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From Fairmount Santrol (FMSA – NC) to Preferred Sands (private company) to Black Mountain Sand (private company), we continue to see more newbuild frac sand mine announcements. FMSA announced a new Mid-Con mine on their 1Q18 conference call earlier this month (avid readers of the Morning DEW were aware of the permit filed back in April). In addition, Preferred Sands has filed new permits in the Mid-Con and the Eagle Ford basins in the past two months. And more notable, Black Mountain Sand announced this week at an industry conference the company will not only be adding more capacity in the Permian (2mm TPY of brownfield + 2-3mm greenfield) but also entering the Eagle Ford and Mid-Con frac sand markets. The Eagle Ford mine, however, is not incremental to our list as we already included this permit (Western Silica). We’d be surprised if this was the last of incremental capacity announcements.
Midland differentials have narrowed a couple of bucks over the past week or so as the Midland oil price is climbing back towards the high end of its YTD trading range of $55-65/bbl. We suspect that a week of sustaining a roughly $15/bbl differential vs Magellan East Houston oil price has either incentivized 1) E&Ps to choke back Permian wells, 2) E&Ps to delay Permian completions, 3) optimization of pipeline throughput, 4) ramp of crude trucking capacity, and/or 5) increasing crude by rail capacity. Since the absolute WTI-Midland oil price (Friday (05/18/18) close = $64.11/bbl) has remained above the $55/bbl, a price that most E&Ps have set their ‘18 budgets, we suspect that wider differentials are incentivizing the latter 3 rather than the former 2.
Since reporting 1Q earnings after the close last Wednesday (05/09/18), shares are down 4.5%, worse than the 0.6% decline in the OSX. While FTI delivered a solid 1Q beat, the upside was entirely attributed to new revenue recognition standards (ASC Topic 606) that added $36mm to 1Q EBITDA. Further, the 100bps increase to ON/OFF mgn guidance was a bit underwhelming considering that the benefit from the revenue recognition changes padded ’18 mgns by almost 200bps. Lastly, there is growing concern amongst investors regarding ’19 Cons estimates. While we agree ’19 Cons looks ambitious – our $1,486mm EBITDA is 4% below Cons – we maintain our OP rating given FTI’s differentiated integrated subsea offering, LNG exposure, leading shareholder returns, and relatively attractive valuation. Bumping up YE18 PT by $1 to $36 (10.0x WR ’19 EBITDA) on slightly higher multiple – see pgs 2-5 for detailed analysis.
Lots of debate amongst pressure pumping companies and investors these days. The bears point to the potential 4.5-5mm HHP set to enter the market this year, while the bulls see this incremental supply absorbed on an optimistic outlook for attrition and demand. We sit closer to the middle, not bullish but not uber bearish either.
Depending on overallotment, NBR plans to raise between $515-600mm (before fees) from issuance of common and convertible preferred shares, which will go to pay down the $445mm drawn on the revolver as they were uncomfortable close to their 60% net debt / cap covenant. In total, that’s roughly 20% dilution to current shareholders. With $3.9bn of net debt at the end of 1Q, leverage has always been our hang up with the stock (1Q recap note here). We’d been advocating for more asset sales to focus on NBR’s core strategy and deleverage the balance sheet, which we still think would be helpful. Maintain Peer Perform and YE18 PT of $8 (6.2x WR ’19 EBITDA).
Excluding $48mm in charges and $19mm of FX losses, FTI posted Adjusted EBITDA $406mm vs Cons/WR = $374mm/$382mm. ON/OFF and Subsea EBITDA mgns drove the beat despite roughly in-line revs.
After reporting a 1Q miss and providing a 2Q outlook that implied further negative revisions, FI closed -2.2% vs OSX +1.5% and SPX flat. We have confidence in the new CEO’s, Mike Kearney, ability to execute the new plan while FI is incurring costs ahead of activity ramps. However, we remain on the sidelines until the risk/reward improves from here. Maintain PP rating. Raise YE18 PT from $6.20 to $7.30 (19.2x WR ’19 EBITDA), entirely attributed to a higher multiple since we have more confidence in offshore rebounding at these higher oil prices. See valuation analysis on pgs 2-5.
Excluding FX gains ($1.7mm), equity comp ($2.3mm), and severance/other charges ($2.4mm), FI reported Adj. EBITDA of -$2.2mm, below Cons of -$0.2mm and WR of $1.4mm. The EBITDA miss was led by weak Int’l Services mgns (5.3% vs Cons/WR 11.1%/10.6% and 1Q of 10.1%) despite roughly in-line Int’l Services topline. Weak mngs were attributed to decreased work scope and lower market share in Europe. Light Blackhawk mgns also added to the miss, coming in at 12.4% (1Q = 18.0%) vs Cons/WR of 18.3% / 16.0%. Consolidated revs of $115.6mm (-2% q/q) slightly missed both Cons of $117.0mm and WR of $119.4mm due to weak Tubular Sales revs of $15.2mm (-13% q/q), which oddly didn’t have a negative impact on Tubular Sales mgns that increased 600bps q/q to 14.4%.
A bit of straggler update. We needed to allocate some additional time to the model and do a bit more valuation analysis to see if OIS was worthy of a downgrade to UP. After a detailed review, we decided to maintain our PP rating since 1) we now see 6% upside to ’18 EBITDA after increasing our estimate by 15% and 2) our SOTP valuation analysis leads to a $35 YE18 PT (10.7x WR ’19 EBITDA), implying only 3% downside. See pgs 2-7 for detailed valuation analysis, which includes detailed SOTP analysis.
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