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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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 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 $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.
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.
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!
We published our 1Q Preview Wednesday night (04/11/18), where we highlighted that we believe the recent energy rally just might have some legs if OPEC continues its supportive oil policies and barring a global recession. As such, we decided to dip our toes in the water by upgrading PTEN to Outperform from Peer Perform, but we still maintain Market Weight for the OFS sector.
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