Light incremental news again this week despite the fact an industry investor conference took place.  Normally during conference season one would expect to see some 8-K’s with newsworthy items, but nothing really jumped out to us.  The most newsworthy item, in our view, is an announcement of a new electric frac fleet by a new frac company.  Separately, we were excited to see another healthy gain in the U.S. rig count this past Friday.

New Electric Frac Player.   Interesting news from Black River Pumping Services as it announced plans to build/deploy an electric frac fleet during Q1’21.  The fleet will be located in the northeast and we suspect it will work with a dedicated customer.  Exact details on the equipment specs are not yet available, but the move is one to follow.  Of note, Black River started in 2020.  The company is based in Ohio, but quickly expanded into the Permian Basin.  Primary services offered today by Black River include pump down and pressure testing services.

Energy Tech Update.  As we noted two weeks ago, C3.ai was on track to price their much anticipated IPO this year. Well, they accomplished that feat Wednesday and it has been one of the big news stories of the month.  Again, why would anyone in the oil patch care? With Baker Hughes owning approximately 10% of the company (after the IPO) it is a big deal for new technology in our space and a savvy investment by a shrewd management team. We should all be taking note. Baker Hughes paid ~$70 million in June 2019 for their initial equity stake and a sales partnership with C3.ai.  After the successful IPO on Wednesday (proceeds of $651 million to C3.ai) and the move in the share price (+184% since) the Company’s stake in C3.ai is now worth almost $1.3 billion.  That’s a pretty solid return.  And while we’re happy for BKR and we appreciate the value of technology, perhaps we are too old-school as it’s hard for us to understand/appreciate how companies such as DoorDash, which also IPO’d this week, enjoy a market cap of ~$56B, which is bigger than energy stalwarts such as COP ($46B); SLB ($32B), PSX ($31B) and HAL ($18B).

PPP Loans Impeding M&A.  We all know M&A is needed within OFS, but getting deals done has been virtually impossible.  In the past, we’ve chalked up M&A impediments to various factors such as disagreements on relative valuation, balance sheet limitations, lack of capital to fund deals and perhaps in some cases, management/BOD obstinance.  A new wrinkle may be the existence of PPP loans.  Several contacts who we believe would like to pursue a consolidation strategy tell us the uncertainty over the PPP loan forgiveness is a short-term impediment.   In some cases a consent by the SBA may be required for a potential transaction while in other cases buyers simply don’t want to acquire businesses with debt.  We also suspect some buyers may wish to avoid the bad PR which could be associated with buying a company with a PPP loan and then seeking forgiveness of such loan.  For public-on-public M&A, we don’t believe there is any real issue as most public companies did not take PPP money.  Rather, smaller companies, we believe, were the most active recipients of this money.  The PPP challenge, we believe, will be short-term as we surmise most companies are already preparing to seek forgiveness or have already asked.  Once that process plays out one would think this impediment could simply fade away.

BKR Rig Count:  Another healthy gain as the BKR U.S. land rig count gained another 15 rigs this week and now stands at 323 rigs.  Gains were witnessed in multiple basins, a good sign.  The BKR land rig count is now up ~92 rigs or nearly 40% from the trough reached in August.

KLX Energy Recap:  Several observations from KLXE’s fiscal Q3 earnings call held earlier this week (company’s fiscal year end is January 31st, thus Q3 ended on October 31st).  First, KLXE recently merged with Quintana Energy Services with the deal having closed on July 28th.  A prime example why consolidation is needed and the attendant benefits is clear when one considers KLXE advertises roughly $41M of annualized deal synergies have already been achieved.  Moreover, the company still sees another $6M of savings, potentially bringing deal combination savings of nearly $47M, above the original goal of $40M.  That’s impressive.  Equally important to the savings, however, is the recognition of the challenges facing the OFS sector when one considers that KLXE generated adjusted EBITDA of negative $5.4M in Q3, an improvement from negative $19.3M of adjusted EBITDA in Q2.  Even with the 30% q/q top line improvement in Q3, the combined revenue enhancements and deal synergies did not yield positive EBITDA.  The good news for KLXE is the continued ramp in activity through the quarter distilled in near EBITDA breakeven results in October.  What does this mean?  Simple, industry pricing needs to move higher, an outcome which will require further activity improvements, but also more M&A.  There are simply too many different companies still bidding for work and willing to do so at break-even levels.  Also, we point out the KLXE capex spend during the quarter was only $2.6M with the budget for this year equal to $13-$15M.  This is a fairly minimal level of capex spend given the company’s asset base, but this maintenance-level spending is emblematic of essentially all OFS players.  Of note, the company guided fiscal Q4 revenue to improve 7-14% sequentially with positive Adjusted EBITDA anticipated.

Upcoming Auction:  Another frac auction will take place on January 20th in Oklahoma City.  Superior Energy Auctioneers will auction 65 frac pumps as well as an assortment of support equipment such as blenders, hydration units, cement double pumpers, etc.  It appears some of the equipment will be sold as complete frac spreads while there is also a separate private sale package in the Superior brochure.  All of the equipment was previously owned by BJ Services.

DEP Upcoming Trips:  Time for DEP to get back on the road.  We’ll be in the following areas soon, so let us know if you’ll be around:

  • Fort Worth:  December 14-16
  • East Texas: December 21-23
  • Permian Basin: December 29-31
  • Oklahoma: January 18-20

DEP Subscription:  For those who enjoy our weekly note and would like to learn more about our upcoming events and how your company can participate, shoot us a note.  We would love to earn your business via a subscription to DEP.

THRIVE Energy Conference:  We promised last week to have an agenda for our conference tonight.  We are still waiting on confirmation from several speakers so we are a tad late. We’ll publish the panel topics this week and then the committed speaker/sponsor list next week.  That said, interest is growing as our expected speaker, sponsor and exhibitor list is approaching 35 companies.

As always, this note is not intended to be investment advice….

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Daniel Energy Partners is pleased to announce the publication of its first market research note. In this note, we reached out to executives across the oil service and E&P sectors to gauge leading edge sentiment.

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