DEP Update: Christmas is upon us, but no letting up for the DEP team as we hit the road again this week for our annual father/son Christmas field tour. We’ll be in the DFW/Tyler area on Wednesday/Thursday. We expect to briefly touch on trip observations in next Sunday’s note, but similar to last year, we’ll use our year-end epistle to review the status of DEP and present our 2022 event calendar. To state what should be an obvious, we hope everyone has a very Merry and Safe Christmas.
Items of Note This Week:
- Permian Trip Takeaways
- Rig inquiries fading, but rig count still rising.
- Sand shortages and implications to one contact.
- New CT start-up.
- More Upstream & OFS M&A
- Bynum School Fund Raiser
Permian Tour: Just a few meetings on this past week’s tour as most of our time was spent cooking at the Bynum School. That said, here are a few interesting observations from our discussions.
- We visited with three land drillers who all report a drop in rig inquiries. Initially, this sounds bearish, but all rig contacts foresee a continued increase in their rig count as all contacts still have multiple rigs which are contracted and preparing to be deployed.
- The inquiry declines are believed to be nothing more than customers who moved early to secure rigs (i.e., the healthy gains witnessed in Q4 which will also bleed into Q1).
- The implication, however, is rig count growth will slow/stabilize as we exit Q1.
- It takes time to reactivate equipment and staff crews, so a slowing of inquiries and the subsequent duration of this inquiry lull, would seemingly distill into a flattening rig count.
- We cross-checked these driller observations with one Permian E&P who previously shared aggressive rig count expansion plans. Due to infrastructure issues and casing shortages, the company noted it will fall one short of the level it had guided to us previously.
- One frac player recently moved a fleet out of the Permian due to sand shortages.
- The company claims it could not find sand which would have caused the fleet to sit idle for multiple weeks. As a result, the frac fleet moved from the Permian to another part of Texas.
- Of note, the company claims growing interest in wet sand as it is cheaper (~$12/ton) and more readily available.
- We queried multiple frac companies about 2022 Permian activity. Overall expectation is an increase of 5-10 fleets in the basin. Most estimate the Permian active frac crew count is hovering around 100 crews, so not a material gain. This view is consistent with what we have written previously.
Select/Nuverra. WTTR continues its methodical effort to reconsolidate the fluids market with its fourth acquisition of the year, this time via its acquisition of Nuverra Environmental Solutions. The transaction price totaled $45M. On an EBITDA multiple basis, the price optically screens generous as YTD EBITDA for Nuverra is roughly $1.0M with Q3 EBITDA coming in negative. But to look at it this way is to not see the forest through the trees. First, quarterly G&A at Nuverra is roughly $5M/quarter. Presumably, much of this gets blown up. Second, one would surmise other synergies within traditional direct operating costs exist given the geographic overlap. Third, this is now the fourth deal WTTR has consummated YTD. At some point, the consolidation effort will yield more tangible pricing synergies.
One final point – in the better days of OFS (i.e., 2013-2015), Nuverra invested nearly $125M into organic capex. Yes, this trailed off during the past five years as returns soured, but total capital invested during that time frame was ~$30M. Moreover, Nuverra also grew via M&A with deals totaling over $50M. So, in the past ~8 years, Nuverra effectively made investments approaching $200M and WTTR is now buying this business for $45M. Now, to be fair, just because Nuverra spent lots of money doesn’t mean all of it was spent wisely, but when one considers the potential cost savings (i.e., a material uplift to reported EBITDA on G&A savings alone) as well as the investment in PP&E over the last decade, it would seem WTTR is gathering up a sizeable asset base at a reasonable price. Moreover, with more scale and more pricing power, one could reasonably assume the wherewithal to generate decent FCF on a go-forward basis is real. Time will tell if our view is correct, but the bigger picture is WTTR is doing what market leaders should do which, in our view, is to opportunistically consolidate in order to address the weak market structure plaguing the fluids business. Additionally, we would suspect additional tuck-in opportunities remain as there is no shortage of OFS veterans who are sick of this business and ready to go fishing. For our E&P readers, these transactions matter as it impacts the availability of suppliers while integration efforts often create internal disruptions, sometimes affecting service quality.
Earthstone/Chisholm: More M&A on the E&P front as Earthstone Energy announced the purchase of Chisholm Energy Holdings for $604M. This transaction continues ESTE’s proactive consolidation efforts as ESTE has already closed four acquisitions this year. Collectively, these deals increased Earthstone’s Permian net acreage by 400% with the Chisholm deal providing ESTE a foray into the Delaware. Activity levels will stay the same. ESTE was operating 2 rigs in the Midland Basin while Chisholm was operating 2 rigs in the Delaware. For 2022, it would appear ESTE will stay at 4 rigs with total pro forma capex estimated in the $385M-$415M range. While the formal 2022 budget has yet to be released, ESTE believes it can generate $130-$150M in FCF in 2022 – one would think this FCF will be used to enhance the balance sheet.
Northern Oil & Gas: Announced a dividend growth plan this week which highlights NOG’s intent to grow its dividend each quarter while still generating FCF for debt reduction and/or other corporate purposes. The fact that NOG is increasing the dividend is not a surprise as the company previously alluded to this. However, what is noteworthy is the granularity surrounding NOG’s dividend growth expectations, a plan which is presented well in an updated IR slide deck. Under what should be a relatively conservative construct, NOG foresees an ability to grow a dividend such that the dividend yield could exceed 6% by late 2023. Whether the implied yield materializes exactly as planned is not the point. Rather, the continued focus on returning cash to shareholders is. And that desire, we submit, is not just the goal of NOG, but rather the broader public E&P universe. This point shouldn’t come as a surprise to anyone who regularly reads E&P quarterly earnings releases. However, it is for this reason the OFS sector needs to take a lesson from the E&P playbook and focus less on market share and equipment reactivation, but on returns and free cash flow.
New CT Start-Up: We are a bit slow in our reporting, but it is our understanding a new player called Redhawk Coiled Tubing emerged earlier this quarter. We will have more color on this new player in the coming weeks, but for now, Redhawk is another example, we submit, of industry veterans leveraging experience and relationships to create new competition.
Bynum School Fundraiser: This week we had the opportunity to cook BBQ for the kids and staff at the Bynum School. We would like to thank a few of our industry friends who came out to help us: Liberty Oilfield Services, ProPetro Services, Warren CAT, Advanced Stimulation Technologies and Ranger Energy Services. For those not familiar with Bynum, it is a fantastic program that helps very special kids who live in the Permian Basin. Because Bynum School is a fantastic program and because like most organizations, it has needs, the DEP will coordinate and host a fundraiser for the school. Readers who want to help, please let us know. We could use your support. Here’s what we want to do.
- We will host/coordinate a BBQ for Bynum’s parents/kids/staff on April 7th. This will essentially be a family day for Bynum kids/parents, but we want to bring in folks from the community to learn more about the school.
- Importantly, DEP will not make any revenue on this event.
- Everything goes directly to the Bynum School.
- We are targeting 15-20 cooking teams to cook BBQ (asking for an entry fee to cook – payment goes to the school as a donation, not to DEP).
- We need sponsors to help with various items such as drinks, games, paper goods, etc.
- We will likely need other forms of assistance but give us time to figure all of this out.
- Cooking teams and sponsors will be allowed to invite guests/customers to come out to the event, but we’ll have a managed invite list so that we do not overwhelm the kids and staff.
- Cooking teams and sponsors will write checks directly to Bynum, again nothing to us.
- We will determine the sponsorship fees, but our goal is to raise at least $100,000 for the school.
- We also want to find/donate a smoker to the school so the Bynum kids can create a competing BBQ team to compete against other local schools (eventually we could also use a couple volunteers to teach the older kids how to cook).
Yes, there are lots of charitable organizations out there and most of our readers are already very generous with their community involvement. That said, if you have a little extra in your 2022 budget, we would love to get your support in April.
BKR U.S. Land Rig Count: +3 rigs to 563 rigs. With two more weeks to go in Q4, it would appear the Q4 average rig count will come in around 545 rigs, +12% q/q.
THRIVE 2022: Please let us know if you have any interest in participating at our THRIVE 2022 Energy Conference. Our sponsorship and exhibit brochure has been circulated. If you didn’t get it, please let us know. We’ll likely pester folks about this after Christmas, but the dates are February 22-24 at Minute Maid Park. This event will be invite-only to DEP subscribers, THRIVE Sponsors and DEP friends.
As always, this note should not be considered an investment opinion or recommendation.