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.
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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.
In our view, guidance to flat 4Q margins blunted the initial sell-off yesterday, despite higher 4Q ests into the print (to be clear, 3Q was not good), and FY20+ ests will likely be trimmed appreciably. However, +200bps of margin expansion in 1Q and key (accretive) project startups in 2H20 look favorable following this estimate reset. Our coverage continues to offer bullish int’l/offshore commentary that should help to offset NAM friction in coming quarters, helping to solidify TS’ position as the more defensible play in OFS. RigDirect momentum in NAM and int’l markets should still drive WC efficiency gains (a key question mark following solid 3Q FCF) and we expect TS to drive similar ~$1B FCF in both FY19/20. Maintain TS OP with $27 YE19 PT (down from $28) based on 9.5x FY20 EBITDA, the FY20 FCF yield of 9% (EV) looks attractive for an asset with relative cash flow stability & int’l EPS power upside.
TS reported 3Q19 results yday AMC and will host a conference call today at 10am ET. The company largely hit consensus topline on an 8% q/q decline, driven largely by telegraphed volume weakness in Argentina/US L48. Sequential EBITDA decrementals of 31% (vs cons 29%) were duly hit by an aggregate 2.4% price decline and a turnaround stoppage in the N-Hemi (specifically Veracruz, MX). Despite the miss, TS drove a robust $287MM in FCF (vs. WR/cons $150-200MM), on the back of a $157MM drawdown in working cap (vs our modest build) and in-line capex. We’ve seen the P&L miss/FCF beat print before with TS. While the magnitude of the negative revision could be worse this quarter given the tepid tone of the press release on a N-T volume recovery, the flat 4Q margin guide (despite further pricing weakness) and FY20 commentary around offshore/nat gas mix tailwinds could help assuage revision volatility. Cap allocation remains a focus (MidEast/Russia expansion).
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).
CHOW – SLB vs. HAL tale of the tape (more robust review/charts within). SLB and HAL are up 9.2% and 7.5%, respectively, since SLB reported 3Q19 earnings last Friday BMO (HAL reported Monday BMO). The relative strength is somewhat surprising given what we perceived to be mostly neutral prints/calls, and a chunk of the outperformance can likely be attributed to both short covering and/or inordinately low expectations. Still, OFS will gladly take momentum regardless of the source in the current investing climate. Sustaining said momentum has proven to be the more difficult task. In this week’s CHOW, we revisit both sets of results and compare/contrast certain metrics and emerging themes. SLB’s quarter can be summarized as a modest beat and uncertain guide, while HAL modestly missed and issued surprisingly strong guidance. As it stands, much of our tactical positioning call for SLB over HAL into the 3Q print has been deferred to 4Q earnings and the ensuing reveal of SLB’s NAM land portfolio review. We still prefer HAL’s upside L-T.
CHOW – PE/JAG from the OFS perspective – Will E&P consolidation further squeeze service pricing in a lower growth USL environment? Within, we take a look at the rig/frac exposure at play in this week’s PE/JAG tie up, the conclusion being that legacy OFS suppliers for PE are likely to benefit at the expense of those working for JAG (understandably). However, given that PE takes a “squeeze the turnip” approach to service pricing and capital efficiency, we also believe that broader consolidation trends across E&P could further (and permanently) undermine the pricing power of a much more fragmented OFS contingent. While pumpers cite unsustainably low pricing, E&Ps purport continued unit cost tailwinds into FY20, a dislocation in messaging that could inevitably see bad OFS actors acquiesce to larger, post-merger operators in the Permian (unless the frac subsector also consolidates, in the face of low barriers-to-entry). We also observe a HAL/LPI case study which tells of a more amicable equilibrium between OFS, E&P, efficiency and more sustainable investment growth.
From an oil supply side standpoint, the only catalyst that matters is US shale. The LO/generalist market has largely given up on OFS, right before what we believe will be the most impactful structural shift in oil S/D in the past decade – one that benefits OFS, as it stimulates higher calorie int’l/offshore activity and serves as a bbl/$ tailwind for USL drillers and frac. 3Q OFS earnings will be dominated by SLB/HAL/BHGE on the E-Hemi, but equity markets will be looking to the Permian for early indication of the new normal for a ‘steadier state’ US shale complex.
CHOW – Div yields looking increasingly attractive. Where should OFS trade? As the OFS sellside collective (including us) prepares another round of earnings preview, we revisit our 2Q Preview in the context of rising div/FCF yields across OFS. We continue to see more consensus FCF stability vs. associated earnings revisions. With 1) clarity on FY20 NAM spending, 2) demonstrated margin stability despite a contracting NAM environment (aided by int’l tailwinds), and 3) further capex reductions in a broader shift to ‘capital-light’, we believe the S&P500 div yield bogey is tenable for an OFS sector that is both A) at subdued EPS power, and B) overly discounted in terms of near-term growth (or perceived lack thereof). Upside across coverage.
E&P budget exhaustion is already being felt within the super spec USL rig market and across an embattled pumping subsector. E&P alignment is crucial, and tracking rig/frac activity into 3Q earnings (in addition to capturing E&P budget exhaustion impact on 4Q) will be crucial in navigating an otherwise sloppy 2H19 for NAM OFS. Yesterday, we published the September Data Van Download, which provides ests for QTD frac volumes and E&P alignment for key frac players. Complementing this frac monthly, we also recently rolled out our Cat Walk Chronicle, which provides a similar, layer-deeper look at the domestic drilling/super spec rig market.
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