C&J Energy Services (NYSE: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”CJ” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) has witnessed a remarkable turnaround in its fortunes in 2019. The stock had taken a massive beating last year but has shot up in excess of 22% so far this year, though there hasn’t been any company-specific news.
[stock_market_widget type=”chart” template=”basic” color=”blue” assets=”CJ” range=”1y” interval=”1mo” axes=”true” cursor=”true” api=”yf”]C&J supplies well construction, completion, support, and other oilfield-related services to exploration and production companies, so it is surprising to see the stock rising of late despite the headwinds that it faces. In fact, C&J investors might get a reality check when the company comes out with its fourth-quarter results on Feb. 21. Here’s why.
C&J Shares Face A Sharp Drop Ahead
Analysts expect C&J’s top line to increase just 1.2% for the fourth quarter to $498 million. However, the company is expected to swing to a loss of $0.27 per share as compared to a profit of $0.31 a share in the prior-year period. Such a steep bottom line drop might seem surprising considering that the company’s revenue is expected to grow slightly, but a softening end-market environment will reduce demand for C&J’s services and lower its utilization rates.
C&J management had pointed out in the company’s third-quarter report that it was facing “customer job delays and lower overall utilization in our fracturing business, as well as utilization declines in our other completion-oriented businesses.” The company went on to clarify that it expects the softness to continue into the fourth quarter, which will eventually hurt its completion business and also lower the utilization rate across the majority of the company’s core operations.
Additionally, C&J’s acquisition of oilfield cementing services provider O-Tex isn’t delivering either. C&J had spent $132 million to acquire O-Tex toward the end of 2017, but the timing of the acquisition seems to have been off as it is facing equipment downtime and cost overruns. The bad news for C&J is that the headwinds won’t be dispersing anytime soon in light of recent end-market developments.
This could lead to a further decline in the revenue and margins of the completion services business that supplies nearly two-thirds of the total revenue.
Oil Company Cutbacks Hurt C&J’s Outlook
Sliding oil prices in recent months mean that West Texas Intermediate (WTI) crude fell close to the break-even price in shale areas of the U.S. Now, oil prices might have recovered of late, but exploration and production companies are treading cautiously so as not to burn their hand in case another decline comes their way.
As a result, several oil companies in North America have slashed their 2019 capital budgets to preserve their balance sheets and keep spending under control. That’s bad news for C&J as demand for its well completion services could decline further going forward, which would eventually hurt margins thanks to an increase in equipment downtime and lower utilization rates.
In the end, it is unlikely C&J Energy Services will sustain its recent stock price momentum despite the rise in oil prices as producers are looking to keep a handle on their 2019 spending. Investors should brace for weak guidance from C&J Energy when it releases its next set of results.
