Should you buy Titan Energy Services?

One of the best performing mining services companies this year has been Titan Energy Services (ASX: TTN). Most mining services contractors have been severely hit by the well-publicised end of the mining boom. However, this provided an opportunity for savvy investors to pick up shares in companies that are exposed to production rather than capital expenditure. Titan was one such company.

And it has not disappointed. The share price has moved from under 90 cents to $2.25 in the last 12 months, a gain of 150%. EBIT for FY 2014 were previously projected to skyrocket to $9 million – $9.5 million in the first-half of FY 2014. However, the earnings guidance released on Friday adjusted the expected EBIT down to $8 million. Still an 86% improvement on the first-half of FY 2013. The company still expects to achieve EBIT of $21 million to $23 million for FY 2014.

If the full year guidance is accurate, this could provide a buying opportunity for investors looking to gain exposure to the coal seam gas industry, although the company expects a considerably improved second-half. At current prices, Titan is trading on a trailing P/E ratio of 8.65, and a dividend yield of 2.95%, fully franked. The company will be involved in extracting the gas that will supply the new export terminals on the east coast, so the long-term prospects look good. However, it’s worth noting there has been significant director selling since September.

It’s also important to note that the company is exposed to weather related risks. In recent years, the east coast of Australia has been beset by a series of floods that tend to disrupt the resource industry. If this flooding becomes more frequent, the company is likely to face volatile earnings. In that case, a volatile share price is likely to follow, allowing investors the chance to pick up shares when they are cheap, and sell when they’re expensive. The best time to buy Titan might be when floods interrupt their operations.

Another mining services company exposed to production rather than exploration is explosives manufacturer Orica (ASX: ORI). The company’s operations have, in the past, created environmental hazards, so the company is not without risk. However, demand for explosives is likely to continue throughout the production phase of the mining boom. Orica currently trades on a P/E ratio of just under 14, and a dividend yield of 4%, fully franked. The analyst consensus is that earnings will increase in FY 2014. On the other hand, it’s worth noting that one of the directors sold $1.35 million worth of shares in October.

Foolish takeaway

This Fool doesn’t have the temperament to invest in companies that are exposed to commodity prices. However, I think Titan is an interesting play on the east coast gas industry and I’m partial to the theory that mining services companies with exposure to producing assets (rather than new assets) will generate value for shareholders over the next few years.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

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