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.
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.
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.
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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