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.
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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.
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).
We spent a day on the road with management last week, really reiterating our view that CLB not only has underappreciated RD operating leverage, but also well positioned to benefit from a shift towards more technology spending from US E&Ps. Maintain OP rating. Increasing our YE18 PT to $139 (27.2x WR ’19 EBITDA) from $135 due to increasing confidence in Reservoir Description’s recovery. See pgs 2-5 for valuation analysis and pgs 6-8 for full meeting highlights.
18 of our 20 companies have reported thus far. Fairly mixed results – 6 beats, 5 misses, 6 in-line, and 1 pre-announcement. Regardless of the mixed results, the ’18 outlook for most companies remained strong, especially 2H18. Our stocks have performed pretty well on the day of reporting and thereafter, averaging +2% on day of EPS and +6% post EPS. We believe the positive stock performance likely is two-pronged: 1) 2Q and 2018 consensus estimates were roughly unchanged, on average, after 1Q was reported and 2) the prevailing positive macro backdrop (i.e. improving/stable oil prices) over the last month or so.
Despite posting a 1Q EBITDA miss Monday (4/30) night and 2Q guidance a hair below Consensus, shares closed up 3.2% yesterday, outperforming the OSX (-1.3%) and the S&P 500 (+0.3%). We attribute the outperformance to management’s continued strong 2H outlook, where incrementals are expected to be much more robust and FCF turning positive. Maintain PP rating but raise PT from $13 to $14 (11.2x WR ’19 EBITDA).
NBR reported adjusted EBITDA of $168mm vs Consensus/WR of $172mm. Overall a slight miss, but the US was strong driven by L48 cash margins of about $7k/d vs $6k guide. The offset was higher other reconciling items, Rig Technologies deliveries pushed to 2Q, and international a hair light due to SG&A as rig count and cash margins came in mostly in line. Net debt was up $200mm vs $100mm expected, due to non-repeating cash outlays for a bevy of items.
1Q Adjusted EBITDA of $18.9mm missed our $21.3mm estimate and the Street’s $20.4mm. Adjusted EBITDA excludes $33.5mm gain for the subsea rentals business contributed to Ashtead and a bevy of other special items totaling $10.5mm. Better-than-expected revenues of $250mm (+2% vs Cons and guidance of $240-255mm) was entirely attributed to Completions (+6% vs Cons). Within Completions, Stimulation & Intervention topline grew 12% q/q. The 7% EBITDA miss vs Cons was due to higher costs in Drilling & Subsea, where clean EBITDA margins fell to -6.9% vs Cons of 1.0% and -0.4% last quarter. We suspect the deconsolidation of the subsea rental business attributed to the poor performance, where Subsea revenues fell 39% q/q. Total orders increased 5% q/q to $261mm (1.04x B/B) led by 14% q/q increase in Production & Infrastructure orders. See variance for detail.
A bit of a catch-up note. Eight earnings in only two days. Within this report, we provide post earnings recaps for CLB, DRQ, HLX, HP, NOV, OII, PTEN, and PDS.
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