for drilling. It’s a specialized service for the oil & gas sector, and no one does this better than Aveda.

The Stockhouse audience has already been exposed to AVE in several previous articles. Most recently, a full-length feature article in August pointed to the Company as “an energy sector steal”. On the date that article was released, Aveda was trading at $0.40/share.

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AVE has since appreciated by (as of this writing) more than 50%, now trading above $0.60/share. While the price of crude has been steadily rising over this span, arguably Aveda’s higher valuation hasn’t even begun to factor in higher crude prices – and their future impact on drilling activity.

The Company has recorded back-to-back blockbuster quarters. Record revenues in Q1; record revenues, gross profits and EBITDA for Q2. Even with the 50+% gain in price, many shareholders (and perhaps AVE’s management) would argue that Aveda’s share price should have run even farther.

This is a Company whose share price was badly beaten up by the market. After rising to more than $5/share in 2014, the market punished AVE when oil prices plunged.

In part, this was purely a function of market conditions. However, Aveda was also caught somewhat overextended at that time, with its balance sheet heavily leveraged with debt. The Company’s share price plummeted by roughly 90%.

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This led to a restructuring of management, and a new game plan to turn around operations. Chairman David Werklund, an energy sector icon, and new President/CEO Ronnie Witherspoon revamped the Company from top to bottom.

It was this decisive action that turned around Aveda’s operations – and bottom line – even before recent strength in the oil market kicked in.  As reported to the Stockhouse audience in the first feature article on Aveda (April 21, 2017), this resulted in a “major turnaround”. However, even as management solidified AVE’s balance sheet and dramatically reduced costs, they were already looking ahead.

The Company has put in place a second Midland oil terminal, significantly improving its capacity to service oil field operators in Texas’ famed West Permian basin – the current hot-spot in North America for oil production. AVE’s network of terminals now represent coverage of approximately 70% of North American oil production. With oil prices steadily rising, this management decision now appears to be particularly shrewd.

Parallel to this, AVE has undertaken a significant “refurbishment program” for its rig-hauling fleet. This further upgrades the capacity of Aveda to directly service oil field operations, reducing its use of sub-contracting. With margins on its in-house hauling close to 30% (versus 2% on sub-contracting), there are a lot of additional revenue dollars up for grabs.
From the end of 2015 to the present, Aveda has:

  1. Gone from an operating loss to record EBITDA
  2. Dramatically strengthened the Company’s balance sheet
  3. Strategically added a new oil terminal
  4. Upgraded its rig-hauling fleet

CEO Witherspoon offers these insights:

“We’ve been fortunate to build a team for Aveda that shows a passion for excellence and commitment to the goals of the organization, allowing us to execute at a new level. I’m proud of their achievements over the last year, and look forward to the excitement of tackling the future together. I believe our foundation and practices, along with strong vision, will lead to continued success as we navigate forward.”

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Given this stellar performance over the past two years, many investors may look at AVE’s stock chart and have expected additional appreciation, even in a flat oil price environment. Indeed, bottom-line performance still doesn’t reflect the full impact of these operational improvements.

With the price of oil accelerating (along with drilling activity), the Company is now preparing to release its Q3 results. With the very strong results of the previous two quarters – at a much lower price of oil – expectations will be high.

Rising oil prices mean opportunity for energy investors. What is the best way to capitalize on this opportunity? For many investors, the answer to that question is “AVE”.

  • Undervalued
  • Industry leader
  • Strong management
  • Benefits from all drilling activity
  • Positioned for further growth

Aveda Transportation and Energy Services: the smart way for investors to profit on a rising oil market.

FULL DISCLOSURE: Aveda Transportation and Energy Services Inc is a paid client of Stockhouse Publishing.


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