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…
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. 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).
NOV hosted an analyst day today (11/6/18) in Houston, and beyond the high-quality, racecar-themed hype videos provided a comprehensive overview of each business segment. In aggregate, ‘19 guidance was mostly in line with both our prior estimates and street estimates with some finetuning to be done on the segment level. NOV’s three-year outlook was more unexpected and provides some context for NOV’s underlying earnings power if the recovery plays out as they envision. Our view of the recovery remains somewhat incongruent with NOV’s however, primarily given our more cautious view of the offshore recovery cadence. We’re tweaking our estimates to reflect ‘19 disclosure. Our 2020 estimates remain largely unchanged and we maintain our PP rating and $34 YE19 PT, based on 10.5x our ’20 EBITDA of $1,492MM (up from $1,489MM).
Lot to unpack through two full weeks of OFS earnings. Through two full weeks and with two companies under coverage yet to report (PUMP & HP), a lot to unpack from an otherwise choppy 3Q18 tape for OFS. We understand that it is an extremely busy time for our clients, but encourage those with spare weekend capacity to catch up on both our company-specific takes and also important read-throughs for the group at large. Please do not hesitate to reach out with any follow ups, and thank you for reading! Click the "View Full Note" link to access all WR OFS 3Q earnings notes.