Below are our takeaways from several news events this past week. Also, we share the latest update on the THRIVE Energy Conference & Expo which is now 5 weeks away.
ProPetro Services: Tier 4 DGB Purchases. Constructive news from ProPetro Services earlier this week. In addition to preannouncing Q4 results which we believe were ahead of consensus expectations, the company made an even more important announcement with respect to its foray into the Tier 4 dual fuel market. Specifically, the company purchased 20 Tier 4 DGB trailers for $20M. This is a nice discount as the MSRP for Tier 4 dual fuel frac trailers is generally advertised in the $1.4M vicinity. PUMP’s purchase, we believe, did not include ancillary equipment such as data vans, blenders, etc. thus price per horsepower comparisons relative to newbuild fleets is not meaningful. In fact, doing so would be an apples-to-oranges comparison. Additionally, PUMP will proceed with $17M of Tier 4 DGB conversions which we suspect yields additional Tier 4 DGB capacity of 1-2 fleets. One thing to note, we often call these fleets, but we believe what some companies are doing is placing a few dual-fuel units on an existing fleet vs. running one fleet that is entirely comprised of the Tier 4 DGB technology.
The Tier 4 DGB purchase, we believe, is significant as it validates a premise we have been preaching for some time. First, the bifurcation of the U.S. frac fleet is materializing as E&P customers will increasingly seek more emission friendly equipment. The purchase also validates another premise of DEP’s which is multiple roads lead to Rome. There will not be “one” emission-friendly solution. Multiple engine OEMs are developing new solutions, whether it be dual fuel Tier 4 solutions or the rollout of gas gensets. In the case of PUMP, it is using a CAT solution (engine) as well as an AF Global solution (DuraStim pump) which could have alternate power solutions. Xerox PUMP’s strategy to a few other frac companies, several of whom are testing multiple solutions. Consequently, we do not envision companies standardizing on one specific product, but instead taking a portfolio approach. Conversely, with so many equipment offerings coming to market, E&P companies would be wise to test multiple products before standardizing as well. Herein lies the rub. Service companies need higher pricing to justify the investments and contractual support would be a plus – a point HAL made on its Q4 earnings call (see below).
A final point to PUMP’s announcement. The company will retire 150,000HP of legacy Tier 2 equipment. This is a continuation of a trend many of PUMP’s peers started in 2020 and is a trend which we expect to continue in 2021. Old equipment needs to be retired, particularly when few people, including industry players, believe the U.S. frac crew count will ever return to historical highs. In time, we believe those E&P companies truly committed to ESG principles, notably reduced emissions, will standardize on some form of emission-friendly equipment. We also believe service companies wishing to honestly check the ESG box will do the same. In the short-term, the lack of capital in the business will delay this transition, but make no mistake, the transition will transpire, requiring collaboration between both service and E&P companies. The speed of the adoption will be based on industry profitability and potentially influenced by shareholder demands, particularly if traditional upstream energy investors reward ESG friendly companies with premium valuations.
Solaris Oilfield Infrastructure. A bit like clockwork as Solaris provided its preliminary view on Q4 which, once again, was ahead of guidance. The improvement should not have been a huge surprise for those who actively track frac crew counts, but good news always trumps bad news. SOI’s specific commentary relates to its Q4 utilization which will be up 20-25% q/q. Previously, SOI had guided flat-to-modestly higher.
THRIVE Energy Conference. We continue to make progress with the THRIVE Energy Conference registration and sponsorships. Registered attendees via the formal registration link now stands at nearly 200. Our LinkedIn Accepted invites stand at 342. For LinkedIn friends who are on this distribution list, you must register using the registration link below. Simply clicking “Accept” on LinkedIn won’t get you through the Minute Maid Park doors. We explain why momentarily.
While our sponsorship list is growing, we could use more as Minute Maid Park is not a cheap venue. Remember, THRIVE is free for attendees as DEP does not believe charging excessive attendee fees adds any value to the industry – it simply keeps people away. If you are a potential sponsor/exhibitor, but are on the fence due to COVID, please know we will provide a full refund if the conference is cancelled. We remain optimistic our safety protocols and invite-only attendee list will allow us to move forward and we therefore ask for your company’s support.
For readers who have not filled out the registration link, here’s why you need to do so. First, it is our understanding Minute Maid Park will email all registered attendees a COVID disclosure form ahead of the event. They will use the email addresses from our registration list. This form is a requirement to enter the ballpark. If you haven’t registered via our registration link, you won’t receive the Minute Maid Park email which means you won’t get in. Second, Daniel Energy Partners is a small staff. During the conference, all of the firm’s three partners will be in the conference room moderating panels. Our lovely spouses will do check-in and at least one of them can be really tough. If your name is not on the registration list, they too won’t let you in. Moreover, no one will be able to call the DEP team to bless your attendance as we will be preoccupied and our phones will likely be turned off. Therefore, if you have any desire to attend this event, you must register. The link is below.
A final conference consideration. We strongly ask all of our readership, especially our E&P friends, to consider attending this event. Many of the leading oil service and capital equipment providers will be on site in order to profile new equipment and designs. As we all know, 2020 was no fun, particularly for this sector, yet many of these same companies continued with their R&D efforts in order to satisfy the growing need for safe, ESG and emission friendly equipment. Moreover, because of the challenges with COVID, there have been essentially no trade-shows for these companies to highlight their initiatives. We recognized this, thus our desire to create the best ongoing conference platform for our onshore capital equipment friends and to do so at a fun venue. Therefore, as a sign of support for the industry, we ask you to consider sending senior leaders within your company to come learn about emerging trends in equipment design and how these solutions can help you. BTW – if your company is developing an ESG solution, whether it be a product or service, you really should consider a booth at the THRIVE event.
BKR Land Rig Count. No surprise, the weekly rig count is up again adding another 5 rigs. The count now stands at 359 rigs, up 128 rigs or 55% from the August trough.
HAL Earnings – Observations from Q4: Constructive outlook for both NAM and International. As always, our thoughts on any company’s earnings call relate to operational outlooks and strategy, not valuation or developing an earnings forecasts. To this point, HAL’s North American outlook is consistent with DEP and consensus expectations as management sees 2021 up relative to 2H’20 annualized. Our view is up 20-25%, perhaps more if WTI stays north of $50/bbl. For international, HAL sees Q1 marking the bottom with a recovery to follow. International optimism is, in part, supported by rising tender activity in the Middle East and Latin America. Management believes the oil demand recovery will lead to the beginning of a multi-year energy up-cycle. How many years we don’t know, but the DEP view is decent recovery in 2021 with a more assertive upward slope in 2022 (all based on a ~$50/bbl price deck).
Operationally, HAL should be commended for further improvements in safety measures as the company announced 2020 was a record in key safety measures such as recordable injury rates and lost-time incidents. The exact incident rates were not reported, but the company claims a 20% y/y improvement. Not too shabby, particularly for a company as big as HAL. FCF generation also impressive as HAL generated $1.1B in 2021, of which $638M came in Q4. For 2021, HAL noted FCF outside of working capital changes would likely double. Pretty good. Debt reduction, meanwhile, will be a key short-term priority with plans to reduce at least $685M of maturing debt this year. Capital discipline remains intact as HAL announced a 2021 capex budget of $750M, essentially flat with 2020. Of note, HAL spent $218M in Q4, thus the 2021 budget does not imply a steady ramp in spending. We suspect some of HAL’s peers may witness this, particularly in 1H’21 as equipment returns to service.
Prior to HAL’s earnings release, the company announced its first success using grid-power for a fracturing operation. During the company’s prepared remarks, we embrace HAL’s statement that “when demand for emission reduction solutions translates to better pricing, I expect we will replace within our planned capital budget some of our conventional fracturing capacity with electric over the course of a normal replacement cycle”. That’s an important statement. HAL further stated new electric investments will require not just higher pricing, but different types of contract terms. Makes sense. While we support the transition to better ESG, we also believe companies should generate a return for the money they spend. At the same time, operators wishing to reduce their carbon footprint need to accept the transition may require an “investment” in their service provider (i.e. higher pricing/contractual support). We somewhat alluded to this earlier, but how investors respond to OFS investments in electric is important. If companies simply spend money to differentiate fleet quality, but don’t generate a noticeably higher return, it’s not clear investors will embrace this strategy, particularly given the historical capital allocation strategy/success of the sector. This is why HAL’s statements are necessary.
BKR Earnings – Observations from Q4: Healthy free cash flow at $500+MM; solid bookings of $6.4B in TPS and commendable execution on a substantial cost-out and restructuring program of $700MM. BKR provided a balanced outlook for 2021 with solid growth in oil demand over the next year and a half if vaccines are working around the world. This outlook translates to slower investment by E&P’s in 1Q21 with increase in 2H21 and into 2022. LNG was bright spot in 2020 as demand was more resilient due to China and more coal to gas switching around the world. BKR remains focused on three pillars: 1) transform the core; 2) invest for growth and 3) position for new frontiers. Transforming the core is easily measured as $700MM of annualized cost were achieved in 2020 and BKR will continue to right size their core business in 2021 with plans to reduce rooftops on over 100 facilities. Investing in growth pillar was enhanced with DS segment winning awards in industrial asset management and digital capabilities. BKR continues to evaluate multiple opportunities in new frontiers with CCUS, hydrogen and energy storage. 3C acquired in November is a carbon capture technology that offers a 75% smaller footprint and lower capex requirements. Carbon capture the best opportunity in the next one to three years. Also pay attention to methane release, as methane is around 80x worse for the environment than carbon emissions. Shell working with BKR on Lumen Technology which is continuous monitoring for methane emissions.
Thoughts on each business segment from the conference call: OFS- activity stabilized globally and expect modest improvements in 2021 with more activity from E&P companies, but also expect E&P’s to remain disciplined. Expect OFS operating margins to reach double digits in the coming years. TPS- focus remains on backlog execution of LNG projects. Expect 3-4 projects to move forward in 21’ and robust pipe of LNG projects to reach FID beyond 2021 as customers resume spending to maintain and upgrade equipment (decarbonize and improve efficiency). OFE- Despite a challenging offshore market, BKR will continue to focus on right sizing and optimizing the portfolio. Nice award from ENI on subsea trees, wellheads and manifolds which helps drive an improving outlook for trees in 2021. Digital Solutions- Oil & Gas and aerospace remain challenged while some recovery on the Industrial side. Several project awards on the industrial side demonstrate BKR’s capabilities in industrial asset management.
BKR Guidance: Corp expense in Q4 was $111MM and expect flat in Q1. D&A expense was $307MM in Q4 and expect slight decline in Q1. FCF was $250MM in Q4, expect FCF to decline in Q1 due to seasonality. FY21 FCF should improve significantly over 2020 driven by higher op income, modest decline in capex and lower restructuring/separation cash expenditures. OFS – revenue likely down modestly for the full year, but margins should improve y/y and reach high single digits by Q421. OFE- expect revenue to be down double digits y/y, but expect to maintain positive operating income for year with cost out. TPS – expect solid revenue growth y/y, but higher mix of equipment revenue might be slight headwind for margins. Digital – Q1 lower seasonally, with modest revenue growth for FY21 and margins in low double digits for the full year. M&A- not likely large scale acquisitions, but rather small tuck-in technologies
Final Thought – As always, our individual company commentaries are not investment recommendations – just our thoughts/takeaways/regurgitation on what these companies said/announced.