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.
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.
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.
In this week’s CHOW, we dissect diversified service company revenues performance since 1Q16, which was really the nadir in the OFS space. Note this analysis only includes oilfield service (OFS) revenues for each company. Since 1Q16, Halliburton’s (HAL-OP) total topline is up 37%, significantly better than Schlumberger (SLB-OP) at +1%, Baker Hughes (BHGE-OP) at -4% and Weatherford (WFT-PP) at -10%. HAL’s outperformance is a function of two things – 1) higher NAM mix and 2) share gains. And these HAL share gains, the company seems to be taking share in both the North America (NAM) and International (INTL) markets.
After posting positive 1Q results and providing a confident outlook on Wednesday’s (04/25/18) conference call, shares have climbed 10.1%, significantly outpacing the OSX (+2.6%) and the SPX (+1.2%). And while we are not bullish pumping, we are not outright bearish either. In addition, irrespective of the market, SPN has levers to pull that will be a tailwind for their pumping business. We reiterate our OP rating and raise our YE18 PT to $13 from $11 (6.5x WR ’19 EBITDA), mostly attributed to our higher estimates and FCF. See pgs 2-5 for analysis.
After WFT reported an 18% EBITDA beat and provided somewhat positive, if not conservative, 2Q guidance, shares closed up 6.4%, significantly outperforming the OSX (-0.6%) and S&P 500 (-1.3%). These strong 1Q results came as a surprise as WFT recently flagged, at a competitor conference in late March, NAM rail issues and early Canadian breakup as problems for 1Q. Despite the beat, WFT still has $7.8bn of debt and annualized cash interest nearing $600mm in 2H18. Thus, we remain on the sidelines, especially considering we forecast WFT’s leverage ratios remains above 5x throughout all modeling years (2020). That could be problematic if a recession hits anytime soon. Maintain PP rating, but increasing YE18 PT from $2.50 to $3.00 PT (10.0x ’19 EBITDA) on higher estimates. See pages 2-5 for detailed valuation analysis.
Excluding restructuring charges ($8.1mm pre-tax), SPN reported EBITDA of $71mm, beating Cons of $68mm and WR of $65mm – but basically in-line with where Cons was just 3-4 weeks ago and generally in-line with management’s expectations laid out on the 4Q conference call. Solid results considering peers missed original 1Q outlooks given weather and rail issues impacting US completions during 1Q. Revenue of $482mm did slightly miss Cons of $491mm, but EBITDA margins of 14.5% beat Cons of 13.8% and WR of 13.7%. Both DPS and TS segment margins handily beat estimates. US land and GoM toplines were both flat sequentially while international revenues fell 17% q/q due to typical seasonal declines and reduced well control and well intervention work during the quarter. The one negative; FCF was a negative $91mm during the quarter on higher-than-expected seasonal increase in working capital. See variance for detail.
Excluding $25mm of restructuring & transformation charges and $18mm in impairments, asset write-downs and other charges, WFT reported $151mm adjusted EBITDA, handily beating Cons/WR of $128mm/$117mm. Revenues of $1,423mm (-4% q/q) were below Cons/WR of $1,462mm/$1,454mm, while reported EBITDA margins of 10.6% beat Cons/WR of 8.8%/8.0% and were up materially from 4.7% last quarter. Both hemispheres beat on margins. The FCF burn of -$211mm was worse than consensus of -$159mm but better than our -$277mm estimate. Due to some project delays, capex of $38 was well below expectations for $100mm, where 1Q capex was guided up q/q vs $78mm last qrt. Also additive to FCF, the company noted it achieved $41mm in one-time benefits to cash flow driven by sale of assets, liquidation of inventories and improved collections process. Lastly, we were expecting an announced sale of at least part of Land Rigs business today (04/24/18) but nothing noted in the release. See variance.
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