TS reported 2Q20 results AMC close today, and will host a call tmrw (8/06) at 10am ET. Results were modestly better-than-expected, with revenue topping WR/C by 6% and adjusted EBITDA of $113M beating the prior WR/C estimates of $106M/$97M (excluding $54M in severance). Total tube volumes fell 34% Q/Q vs. the 39% decline in global rig count, and while TS saw pricing pressure across all regions, ASP improved on mix enrichment (less USL, more int’l by percentage). Tube sales by region either matched or beat our prior ests across-the-board, with NAM (+4% vs WR, aided by MX), Europe (+28% vs. WR) and MEA (+10% vs. WR) surprising more to the upside than LatAm (well-telegraphed headwinds) and APAC. FCF of $400M beat prior consensus of $200M, aided by better-than-expected CFFO and capex. The dividend cut had been previously signaled in the TS BoD limiting payment to the interim div in November. While other OFS subsectors are expected to enjoy flat/modestly higher activity and margin recapture in 3Q, negative follow-through in drilling activity (particularly int’l) and heightened pipe inventory are expected to yield another “significant” reduction in sales & margins (expected to near low single-digit % EBITDA).
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CHX reported 2Q20 earnings AMC today, its first quarter since the Champion merger close, and is hosting a call tomorrow (8/05) at 10am ET. While comps were messy given a broad range of sellside proforma estimates, we believe that 2Q consolidated adjusted EBITDA of $62.8M (proforma for a full quarter Champion contribution, inc $6M synergies) was modestly better-than-expected, and beat our proforma estimate despite largely in-line revenue. The company outperformed its planned cost cuts in legacy APY (PAT & DT), guided to $50M of ann savings in legacy Champion (initiated prior to the merger, a separate from synergies), and appears to be ahead of schedule on the pre-planned $75M in ann synergy capture. Progress on this aggressive cost-out, as has been evident across broader OFS, was reflected in better-than-feared, proforma Q/Q EBITDA decrementals of 41% vs. WR 45%. FCF of $72M (ex-transaction payments) was solid vs. WR $75M. Perhaps most positively, CHX expects a modest Q/Q proforma revenue increase (EBITDA follows), due to improvement in production-oriented segments. The key unknown remains whether mgmt will perhaps temper expectations in 4Q & beyond, noting that seasonal & budget impacts into YE20 are unclear now.
Not enough info to parse results vs. guide (does it matter?), but visibility improving. PUMP reported 2Q20 earnings AMC today, and is hosting a call tomorrow (8/05) at 9am ET. Adjusted EBITDA of $17 million (including $9 million loss on disposal), was largely in-line with prior consensus and above our $11 million estimates, as the company averaged 4 active spreads vs. the 3-4 spread guidance (and WR est of 3.0). The company benefited from a $32.6 million fee paid on idle spreads in the quarter. Given our prior assumptions of a 50% gross margin (on the fee) & $1M G&A/spread, the implied annualized EBITDA of $4 million (inc. LOD) for the four active spreads improved sequentially, but we do not have enough information to make this determination (nor does it matter, compared to the outlook provided tomorrow). Meanwhile, ‘other’/corp EBITDA of -$8.6 million partially offset the better-than-expected pumping result. The company was modestly FCF positive in the quarter, but saw liquidity shrink due to A/R decline.
“Too good to be true” OFS stories have disappointed at a near 100% hit rate over the past cycle or two, so we’ve been embedding topline growth conservatism in our NESR model (relative to mgmt ambitions) to discount for the inevitable execution misstep. Amidst historic headwinds to upstream activity (even in MENA), NESR’s 2Q results indicate that this miss may not arrive in the near/med-term. In fact, earnings were particularly strong given that 1) growth, 2) margin stability, and 3) FCF execution were all solid (especially relative to that of larger peers). Furthermore, the guidance and broader MENA outlook remain positive, despite divergent commentary from peers (clear evidence of durability in NESR’s rigless/opex exposure vs. D&C). Maintain OP, raise PT to $12 (from $11), based on 5.5x (down from 6.5x) FY21 EBITDA of $257M (up from $207M). Lowering the multiple is not a function of where NESR should be priced, but is underpinned by market apathy toward OFS/small cap broadly.
NESR reported 2Q20 earnings this morning (8/4/20) and is hosting a conference call to review results today (8/04) at 8:30am ET. The company posted another healthy topline beat (+4%/6% vs. WR/C), likely driven by the rigless exposure and continued share gains across key Production Services (PS) segments. Drilling & Evaluation (D&E) revenue held in better-than-expected considering the sequential regional decline in rig activity. Topline growth vastly outperformed MEA regional revenue across the large cap peer group, as has come to be expected given the share gain momentum. Encouragingly, margins were also better-than-expected, with adj EBITDA of $52M topping WR/C of $48M at a 26% margin (in prior quarters, margin friction had perhaps partially offset the euphoria of industry-leading growth). FCF also beat prior expectations, despite hotter capex (front end loaded in FY20).
Earnings execution quality didn’t erode all that much across the NAM-centric names last week. Relative to in recent quarters/downturns, earnings execution quality has been fairly consistent (and good), driven predictably by cost out. The bar for earnings execution seems to have ramped through the season. Overall, we don’t see anything tactically-positive in the OFS space until visibility into topline improvement is achieved (from the depressed, post-COVID level). We don’t expect revenue growth over the longer-arc of time for the sector, but need to see activity normalize in order to meet the OFS oversupply in the middle (and also see global rebalancing take place beyond USL contraction). Mix-shift away from USL to int’l is imperative for earnings power, as we’ve been discussing.
Earnings execution surprisingly strong, moving down the market cap spectrum. Where we would have thought that strong execution from the ‘Big 3’ would yield to underwhelming performance elsewhere, last week’s (mostly NAM) OFS prints showed steely resolve. Too bad the bar had moved higher for the group, and the longer-term outlook for USL remains far more opaque.
Weekly OFS thoughts, including 2Q20 earnings takes for NBR/HP/LBRT/RES/OII/WHD, and thoughts into next week’s prints (NESR/PUMP/CHX/TS).
Quick take – Good cost mgmt considering global crosswinds. DRQ reported 2Q20 EPS AMC yday, and is hosting a fireside chat to discuss results today at 11a ET. Results were decent all things considered, with in-line revenue & better-than-expected (vs. cons, below WR) adj EBITDA on cost-out. Bookings were weak in the quarter (as expected) with book/bill of 40% consistent with that of prior downturn periods. DRQ expects ~$200M in FY20 bookings, vs. the pre-COVID bogey of $80-100M/qtr and $85M in 1Q20. The balance sheet remains pristine, so minimizing cash burn makes for perhaps a lower execution bar for DRQ vs. leveraged peers. Waiting game continues.
Over half of our coverage has reported 2Q earnings so far and the results have been relatively decent, at least versus consensus. Stock price reactions have been biased to the upside post-print and our coverage is up 6% since HAL kicked off earnings on 7/20 (vs. -1% WTI and +1% SPX). Cost cutting measures have been swift and profound in the current downturn. Topline ests have been relatively static for 2020/2021 but EBITDA has been revised up across the board (with the exception of the pure play pressure pumpers).
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