Global exposure is key to our *top pick* designation for TS, but global trade uncertainty remains a key overhang. Earlier this week in a pair of tweets, Trump announced restoration of steel/aluminum tariffs on Argentina, Brazil and France for “massive devaluation” of currency. Given its Arg exposure (annual160kt of tubulars imports), TS traded lower on the news, but lack of price action indicates that the market is discounting follow-through on the latest tweets (a la Turkey on Oct 14th). caught up with the company yday, we see the most likely outcome (if tariffs are enforced) as a <75bps margin impact driven by a manufacturing shift to US/MX/CA and/or rationalization of W-Hemi shipments to the E-Hemi. The higher-level takeaway is that despite our positive view of TS’ FCF potential (HSD % yield) and optimal exposure to the cycle (offshore optionality), we recognize that global trade/steel uncertainty may be untenable to potential (incremental) investors.
Search Coverage List, Models & Reports
Search Results1-10 out of 153
After a stark Sep falloff in frac activity, USL completions bounced back slightly in Oct, indication that budget exhaustion is somewhat of an intra-quarter phenomenon in the current E&P spending environment. A strong month of Bakken filings in October and bounce-back in the Permian offset MoM declines in the Eagle Ford, Niobrara, and Anadarko basins. The Northeast/Haynesville also saw modest recoveries from 2Q YTD lows. Given the lag from completion to filing (FracFocus), and then to aggregation (Rystad), the Oct/Jul QoQ comparison is still just a nascent view of how 4Q19 will shape up, although better-than-expected October activity could portent accelerated Nov/Dec declines.
Within, we delve into three key OFS/NAM shale activity topics, including, 1) “DUC exhaustion” in-focus near YE20, 2) a 4Q19 ‘bottom’ for frac utilization(?), and 3) recent US productivity gains through E&P retrenchment, but near/medium-term thesis still intact (productivity headwinds/rollover).
Wednesday AMC, we launched on four additional OFS names, OII (OP), DRQ (UP), WHD (PP), and PD-CA (PP). For OII, pushback came primarily on modest margin growth modeled in Subsea Projects & Products, although investors generally agreed with the better-than-expected FCF premise based on ROV pricing. For DRQ, the key concern was whether our ‘subsea integration’ downside risk (to SPS growth) could be viewed as M&A upside risk for the core wellhead/connector offering (we agree, but valuation is perhaps still a bit rich, despite earnings moving off bottom). WHD is a sellside/investor favorite (for good reason, solid mgmt/cap allocation), although pushback on N-T Products growth was muted given the wait-and-see IOC qualification. PD is a familiar story for most folks, although the timely AlphaAutomation commercialization is a catalyst worth revisiting. We are around today/next week, so don’t hesitate to reach out on any of this.
PUMP will report 3Q19 results today AMC, bringing operational results back into focus (at least temporarily) after the internal review and related inquiries have dominated the narrative since Aug. On Oct 9th, PUMP announced the effectively utilized fleet count for 3Q was 25.1 (vs. 25.6 in 2Q) and guided to 18-20 fleets for 4Q (-26% at midpoint), with no other 3Q/4Q detail provided. Among peers that report/guide to similar effective utilization metrics, FTSI guided to a 26% decrease and legacy Keane guided to a ~23% decline. Figures for PTEN & LBRT depict deployed spreads based on commentary and are thus less comparable, which perhaps also skews the comparability of cited EBITDA/spread metrics. Tables within show 3Q/4Q consensus for PUMP, with figures for peers based on results/guides (or ests in the absence of guidance). We continue to see the market in somewhat of a ‘holding pattern’ on PUMP, with those currently involved leaning into the ~$630/HP valuation (limited downside?), and others waiting for clarity on the SEC review/mgmt re-org.
In this week’s CHOW, we take an early look at implied 2020 capex based on early E&P budgets thus far in 3Q earnings. E&P budgets are tracking down 19%, albeit based on a limited sample and weighed down by massive cuts by OXY, and to a lesser extent, CHK and EQT. We chart the spending data, and then map out OFS exposure to each respective E&P based on YTD frac activity and active rig counts.
3Q did little to derail our constructive BKR thesis, despite the incrementally cautious macro oil/OFS messaging that led to a modest downward revision of FY20 ests. On the call, BKR framed a more deliberate OFS outlook (compared to peers), citing softer oil demand growth and non-US/OPEC oil output as driving ‘flatter’ global upstream activity next year. This conclusion cuts against more favorable consensus topline growth for SLB, particularly in the context of NAM declines, but underscores that BKR’s non-OFS segments will be a bigger growth differentiator next year (and powerfully, a driver of further margin/FCF improvement). A notable P&L blemish was TPS topline, but higher q/q growth expected for 4Q, in addition to FY20 follow-through on strong orders in 2H19, solidify our positive segment view. Expected FY20 improvement in OFE/DS also help offset a more tepid OFS outlook. Aside from more wood to chop on the GE separation, FCF conversion remains a key catalyst.
BHGE reported 3Q19 earnings this am and is hosting a conference call to review results today (10/30) at 9:30am ET. OFS saw strong inc margins on modest topline growth, as EBIT margins grew ~100bps q/q and beat WR/cons by ~70bps. A modest q/q decline in NAM OFS was more than offset by substantial 22% YoY int’l OFS growth, which makes margins more impressive (and gives credence to a more price disciplined SLB/HAL/BKR int’l contingent). A modest OFE beat in the quarter was dulled by underwhelming billings in TPS, although the 2.3x TPS book/bill would suggest more of a revenue timing issue in 3Q (we’ll look to the call for further color on what we had already anticipated to be 25%+ q/q TPS growth in 4Q). FCF of $161MM (OCF of $360MM less capex of $199MM, net of disposal proceeds) undershot WR/cons of $250-270MM, driven by a drag in “working cap & other items”, perhaps a GE separation idiosyncrasy (in our view). DSO/DSIs were fine.
Related to ongoing bankruptcy proceedings, Weatherford released updated revenue and EBITDA projections through 2022 earlier this month. Akin to its solvent peers, internal projections have been revised down since the mid-year update with North America weakness offsetting Int’l growth and reduced activity suppressing the uptake of new technology offerings. At the end of 2018, Weatherford thought $1B of EBITDA in 2019 was feasible given its then macro viewpoint. In June, the revised projections pushed $1B of EBITDA to 2021, and under the revised projections, EBITDA tops out at $950M in 2022. The company expects no net growth from activity through 2020, with the incremental growth instead driven by new tech offerings (capital light is trending across OFS). It’s also worth noting that there is not much downside from divestitures baked in, which may signal how tough it has been to sell non-core assets (especially when peers are also more inclined to sell).
The outlook for 3Q frac activity got incrementally worse over the past month, with our revised QoQ decline falling to 10% (from an 8% 3Q decline estimate last month). Our outlook for the Permian (tracking -9% QoQ) was relatively unchanged, while the EF outlook improved modestly and the rest of the basins (particularly NE) fell materially. A stark September falloff in the Permian/Bakken punctuates a negative (but largely expected) step-down in activity with the early creep-in of E&P exhaustion. Given the ~2-month lag from frac->production, we believe the Aug-Sep falloff could portend an Oct-Nov oil growth decline in USL as E&Ps pack it in early for FY19 spending.
- 1 of 16
- next →