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 reporting an in-line 1Q and reiterating their prior TPS outlook, BHGE shares closed up 0.9%, outperforming the OSX (-0.7%), SLB (-1.5%), HAL (-0.1%) and the S&P 500 (-0.9%). We think the negative revisions cycle has run its course for BHGE. Investors can now focus on the positives – 1) LNG leverage, 2) best-in-class cash return to shareholders, and 3) a self-help margin story, where margins are only about half of HAL & SLB levels. We maintain BHGE as our Wolverine top long for 1H18 and an OP rating. YE18 PT down $1 to $40 (11.6x WR ’19 EBITDA) on slight tweaks to FCF conversion. See pgs 2-5 for detailed valuation analysis.
US unconventional oil production now increasing 1.3 MMBopd y/y. According to the EIA’s Drilling Productivity Report (DPR), US unconventional oil production for the 5 major US oil producing basins has reached approximately 6.5 MMbopd, almost a 1.0 MMbopd above ‘14 peak levels and now up about 1.3 MMbopd y/y, which is comparable, on an absolute basis, to peak year-over-year growth levels reached during 2014. We expect this pace of growth to continue, with US unconventional oil production exiting the year up 1.4 MMbopd y/y.
Excluding $269mm of pre-tax adjustments, BHGE reported an Adj. EBITDA of $617mm (Cons/WR = $615mm/$625mm) and Adj. EPS of $0.09, slightly above Cons and WR = $0.06. Total revs of $5,400mm (-7% q/q) were in line with Cons/WR. In OFS, NAM/Int’l revs were -6%/flat q/q compared to SLB -7%/+1% that also reported this morning. Consolidated EBIT margins of 4.2% were also in line with Cons/WR of 3.9%/4.1%, Digital Solutions and OFS demonstrated best margin performance relative to Consensus. Orders of $5,238mm (0.97x B/B) were -8% q/q and about 5% below our estimate. 1Q share buybacks were $500mm, as expected from disclosures in Form 4 filings at the end of March. BHGE has now completed roughly $1bn out of its $3bn share buyback program. Excluding $108mm of disposal of assets, FCF was a $117mm vs our estimate of $104mm. Everything pretty much as expected. See variance details.
Over the first 2 weeks of April, which is right when energy stocks began inflecting higher, we conducted our 2nd quarterly OFS investor survey. Our OFS sentiment rating fell to 3.5 from 5.2, on a scale of 1-10 (1 bearish / 10 bullish). Obviously extreme bearish sentiment, but this could have corresponded with a bottom in the stocks. See note for detailed results and opinions on all 18 survey questions. Thanks again to all 83 participants!
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