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.
A bit of straggler update. We needed to allocate some additional time to the model and do a bit more valuation analysis to see if OIS was worthy of a downgrade to UP. After a detailed review, we decided to maintain our PP rating since 1) we now see 6% upside to ’18 EBITDA after increasing our estimate by 15% and 2) our SOTP valuation analysis leads to a $35 YE18 PT (10.7x WR ’19 EBITDA), implying only 3% downside. See pgs 2-7 for detailed valuation analysis, which includes detailed SOTP analysis.
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.
Excluding $3.4mm of pre-tax charges but including $1.8mm of bad debt expense, OIS reported 1Q adjusted EBITDA of $32.3mm, handily beating Cons/WR of $26.0mm/$25.5mm. All three segments came in better than expected, with Offshore/Manufactured Product (O/MP) beating by the widest margin. Falcon, the flowback acquisition that closed in early March that’s unlikely included in Cons but was included in our estimate, probably added $1-2mm to 1Q EBITDA in Well Site Services which basically offsets the $1.8mm of bad debt expense. Also, with O/MP being the largest contributor to the beat, we will be listening tomorrow to see if there were any large project closeouts or other one-offs that could have driven O/MP results well above even the high end of the guidance range. O/MP orders were up 23% q/q to $99mm (0.92x B/B), still resulting in a 7% seq decline in backlog to $157mm. See variance for full details.
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.
Complete investor apathy for OFS stocks despite solid oil fundamentals, admittedly supported by OPEC and Russia policies, and rising geopolitical risk that now has Brent above $70/bbl. Our concern has always been about US shale and OPEC’s potential policy reversal once US oil production began to surge. Now US oil production is swelling, yet OPEC and Russia seem hell bent on pushing oil prices higher at the expense of losing share to the US. But if OPEC doesn’t change its supportive oil policies and markets are able to avoid a global recession, it does seem this rally just might have some legs. We will dip our toes into the water with an upgrade of PTEN but, at this point, maintain our Market Weight for the OFS sector.
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