MY FAVOURITE OIL SERVICES COMPANY PHX ENERGY SERVICES PHX-TSX PHXHF-PINK

It’s rare to find a company–in any sector–with a combination of high quality management who own a lot of stock and execute SO WELL on a business model—as well as PHX Energy Services does.

I bought this stock for both my newsletter portfolios–InvestingWhisperer and the Oil and Gas Investments Bulletin.

They arguably don’t have a moat, as the two large OFS (OilField Services) companies Schlumberger and Halliburton–also offer very similar drilling services.

But this company continues to take market share and increase revenue and EBITDA, to the point where they

A) pay a dividend
B) buy back stock
C) pay down debt

every year.

I have been moving my own capital into dividend paying stocks in the last year, and this company is a compounder that pays 9% (a bit less now that it has run up). Most compounders pay 2-3% yield.

Here’s my original write up for subscribers that went out a short time ago when the stock was $8. Obviously, I had no idea that war would break out and send all oil-related stocks higher, but this company performs so well that it, to me, takes a big chunk of cyclicality out of the stock:

PHX Energy Services  PHX-TSX  PHXHF-PINK

Old-school drilling is like using a hammer and chisel to dig a tunnel. PHX’s drilling technology—all built in-house—is like a laser-guided drill with real-time AI optimization. PHX drills faster/cheaper/better than the competition, saving $$ and allowing more wells to get drilled in a year.

PHX will likely go net debt free this quarter, they pay 80 cents a year dividend, 20 cents/quarter, just under 10%. And they make so much money they buy back stock every year—which to me sets up years of dividend increases!

NEVER WASTE A GOOD CRISIS! Institutional money flew to the sidelines this spring as President Trump started his campaign to get the USD and interest rates lower—by threatening tariffs on everyone from Canada to a remote island where only penguins live.

And for a couple months, it worked! Both the greenback and the 10 yr rate went lower. And oil prices tumbled hard, taking oil stocks with it (naturally).

But as China and the US kiss and make up, markets are now not pricing in so dire a situation—and oil is rebounding. At the same time, the Street seems to be really coming around to the idea that natural gas will fuel most of the increased power demand that will allegedly be coming from the AI boom.

So both oil and gas have become at least a bit bullish—even as most every country in the world is broke.

Natgas prices have been going up for a 2-3 weeks, and oil just popped as China-US relations started to warm, so I think one of my favourite companies is now a great buy—so Tuesday I bought 20,000 PHX Energy Services at $8.07.

While I was travelling, PHX Energy Services (PHX-TSX) reported its best year in company history, and then in early May reported its best Q1 ever. And the stock kept dropping!!!

For 2024, they had annual revenue of $659.7 million, an all-time high, with record Q4 revenue of $178.7 million. EBITDA margin is about 20%. Last year paid out $37.6 million in dividends, and bought back 2.1 million shares.

QUICK FACTS

Trading Symbols: PHX
Share Price Today: $8.07
Shares Outstanding: 45.56 million
Market Capitalization: $367 million
Net Debt: $12.2 million*
Enterprise Value: $379.2 million
EPS (TTM): $1.16
Dividend & Yield: $0.80 (9.91%)

POSITIVES

1. PHX is Gaining Market Share

Drilling activity in the U.S. dropped 13% from an average of 687 rigs in 2023, to 599 rigs in 2024, an obvious challenge for service companies.
PHX grew U.S. revenue to a record-breaking $479.5 million. How?

• More producers are adopting PHX’s directional drilling technology to reduce drilling time and costs.
• The industry is continuing to move to ever-longer horizontal wells, which require precision drilling tools—PHX’s specialty.

2. Focused on High-Margin, Technology-Driven Services

Many oilfield service companies depend on rig count growth to drive revenue. PHX has more complex technology that creates a more compelling value-add for customers (the O&G producers)—so they get to charge more.

• The industry is shifting to longer horizontal wells, which require PHX’s drilling technology.
• PHX technology has been used successfully in 10,000-15,000+ horizontal wells where standard telemetry can fail in deep, high-pressure formations.
• In 2017, drilling a 10,000-ft lateral well took 8.76 days.
• In 2024, using PHX’s tools, that same well is drilled in 3.8 days.

Faster drilling means:

✔ Lower costs for operators.
✔ Faster project completion.
✔ More wells drilled per year.

3. Almost No Debt, Massive Free Cash Flow

Unlike many oilfield service providers that carry a lot of debt, PHX has kept its balance sheet lean.
• Net debt: $12.27 million as of Q1 25 financials, very low debt compared to direct peers like ACT Energy (ACX-TSX) $106 million net debt, Precision Drilling (PD) $888 million net debt, and Ensign Energy Services (ESI-TSX) $1.1 billion net debt.
• No real interest burden or refinancing risk.
• More flexibility to increase shareholder returns.

4. PHX Continues to Prioritize Shareholder Returns

PHX is steadily increasing dividends and reducing share count; buying back stock.

• $37.6 million in dividends paid in 2024, up 24% from 2023.
• 2.14 million shares repurchased, part of a 25% share reduction since 2017.
• 70% of excess cash flow goes to buybacks and dividends.

5. Profits Increase—due to no longer renting RSS Rotary Steerage equipment from Schlumberger.

NEGATIVES

1. U.S. Rig Counts are Down

The U.S. makes up 73% of PHX’s revenue, so when drilling slows, investors naturally question the outlook.

• 2024 U.S. rig count fell 13%, usually bad news for oil services.
• Yet PHX’s U.S. revenue hit an all-time high of $479.5M in 2024, and all time high Q1 recently — $193.7 million, which is 17 percent higher than the $166.1 million generated in the first quarter of 2024 and 8 percent greater than the previous quarterly record of $178.7 million generated in the fourth quarter of 2024.

Rig counts don’t tell the whole story. Producers are drilling fewer wells, but they’re making them bigger and more complex. Many producers are drilling 10,000-12,000 ft laterals, with some exceeding 15,000 feet, increasing demand for precision drilling services.

That being said, while PHX has continued to grow despite lower industry activity, a prolonged decline in drilling could present challenges.

While PHX works with 23 of the top 25 North American producers, sustained oil price weakness could affect industry spending.

BACKGROUND

PHX is the largest independent directional drilling provider in North America, meaning it operates without being tied to a major oilfield services conglomerate.

What PHX Actually Does

PHX isn’t a traditional drilling contractor; it provides specialized drilling tools and data solutions that improve well efficiency.

Here’s a simple way to think about it:

• Old-school drilling is like using a hammer and chisel to dig a tunnel.
• PHX’s technology is like a laser-guided drill with real-time AI optimization.

The more accurate the well placement, the higher the oil recovery and the lower the drilling costs.

Why PHX’s Business Model is Different

Most oil services companies are tied directly to rig count fluctuations. If drilling slows down, their revenue takes a hit. PHX has built a more resilient business.

• Technology-driven pricing power: PHX’s premium tools command higher rates than standard drilling services. They get about US$15,000 a day more for their specialized, Tier 1 equipment like RSS Rotary Steerage and MWD

NOTE—both Haliburton and Schlumberger have similar technologies, but PHX designs and builds everything in house so their product is slightly different in both hardware and software. This is not really a commodity, but it is, kind of. Also remember that customers LIKE TO HAVE OPTIONS. Nobody wants single source suppliers on such an important part of producing oil.

• Recurring revenue streams: Many of PHX’s tools and services operate on rental and data-based contracts.
• Efficiency-first focus: Operators use PHX’s technology to drill faster, lowering their own costs.
• That’s why PHX’s U.S. revenue hit a record high in 2024, even though U.S. rig counts fell 13%.

Key Differentiators

Largest Independent Provider of Directional Drilling Services
• PHX remains independent, giving oil producers an alternative to global giants, providing flexibility in the supply chain.

Global Experience Adds Another Layer of Expertise

• While the focus remains on Canada & US, PHX has operated globally (Albania, Russia, South America) and has the experience to explore new markets.
• Producers want a service provider that can adapt to different drilling scenarios and on-the-ground operational challenges. PHX’s work in Albania, Russia, and South America shows that its tools and teams can work in a range of rock types, climates, well designs, etc., not just Western Canada or the Permian.

Exclusive Focus on High-Tech Drilling Tools

• Rotary Steerable Systems (RSS): Automated well steering for precise directional control.
• Velocity Real-Time Measurement-While-Drilling System (MWD): Live drilling data to optimize well placement.
• Atlas Motors: High-efficiency motors that improve performance and extend drilling tool lifespan.
• Dual-Telemetry System (MP+EM): Simultaneous Mud Pulse (MP) and Electromagnetic (EM) telemetry ensures more reliable data transmission.
• Multi-Decoder System (MD): PHX’s proprietary AI-based signal processor consolidates data from multiple telemetry streams and automatically filters out low-quality signals. It continuously re-optimizes itself during drilling, improving MWD accuracy in real time. This reduces signal failure and improves drilling efficiency, especially in deeper or more complex wells.

Less Cyclical, More Resilient Revenue Model

• PHX’s technology remains in demand even when drilling budgets tighten.

PHX Builds, Tests, and Maintains Its Own Equipment

• While other companies may offer similar drilling tools (except for the patented-protected Multi-Decoder System), PHX designs, manufactures, and services its own drilling tools in-house.
• In-house manufacturing allows PHX to maintain strict quality control, reducing costly equipment failures in the field.
• Doesn’t have to rely on external suppliers, avoiding markups and delays.

Survey Management & Optimization Services Set It Apart

• Real-time wellbore corrections, minimizing trajectory errors.
• ISCWSA-certified experts providing precision drilling analysis.

Why This Matters for Investors

✔ Unlike traditional oilfield services stocks that swing with drilling cycles, PHX’s technology-driven model provides a steadier revenue base. The shift toward longer laterals and more complex wells supports ongoing demand for its premium tools.

✔ PHX isn’t pressured by high interest costs or refinancing risks. This allows it to prioritize shareholder returns instead of just maintaining operations.

✔ High-value contracts drive long-term visibility. PHX’s tool rental and data services create recurring revenue opportunities, reducing reliance on one-time drilling contracts. Its presence in both Canada and the U.S. gives it access to a diverse customer base.

✔ Operational control keeps PHX ahead. By building and maintaining its own tools, PHX avoids supply chain constraints that can hurt competitors. This ensures faster technology rollouts and better margins.

With most of our reports, we talk to management and often some of the large shareholders. I didn’t do that here, but this story and its numbers are transparent and compelling.