In conjunction with this report, we have also updated our macro/activity view in this report. The key takeaway from the activity update is further flattening of the US oil growth trajectory, productivity slowdown in key shale basins (an important OFS catalyst), and an implied 2H19 E&P production ramp that we don’t see as being priced into OFS activity levels.
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We are updating our Capex, Drilling, Pumping, and Production models, in tandem with our 1Q19 Quarterly Crew Change.
In our view (and based on overwhelming investor feedback) an SPN sale of Pumpco would yield a rapid upward SPN re-rating on both balance sheet and revenue quality tailwinds for the remain-co (7x EBITDA, discounted by a mere 20% of TTM EBITDA would imply much more equity value). From Spears, we estimate that DRILCO, Thomas Tools, and SLB’s fishing business generated $600M of FY18 revenue, which at 15% EBITDA margin implies a 4-5x TTM EV/EBITDA takeout on these recently sold Smith segments. We would assume that SPN’s DPS segment yields a greater margin (given its competitive moat in more differentiated deepwater locales) and the midpoint DPS valuation (vs. SLB comp) on a 25% EBITDA margin implies that DPS alone is worth as much as SPN’s total equity value.
In an otherwise dismal tape for OFS equities, NESR quietly printed another solid 1Q19 result on the back of better-than-expected topline growth (the most important performance metric at this stage of the NESR story, in our view). The proliferation of cost-plus project management wins and robust share gains broadly will likely yield a higher-growth, lower margin, equal (or slightly better) cash flow profile for the balance of FY19, perhaps punctuated by activity acceleration in 2H19. Recent developments at WFT (suspended – Ch11) are, in our view, partly indicative of NESR’s successful growth campaign as a newly public company, and we believe this specific share gain runway has additional leg (with labor-related tailwinds to boot). Perhaps most importantly, NESR shares have begun to trade at consistently high volume as market recognition and the execution track record continue to evolve over strong fundamentals. We maintain our OP rating and YE19 PT of $23 (street high), based on 9.0x our FY20 EBITDA of $147M (unchanged).
We are suspending coverage of WFT following the company’s quarterly filing on Friday (05/10/19) after market close, in which WFT disclosed its plan to file for Chapter 11. We had previously maintained a Peer Perform rating on the basis that WFT was a going concern, but that we didn’t have enough visibility into refinancing options to determine if/when the company would file for bankruptcy protection. We are suspending coverage on the basis that the company’s capital structure post-bankruptcy is subject to impending legal proceedings and approval from existing credit holders. Prior estimates should no longer be relied upon.
NESR reported 1Q19 earnings this morning (5/13/19) and is hosting a conference call to review results today (05/13) at 10am ET (9am CT).
Another PUMP beat – Capex cause for concern? No. PUMP continues to defy gravity, having posted another revenue/EBITDA beat yesterday AMC. Despite the expected throughput dilution associated with the integration of the acquired PPS spreads, 1Q19 annualized EBITDA/spread (conservatively adjusted for 100% of disposal) held strong at ~$20M/spread-year. A short thesis around PUMP has gained appreciable traction over recent months, with a combination of 1) operational mean-reversion, 2) over-earning on sand, and 3) longer-term fleet fatigue/capex ramp representing key points of pushback. Upon the release last night, investor reactions were decidedly split between the P&L beat and substantial cash burn headline. Beyond the $100M payment to PXD, we believe the ~$80M pumping capex number was reasonable assuming a ~$50M POC DuraStim payment for the two newbuild spreads. The remaining ~$30M would imply an in-the-fairway $4.5M R&M/spread-year. Tomorrow, we look for confirmation of the capex breakdown, but nevertheless point to substantial FCF potential through 2H19 and into FY20, should PUMP continue to execute at its current, sector-high EBITDA/spread level.
PUMP reported 1Q19 earnings after market close today (05/07/19) and is hosting a conference call to review results tomorrow (05/08) at 9am ET (8am CT).
Our Take – They did it again. Once again, PUMP easily exceeded expectations and posted an anomalous quarter relative to the rest of the sector. The company beat consensus revenue and EBITDA estimates by 5% and 17%, respectively, and were 8% above our street-high EBITDA estimate. EBITDA/spread of $19.5MM was down 3% q/q but 7% better than our estimate, likely indicating strong momentum from the legacy fleet given the implied dilution from the PPS spreads. The release also announced plans to build and deploy two DuraStim fleets by YE19 and deploy them to an existing customer under a dedicated agreement, representing the commercialization of AFGlobal’s heralded technology and a major growth avenue for the only pressure pumper that should consider growth. Perhaps the only downer from the release was the guidance for effective utilization of 26.0 fleets in 2Q from 27.0 in 1Q. One less utilized fleet would be a footnote for other pumpers but is noteworthy for PUMP given their history of consistently increasing utilization. Regardless, PUMP remains a top pick and is clearly in a league of its own.
Estimates are likely to come down on the back of a ‘flat’ 2Q guide, but surprisingly-strong FCF buoyed TS shares through a 1Q19 print that, for OFS peers, has brought swift punishment for earnings misses (link). In a single quarter, TS generated nearly half of the prior street FY19 cash flow target, elucidating both working capital and capex efficiencies on the heels of robust FY18 expansion. High single digit FCF yields in FY19/20 are becoming increasingly tenable as TS grows into the long-awaited deepwater spending cycle (which we still contend is further off, for the purposes of modeling a major OFS EPS inflection). We maintain TS Peer Perform and YE19 PT of $32, based on 9.5x our FY20 EBITDA of $1,870 million (down from street-high $2,070). The 9.5x multiple reflects what we view as "solid" 7.5% FCF yield in FY19, as OFS companies could increasingly be valued primarily on FCF yield moving forward.
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