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This week, we caught up with members of the BHGE team to get an updated lay-of-the-land across an otherwise capricious global oil patch. Two key takeaways (our view) 1) OFS is still on track to outperform large-cap peers in terms of growth, with the ‘Big 3’ now uniformly signaling better pricing discipline from the int’l collective (perhaps upside to incrementals), and 2) the 2020 TPS ramp is still very much intact (consensus ests having tightened), and investor fears are likely overblown regarding TPS equipment margins. No further detail on the GE selldown, and we maintain that FCF execution should help alleviate this overhang organically – with cash on hand a potential buyback backstop down the road. Capital strategy remains firm and focused, with no major M&A plans within the OFS purview. Artificial lift remains a bright spot (APY-OP). 

NESR CFO change is (understandably) a tough look – We caught up with mgmt briefly to discuss – No change to our OP thesis. Yesterday (05/28/19) AMC, NESR announced that CFO Melissa Cougle was leaving the company for ‘family considerations’ to assume the CFO role at Frank’s International (as per the concurrent FI-NC press release). We caught up with NESR briefly to discuss, as CFO continuity (even prior to Melissa) has been a point of pushback among investors in the context of unfamiliar MENA accounting/disclosure. Our NDR in mid-April (link) was constructive on the financial disclosure front, and anecdotally it is worth noting that much of the FI team hails from Melissa’s home state in LA (a much more forgiving travel paradigm compared to a MENA-focused OFS company!). NESR’s new CFO, Chris Boone, is a seasoned industry veteran with over 25 years of experience (TESO prior to NBR acquisition & LUFK prior to GE), and his existing ties to the NESR management team make for a relatively seamless transition. As such, we do not change our constructive view of NESR (OP, $23 YE19 PT).

In conjunction with this report, we have also updated our macro/activity view in this report. The key takeaway from the activity update is further flattening of the US oil growth trajectory, productivity slowdown in key shale basins (an important OFS catalyst), and an implied 2H19 E&P production ramp that we don’t see as being priced into OFS activity levels. 

In our view (and based on overwhelming investor feedback) an SPN sale of Pumpco would yield a rapid upward SPN re-rating on both balance sheet and revenue quality tailwinds for the remain-co (7x EBITDA, discounted by a mere 20% of TTM EBITDA would imply much more equity value). From Spears, we estimate that DRILCO, Thomas Tools, and SLB’s fishing business generated $600M of FY18 revenue, which at 15% EBITDA margin implies a 4-5x TTM EV/EBITDA takeout on these recently sold Smith segments. We would assume that SPN’s DPS segment yields a greater margin (given its competitive moat in more differentiated deepwater locales) and the midpoint DPS valuation (vs. SLB comp) on a 25% EBITDA margin implies that DPS alone is worth as much as SPN’s total equity value.