We’ve caught up with about half of our coverage over the past several days (ahead of the looming quiet period), and notable to us is a growing divergence between “neutral/mixed” company sentiment and a more uniformly-bearish market view that contemplates a drastic take-down of FY19 consensus estimates. We understand that larger E&Ps will stick to budget, that the USL rig count continues to retreat (dayrate pressure), and that completion activity peaked in March (utilization pressure on margins). Currently, 2Q19 estimates seem largely de-risked. Several companies have purported a “softer/expected” 3Q and “better/expected” 4Q19, as it seems that some E&Ps are protracting D&C schedules in order to retain quality rigs/crews at favorable pricing (or perhaps smooth production). With back half visibility limited however, the buyside is bracing for a more pronounced cut to FY19. Remaining capex levers will be key in buoying OFS through the 2H19 fog, and nearly every company that we caught up with cited further capex cuts if USL activity collapses into year end. More to come in our 2Q19 preview note, and at our July 8th Wolfe Energy Lunch in NYC .
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This past week, we ran a brief, anonymous survey on e-frac adoption in US pressure pumping. The solid response rate (over 50) is evidence that this is truly topic-du-jour in the oil patch. Within, we discuss the ramifications of 5 key e-frac questions facing the OFS industry, and run through a frac capex thought experiment based on adoption rate results from the survey.
Last chance to share your thoughts on e-frac adoption. Later today (06/20/19), we will recap (analyst, OFS, and E&P) responses from our anonymous E-Frac Survey – we appreciate your participation!
Tomorrow (6/19/2019), we will recap (analyst, OFS, and E&P) responses from our anonymous E-Frac Survey (link) to help build a consensus on this divisive topic – we appreciate your participation!
Following the reported (explored) sale of PTEN’s frac business last Thursday (06/13/19), FRAC & CJ announced this morning an all-stock merger-of-equals, expected to close in 4Q19. The combined company represents the third largest USL frac company (2.3M HHP), with a diversified C&P footprint across cementing, wireline, coiled tubing, workover rigs, and fluid mgmt that represents the #4 NAM OFS provider by revenue (behind HAL, SLB & BHGE).
Earlier today (6/13/2019), Reuters reported that PTEN is exploring the sale of its frac business for $1B (link), a move that we believe would (encouragingly) simplify the business into a US super-spec drilling pure play. Of late, the company’s pumping segment has been a notable EBITDA/FCF drag on an otherwise best-in-class US drilling business, and the potential sale of 1.6M nameplate HHP has been held by many investors to be a positive re-rating catalyst for the stock. While we caution that the news is “headline-only”, the purpose of this note is to present deal sensitivity (potential buyers), pro-forma PTEN valuation, and read-throughs to broader OFS.
In recent weeks, we’ve noted our own emphasis on FCF yield as an increasingly important part of the valuation framework in a “no-growth” OFS – perhaps replacing (or at least supplementing) a shaky EV/EBITDA convention that does little to capture how drastically OFS earnings power, and the shape of the upstream spending cycle, have changed in recent years. “Have we found the valuation bottom?” is ubiquitous in meetings and calls. In recent weeks, non-covered OFS (namely BAS & HCR) have demonstrated that accelerated buybacks could be the sector catalyst that helps establish this valuation floor, having vastly OP the WR OFS index on the day of buyback announcement (and subsequently). LBRT, PTEN & PUMP screen the best in our coverage in terms of accelerated buyback potential, but we suspect the broader sector will follow suit until market expectations are properly calibrated across both OFS and E&P. Details on current authorizations within.
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