Hard to imagine the sector carnage had OPEC not reached its decision to cut last week, but the reality is that the N-T crude balance remains remarkably fragile with unyielding US growth, lack of legacy deepwater declines, and the demand outlook tethered to twitter-fueled consternation. Cycle visibility remains limited by the ebbs and flows of an increasingly short-cycle oil market, so while WR Energy remains L-T constructive on crude ($65/$75 WTI/Brent in ’20), we are lowering forward multiples across our OFS coverage in-parallel with where we see sentiment. A downward inflection in shale capital efficiency remains the ultimate catalyst.
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This week, we are on the West Coast marketing with WR Integrated Oil/Refining/LNG Analyst Sam Margolin. The trip is timely given two highly-anticipated catalysts for the oil price, and based on our marketing conversations around what has become both a fragile and volatile commodity environment, the next two weeks will be crucial for OFS. Friday (11/30/18) kicks off the G20 Summit in Buenos Aires, where investors hope to see some resolution for, or at least clarity on the magnitude of, the US-China trade war (as it relates to the demand side of the global oil balance). In terms of the Oct 6th OPEC meeting, most investors remain confident in the re-establishment of near '16-level production cuts, while a select few see more of a 50-50 possibility. One could argue that a relative lack of spare capacity should invite cuts (even if recent, bearish US production data is inaccurate), but a precarious US-KSA geopolitical paradigm and peripheral Iran/China implications make for a number of possible outcomes next week. We will circle back on the fundamental OFS takeaways following this week's marketing ventures, but clearly N-T group performance will be driven by the outcome for oil.
The markets certainly aren’t providing much to be thankful for and Thanksgiving can’t come soon enough. We wish all our clients the best through thick and thin, but certainly during this exceptionally trying market pullback. Have a Happy Thanksgiving, hopefully the break will provide some perspective for all and help calm the market. CHOW within details how the OSX has historically traded pre/post-Thanksgiving, the takeaway being that post-TG could provide a much-needed reprieve from several weeks of severe underperformance. Click the full note to take a look…
. F1Q19 should see continued (robust) growth in rig days and dayrate, as HP’s speed to market is a clear advantage on the market share front. The company signaled leading edge margins of $12-$13kpd over the next eight quarters, but noted that leading edge dayrate momentum would moderate before reaching newbuild economics. Given this potential cap on leading-edge rates, cost execution is becoming an increasingly important part of an HP story which, on our model of $10.5kpd and $11.2kpd margin in FY19 and FY20, implies a dividend payout ratio well above 100% through YE 2020.
HP reported F4Q18 earnings after market close yesterday (11/15/18) and is hosting a conference call to review results today (11/16/18) at 11am ET (10am CT).
For PUMP, the tradeoff was an attractive HHP acquisition cost ($653/HHP) and enhanced (if not unprecedented) demand visibility for what seems to be beneficial pricing terms for PXD. Nevertheless, PUMP continues to push the envelope on “dedicated" in the realm of OFS, and while investors may debate what our model captures as appreciable earnings accretion in ’20, perhaps the more needle-moving aspect of the deal is how the improved visibility and activity risk mitigation flows through to the forward multiple. We reiterate our TOP PICK Outperform and raise our YE19 PT to $29 (from $27), based on 5.5x ’20 EBITDA. Our (unchanged) NTM multiple is within the historical range for frac over previous market cycles, and in our view is perhaps too low now given how the PXD service agreement further de-risks out-year numbers (for 10yrs).
We are rolling out the inaugural edition of the weekly Roughneck Rumblings in an understandably trying time for our clients. Our goal is to stay ahead of the OFS conversation (however muted it may currently be) and try to improve the research process in any way that we can. Each week, you can expect 1) incremental thoughts on the group, 2) a chart of the week (and/or roughneck rumblings – feedback from the field), 3) links to pertinent WR Energy publications, multimedia, and news, 4) various WR/consensus, valuation, and performance charts (with unlimited transparency into how our calls are working), and 5) a slew of up-to-date industry data (including RigData analysis of rig types, contractors, and customers by US basin). We welcome all feedback and ideas for bespoke items to include on a more regular basis.
This morning (11/13/18), BHGE and GE announced a series of long-term agreements that amended the commercial and technological relationship between the two companies. Perhaps most importantly, the agreement removed the lockup that restricted GE from selling BHGE shares before 2019, a move that portends an accelerated GE exit from BHGE with 1) GE initiating a secondary offering of a portion of its Class A shares, and 2) BHGE initiating a repurchase of Class B GE shares. A fully-underwritten Class A allotment and concurrent BHGE repurchase of $1.5B Class B/LLC units would reduce GE’s ownership interest in BHGE to ~50.4% (from 62.5%). The net impact equates to an approximate 6% reduction in BHGE share count.
PUMP posted what was perhaps the greatest upside surprise of OFS 3Q earnings, with continued QoQ improvement in annualized EBITDA/spread and anticipated outperformance (mgmt’s view, although we agree) through 4Q18. The takeaway seems clear to us – the dedicated, customer-centric model is as much an operational differentiator as it is an earnings moat from the hyper cyclical spot market. We reiterate our OP rating and raise our YE19 PT to $27 (from $24), based on the same 5.5x our ’20 EBITDA estimate of $434MM (up from $392MM). Shareholder returns remain the valuation bogey.
PUMP reported 3Q18 earnings after market close today (11/6/18) and is hosting a conference call to review results tomorrow (11/7) at 9am ET (8am CT).
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