We had previously called out PD (NC) as the only driller poised for a rig count beat vs. prior consensus, with HP & ESI (NC) in-line and NBR & PTEN tracking to lower 3Q exit rates. HP did fall largely in consensus on revenue, with its rig count within the prior guidance range and FCF execution offsetting the modest downward revision. PTEN hit its prior guidance of 142 average rigs operating (as it provides monthly rig count updates), but the 3Q exit rate was lower than we had previously modeled, leading to a nudge-down of 4Q ests. NBR L48 rig count of 108 fell below the prior soft guide of 110-111, and the 4Q bogey of 100 L48 rigs captures the similarly lower/expect 3Q exit. PD (NC) hit revenue, but our tracker did not pick up the modestly worse/expected US drilling decline (perhaps due to the mix of Tier-1 vs. Tier-2 rigs that rolled off).
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Juxtaposed with a relatively mixed F4Q print, HP’s constructive (but equally pragmatic) perspective on the L-T direction of US shale, gives us hope that OFS equities broadly could eventually break upward from the suffocating market narrative of OFS secular decline. Pricing has held in relatively well for the USL super spec contingent in a declining rig count environment, but even if HP results/outlook had surprised further to the downside, we believe the FCF execution/capital allocation (surprise buyback) would have been similarly rewarded in the stock (a la TS 3Q). Quality names like HP generate FCF in an evolving, ‘steadier state’ NAM, which should dovetail with healthy capacity attrition across both drilling & frac in FY20. We maintain our UP rating because we believe that similarly-clean/quality peers will begin returning strong FCF (where HP already trades at a premium given its dividend).
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HP reported F4Q19 earnings AMC yday and is hosting a conference call to review results today (11/15) at 11a ET. F4Q19 revenue was largely in-line with prior consensus, while adj EBITDA of $159M fell short of WR/street $180M (excluding a variety of items). Versus prior estimates, margins were pressured primarily by 1) int’l startup costs & price pressure in Argentina, and 2) lower HPT revenues in a declining L48 market (over a larger HPT cost structure with HP having migrated FlexApps from USL drilling to HPT – we excluded the liability benefit). HP guided to 1) a slightly lower/expected USL activity level for F1Q20 (offset by margin stability), 2) largely flat int’l days, with further int’l margin retreat on startups in UAE, Bahrain & Colombia, 3) bounce-back of offshore margins after rig repair NPT in F4Q, and 4) robust double-digit+ QoQ growth in HPT.
PUMP’s 3Q result was emblematic of its current plight, as a strong print was accompanied by an 8K that disclosed past corporate missteps and identified the uncertainty presented by the ongoing SEC investigation and shareholder litigation. This overhang arrives at a time when investors need little persuasion to avoid NAM pressure pumping. PUMP rallied 6% (vs. -1% OIH), as a strong 3Q beat and leading EBITDA/fleet overcame the newly disclosed deficiencies. Continued operational OP is imperative to hold current price levels, especially since any misstep will likely advance any doubts about the legitimacy of prior results. The reiteration that none of the findings to date would necessitate any financial restatement is incrementally positive, but don’t expect investors to concede any benefit of the doubt. It’s safer to stay on the sidelines while waiting for “the next shoe to drop”, but we contend that downside risk has been effectively priced in given the ~60% drop since August.
PUMP reported 3Q19 earnings AMC today, is hosting a call tomorrow (11/14/19) at 9a ET, and also filed a Form 12b-25 late filing of its third quarter 10Q (as the second quarter 10Q remains unfiled with SEC investigation ongoing). Operationally, PUMP beat consensus despite the modestly lower active spread count QoQ (pump hrs per spread improved, likely on a higher zipper job mix). Adjusted EBITDA per spread of $16.5M (inclusive of fluid end disposal) improved QoQ, and is tops in the WR peer group (including NEX). Slightly better FCF than we had previously expected, but PUMP’s ‘cash out’ 3Q capex was $20M lower than the ‘incurred’ capex number stated in the release – a N-T payable to DuraStim in the coming quarters. We got additional color on the controls review and the print was solid, but we are cautious on stock follow through (even with a short squeeze tomorrow) given lack of clarity around possible filing amendments (and frac uncertainty into 4Q).
PUMP will report 3Q19 results today AMC, bringing operational results back into focus (at least temporarily) after the internal review and related inquiries have dominated the narrative since Aug. On Oct 9th, PUMP announced the effectively utilized fleet count for 3Q was 25.1 (vs. 25.6 in 2Q) and guided to 18-20 fleets for 4Q (-26% at midpoint), with no other 3Q/4Q detail provided. Among peers that report/guide to similar effective utilization metrics, FTSI guided to a 26% decrease and legacy Keane guided to a ~23% decline. Figures for PTEN & LBRT depict deployed spreads based on commentary and are thus less comparable, which perhaps also skews the comparability of cited EBITDA/spread metrics. Tables within show 3Q/4Q consensus for PUMP, with figures for peers based on results/guides (or ests in the absence of guidance). We continue to see the market in somewhat of a ‘holding pattern’ on PUMP, with those currently involved leaning into the ~$630/HP valuation (limited downside?), and others waiting for clarity on the SEC review/mgmt re-org.
3 Earnings Trends, 3 Marketing Observations, NESR/SPNV 3Q Quick Hits
All-in-all 3Q was a solid quarter for SPN, beating consensus revenue and EBITDA ests. Despite no divestiture catalyst, we view the better than expected FCF and lower than expected capex guidance as constructive towards solvency and balance sheet turnaround. SPN continues to reduce its pumping exposure (previously postulated to be 5% of adj. EBITDA) after idling one fleet during the quarter. Until extricated from the dilutive pumping business, investors may not ascribe adequate value to the strong FCF/returns profile of the non-frac business or appreciate the capital light path toward balance sheet improvement. We maintain SPN Outperform and YE19 PT of $1.50, based on 4.2x our 2020 EBITDA of $297 million (down from $311 million).
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