Quote:
Originally Posted by Shifty86
Would you mind giving your thoughts on why you think NAL is a good buy?
similar to HOS its a bet on oil prices recovering but with very asymmetrical payouts.
NAL is an oil services company, focusing on oil sands tailing ponds cleanup, waste water disposal and landfills, tank cleaning ect. Some of its business is drectly tied to drilling activity and some shouldnt. I say shouldnt because things like waste water should be generated even if new wells arent driled by older wells having greater and greater water cuts. Yet in Q3 and Q4 they are even seeing a drop off in this business. How is that possible?
Well E&P companies are so stressed right now that they are retaining waste water on site, delaying cleaning out tanks, anything to conserve cash. This can only continue for so long as oil companies have a limited ability to do this in house and after a few months need to utilise 3rd party guys like NAL. So were looking at Q3 and Q4 being worse than most peoples floor expectations purely due to short term stuff that cant be deferred much longer. Thus results in 2016 can be better than second half 2015 even if oil doesnt recover.
Now im not betting on oil staying under 40$. I think thats pretty much impossible past one more year as producers will start going bankrupt en masse. But its not that relevant as what matters for NAL is really activity levels. So when activity picks up a bit so will NALs revenues. When does that happen? My guess is towards the end of 2016. So its some time to wait but luckily NAL mostly has termed out debt and very little bank debt (which they already got waivers on the covenants until 2017) so there is no immediate risk of bankruptcy.
If oil goes back towards a 55-60 level I think its pretty likely this becomes a $15 stock again and something like 45-55 should see it back to $10. worst case is bankruptcy in 2 or 3 years obviously but just run out a probability analysis and it becomes very compelling.
Best guess in 24 months is:
oil at $30 = 0 stockprice = 20% odds
oil at $45-55 = 10$ = 25%
oil at $55-65 = $15 = 40%
oil north of $65 = 20 = 15%
means target price is = $11.50 vs $3.50 today