Weekly OFS thoughts, including our thoughts on the (empty) OFS/upstream rally, CHX merger close, and PUMP 1Q20 earnings.
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Yesterday (06/03/20) AMC, APY announced the successful exchange offer & close of its merger with ChampionX, and will now trade under the symbol ‘CHX’ as ‘ChampionX Corp’. We are updating ests with our proforma model. Remain PP and raise YE20 PT to $12 (from $10), based on 11.5x our proforma FY21 EBITDA of $308 million. We see the stock as (nearly) fairly valued, and await further earnings execution in an otherwise uncertain OFS landscape.
“Relatively high investor interest, which I don’t understand”. Quote-of-the-week from one of our covered companies, in response to the past week in which investor interest seems to have picked up off of “generationally-low levels” (also as described by the contact). Save-the-date: On June 23rd, we will be hosting a ‘NAM OFS Expert Access Day’, with industry contacts across key US-centric OFS segments. In our view, this day of fireside chats with folks from ops/sales/middle mgmt should provide investors with a differentiated, field-level perspective on the anticipated 2H ramp in USL activity, to supplement takeaways from the ongoing energy conference season. Covered companies also participating (1x1 will be available). More details to come.
Expectations reset, good signal of disciplined retrenchment. The curtain has been pulled back on the US shale complex as a whole, and we do not expect USL activity to ‘snap back’ to the same degree of growth that fueled OFS tightness & a wave of pressure pumping building/IPOs in the FY17-18 timeframe (key to our ‘upstream rebalancing’ thesis). Within this L-T outlook, we still see the potential for a shale capital efficiency plateau/rollover to uniquely benefit NAM-centric OFS, and see ‘survivor’ potential in PUMP based on field-level crew & asset/balance sheet quality. Furthermore, it appears that new mgmt is taking a disciplined stance on the recovery in USL (despite modest activity expansion potentially in 2H20), signaling a withholding of idled spreads until economics improve. In the meantime, the contractual PXD windfall represents a unique EBITDA/FCF buoy, but the ongoing internal review & shareholder litigation remain overhangs. Maintain PP, raise YE20 PT to $4, based on 9x FY21 EBITDA, less loss on disposal costs. Multiple blowout is somewhat arbitrary, but implied FCF yield is consistent with that of LBRT.
PUMP reported (unaudited) 1Q20 results AMC today, and provided a rough, qualitative outlook for 2Q. Activity was largely in-line with the prior guide of 18.6 active spreads, but greater-than-expected calendar white space perhaps contributed to slightly lower-than-expected annualized EBITDA/spread of $14M (excluding est fluid end disposal, down from $20M in 4Q19, and below WR est of $16M – but still well above the frac peer group avg). Positive FCF of $14M was well above our expectation of a modest cash burn. Notably, the company seemingly extended its DuraStim field testing/development (prudent in the current market environment, but perhaps indicative of sustained operational pain points).
This week, we updated our macro activity outlook for upstream, largely lowering estimates for 1) capex, 2) drilling, 3) frac, and 4) production. We recognize that our activity models are somewhat robust in the number of inputs (and that generalists are unlikely to commit the bandwidth to finely modeling this beleaguered sector), so we are also rolling out a streamlined (toggleable) oil/activity sensitivity model. Essentially, we did the iterative scenario analysis through our activity models under various oil price regimes, and condensed the outputs into an easy-to-use excel tool. In feeding various bull/base/bear activity outputs through our company models, the key takeaway is that the globally-diversified names screen much better (than their NAM counterparts) in terms of upside/downside to consensus EBITDA ests in FY20/21. This theme is aligned with our thesis of a gradual upstream rebalancing, a positive for OFS names with int’l/offshore exposure.
Weekly OFS thoughts, including our quarterly activity update (and rollout of our streamlined, toggleable, oil sensitivity model) and the Robinhood impact on OFS stocks.
We’ve spent a good portion of the past few weeks catching up with industry contacts across the OFS & producer space, with the aim of getting a better handle on shale shut-ins and the 2H20 outlook. Amongst our USL contacts, sentiment in recent days seems to be increasingly hopeful, with activity expected to materialize in late June/early July. We’re dubious of this timing, although E&Ps seem to be putting shut production back online at incrementally higher oil prices (not much OFS play).
Quarantine has spawned a legion of retail day traders with seemingly high-risk tolerances and plenty of fresh capital to deploy to beaten down stocks. Call us crazy, but we think this phenomenon partially explains some of the more inexplicable up moves in OFS stocks recently, as +20% daily spikes on zero news has become routine (exacerbated by dwindling cap and thin institutional flows). Within, we analyze Robinhood user ownership data for the stocks in our coverage. We believe the explosion in ownership has contributed to the sharp recovery off the lows but remain wary of a potential unwind from the retail contingent.
SPN’s balance sheet was an issue prior to the crude collapse, but the proposed Forbes transaction offered a creative remedy on the leverage front. SPN announced that the transaction agreement with Forbes has been terminated, as the current macro situation has made completing the transaction under the initial terms “impractical”. The outcome is not surprising, as we thought the deal sounded too good to be true when it was announced (Dec-19) and the outlook for USL levered services companies has subsequently deteriorated to morbidly low levels. From a modeling perspective, we are now adding back $250M of debt (which was supposed to transferred to NewCo) to our SPN balance sheet forecast and valuation. We are also adding back the contribution from the OC&W segment which we had previously modeled through the end of 2Q20 (and subsequently removed). Unfortunately, we now expect the segment to be EBITDA negative for the foreseeable future. SPN was understandably terse on its earnings call but did mention that it believes total EBITDA could be breakeven to slightly positive in 2Q (vs. $55M in 1Q). With $1.03B of net debt and little visibility on a path to material/sustainable FCF generation, it is tough to believe that SPN can find a suitable alternative to restructuring ahead of the $800M 2021 maturities. We maintain our Underperform rating and lower our Price Target to $0.00 from $1.00 as we view bankruptcy as inevitable if WTI remains below $50 through YE20. Company commentary left the door open for similar (Forbes-like) transactions to ultimately split the OC&W business from the globally-diversified “RemainCo”, but we do not envision many opportunities in the near term.
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