CES Energy Solutions

Where we land

CES Energy Solutions makes the chemicals that oil wells need, both while they are being drilled and for years afterwards while they produce. What we like most is how steady it is. Sales are up 11% on a year ago, and its margins have barely moved in five years, a rare consistency for a company selling into one of the most cyclical industries in the world.

Much of this year's lift most likely owes to a sudden boom in the oil price, and booms like that do not last forever. We award CES a gold medal. Judged only against other chemicals and materials makers it earns silver, because that group includes neighbours we rate even more highly. Our view is respect for a business that runs well, together with caution about how much of its current pace it can control.

What the business is

CES reports a single line of business, chemical additives manufacturing, which accounts for all of its revenue. In practice that covers two related jobs: drilling fluids, the specialised liquids pumped down a well as it is drilled, and production chemicals, used on wells already pumping oil to stop corrosion, mineral scale and waxy buildup from choking the pipes. The company does not split its revenue between the two, or between its American and Canadian customers.

Its economics are those of a careful supplier rather than a premium brand. Gross margin, the share of each sale left after the direct cost of the product, is 23%. Operating margin, what remains after the cost of running the whole company, is 10%. The striking figure is the history behind them: over five years gross margin has had a middle value of 22% and has typically moved only about 2 points either side. Holding margins that narrow while selling consumable chemicals to oil producers takes real discipline on pricing and costs.

Why now

The oil market has changed sharply. WTI, the American benchmark crude, stands at $96 a barrel, up 50% in a year. Brent, the international benchmark, is at $114, up 65%. At those prices American and Canadian producers have every reason to drill more wells and keep existing ones running hard, and both mean using more of what CES sells.

The business on the receiving end is, on our measures of quality, among the strongest companies we rate, and the fastest grower among its listed peers. Yet it trades on 19 times earnings, the same price-to-earnings multiple (share price divided by profit per share) as its steadiest rivals. The market is charging nothing extra for the growth.

It joined the Gold Income 10 this month because the portfolio's rules pick from gold-rated companies, and CES stands twelfth on our ranking of dividend strength.

The case for

The strongest argument is that the outlook is improving rather than merely holding up. Analysts expect earnings per share of 1.03 this year and 1.29 next, a rise of about 25%. Every recent change has gone the same way: in the past 45 days there have been two revisions, both upgrades. Analysts are moving up to meet the business, not the other way round.

Sales point the same way. Revenue grew 11.0% on a year ago, ahead of the 7.5% a year the company has compounded over three years. Growth is speeding up, not coasting.

Behind the momentum sits a record that would be respectable in a much calmer industry. CES has been profitable in every one of the last 20 quarters. Its return on equity, the profit it earns on the money shareholders have put in, is 22.4%. A high return can be a one-year flash in a good market, but here it rests on something firmer: over five years the median return on all capital invested in the company has been 13.7%. Today's figure is a good year built on a consistent base.

Where the growth could come from

The company has made no announcements that explain the acceleration, but the pattern fits the oil price closely. With crude this much higher, North American producers most likely have more reason to drill and to push every well, which would account for the sales growth, the expected earnings rise and the run of upgrades. Busier customers buy more consumable chemicals and tend to accept firmer prices for them. Rising American and Canadian rig counts, alongside growth in treatment volumes and revenue per rig from one quarter to the next, would confirm it.

The steadier engine is production chemicals, which treat wells already flowing, mainly in the Permian basin of Texas and New Mexico and in Western Canada. Demand depends on how much oil and water comes out of existing wells, not on how many new ones are drilled, which makes this the larger and more reliable part of the business. At high oil prices producers want maximum output from every well, which should help this recurring base grow faster. Production chemical revenue rising in quarters when rig counts are flat would show the base doing its job.

Drilling fluids are the more volatile lever. CES sells them through AES in the United States and Canadian Energy Services in Canada, well by well. This is the part most exposed to whether producers answer higher prices by adding rigs or by handing cash back to their own shareholders. If they drill, it could push growth beyond current forecasts quickly. Several consecutive months of rising US land rig counts, and CES winning share in the Permian and in Canada's Montney region, would be the signs.

The last factor works through cash. CES needs relatively little heavy equipment and has historically turned spare cash into buybacks and dividends, which can keep lifting earnings per share as the share count falls. The opposing force is the rising cost of money. Free cash flow rising with sales, a falling share count and no increase in net debt would show the company winning that contest.

The case against

The flattering peer comparison can be read the other way. CES grows far faster than NewMarket and Innospec, which match its 20 profitable quarters out of 20, yet all three trade on 19 times earnings. The market may be overlooking CES, or investors may see its growth as borrowed from the oil price and refuse to pay for something they expect to fade. With quality level across the three, the discount on growth is a judgement about its durability.

Its margins are also only middling. Gross margin of 23.4% sits well below NewMarket's 31% and Elementis's 49%. Operating margin of 10.3% is roughly half the 20% both NewMarket and Elementis earn, though ahead of Innospec, TETRA and AECI. CES's strong returns come from volume and efficient use of shareholders' money rather than room to raise prices, and a business without pricing headroom feels any drop in volume quickly.

The share price has lost its drive. Over both the last three and six months its upward run has slowed markedly, even as analysts raised forecasts. The shares still beat most of the market, but the gap between improving forecasts and a stalling price is worth noticing. They have also stopped looking cheap: at 4.3 times book value, the accounting worth of the company's assets after its debts, they sit in the middle of the market.

Finally, there is debt. Net debt, borrowings minus cash, is 0.6 times shareholders' equity, moderate rather than alarming. CES keeps 7.4% of its sales as net profit, which leaves limited room to absorb higher interest bills on the money it borrows to fund stock and customer credit.

What the price assumes

The share price asks surprisingly little. If the shares stood still for five years and then traded at 18.4 times earnings, the typical multiple of profitable listed companies we cover, today's price would be justified by earnings of 0.98 a share at that point. That is below the 1.03 analysts expect this year: the market is pricing CES as though earnings will drift slightly lower.

Simply extending the current trend in operating profit gives earnings of 1.22 a share in five years, 125% of what the price requires. That works out at about 6% a year, well short of the 25% forecast for next year, but a smooth compound rate describes a climb the record does not show. The useful comparison is between levels: the price needs earnings to hold roughly where they are, and the existing trend clears that bar with room to spare.

The share price history fits. The shares have risen 91% over the past year but only 2% over six months. The big rerating has already happened; what remains priced in is a business that holds steady, not one that keeps riding the oil boom.

The other side of the medal

The risk that matters most is the one that also explains this year's strength: an oil price that has jumped in months, with Brent up 62% in three months alone. Drilling demand that arrives that fast can disappear just as fast when prices retreat, and producers cut new rigs long before they touch wells already pumping.

CES's steady margins and unbroken profits give it a solid floor, but the acceleration analysts expect next year comes from the cyclical part of the business. If crude falls back, drilling fluids would feel it first; production chemicals would cushion the blow but could not replace the growth. The early signs would be rig counts rolling over for several months in a row, and analysts starting to cut forecasts after a run of upgrades.

What to watch

The next two quarterly results will say most of what matters. The case holds if sales growth stays above 11% on a year ago while gross margin stays near 22%, showing the oil surge turning into real drilling and well-treatment work rather than a brief spike.

It would be wrong if analysts begin cutting forecasts, if sales growth slips back towards its 7.5% three-year pace, or if gross margin breaks out of its five-year band. The last would be the most telling, because the steadiness at the heart of the case would be giving way.

The numbers

The same industry, for comparison

Research for information, not personal investment advice or a recommendation to buy, sell or hold any security: see Important information. Data as at 30 September 2026.