Happy Father’s Day to all the Dad’s out there.
Busy week last week as the DEP team divided and conquered with Partners hitting equipment tours, analyst days and golf outings. This week we’ll be in Houston for meetings Monday/Tuesday/Wed morn before heading to Pittsburgh for a funeral so apologies in advance for a brief note next Sunday evening. The following week we’ll host our 1st Annual Telluride Executive Series, a small-group event featuring over ~60 companies and multiple industry panels – we’ll summarize the Telluride conclave the following Sunday. With respect to takeaways from last week, below are snippets from our meetings/tours as well as our thoughts on recent OFS news.
NexTier Equipment Showcase. This week NEX profiled its new fleet of frac technology which focuses heavily around enhanced ESG performance. Namely, the display profiled the company’s movement towards electric frac and its greater use of lower carbon emission engine technology. The centerpiece, in our view, is the NexTier investment in the NOV Ideal eFrac Electric Pump. Quick reminder, NEX tested one Ideal unit earlier this year on a simulfrac in West Texas and subsequently announced plans to build its first eFrac fleet. The new fleet is expected to be delivered in 1H’22. Benefits of the eFleet solution are significantly lower fuel costs while the use of a 5,000hp pump is expected to minimize footprint relative to traditional frac designs.
The NEX eFleet solution will be powered by 2.5 megawatt Caterpillar Gas Powered Reciprocating Gensets, which are 100% powered with natural gas. This power solution is expected to generate lower CO2e emissions relative to turbines (we suspect our turbine friends may dispute the relative emissions benefits). Additional advertised benefits associated with the gensets include optimized emissions controls which are set up with the Caterpillar Energy Storage system. This design is expected to lower engine maintenance costs and lead reduced fuel consumption. Like other frac companies embarking on new ESG-friendly equipment, NEX claims it will need a multi-year contract to build out this technology. To date, we have seen a sliver of examples of companies paying more for the emission friendly equipment, but most E&P’s, we submit, remain focused on lower well costs over emissions. At some point this will change. In the meantime, the NEX display features what can be achieved for those E&P’s willing to partner with a service company to accelerate a cleaner emissions profile.
As for attendance, we noticed numerous E&P companies opting to battle the 95+ degree heat to learn more about the NexTier initiatives. This is a good sign as we know from other equipment tours, the pressure to lower emissions is real.
Allison Transmission. DEP participated in an Allison Transmission equipment tour at the EnQuest Energy Solutions facility on Monday. The tour featured Allison’s new FracTran transmission solution. We wrote about this new product last week so we won’t go into product details this week, but we will note the initial production is set to occur in 2023. In the meantime, several units will soon enter field trials with at least one leading pressure pumping company. The key takeaway from our standpoint is the advertised life of ~20,000 hours. If achieved, the product would, in theory, reduce the replacement/rebuild cycle for transmissions, a positive for frac company capex budgets. Also, a huge shout-out to the Allison/EnQuest team for serving Super Chicken at lunch.
Super Chicken Is Open Again! It’s time to give our cardiologists some business. To this end, Super Chicken officially reopened on Friday after nearly a one-year closure. Daniel Energy Partners is a proud sponsor of Super Chicken and we encourage you to pacify any chicken finger desires by giving your gastronomic business to our friend Joe and not to a national fast food chain. BTW – we don’t get any financial benefit from Super Chicken – we simply like to help out the little guy as little guys have to stick together.
Liberty Oilfield Services Analyst Day. Well attended Analyst Day which attracted a respectable crowd in Denver as well as included a basket of online attendees. The most salient takeaway from our perspective is the company’s focus on people and culture. Sure, financial geeks such as DEP love numbers, but numbers don’t really paint the story of a company. To this end, LBRT featured numerous employee speakers outside of the C-Suite, a good method to highlight company culture and present corporate depth. This, frankly, is much more valuable than simply listening to a few figureheads, which is often what investors/analysts usually see. The collective employee presentations conveyed not just a loyalty to the brand, but also solidified our perception that LBRT is one of the industry leaders with respect to technology savvy. So much so that some of the technical discussion went way over our head, but the charts and explanations conveyed to us that a lot of really smart people work at LBRT. And, while our praise may come across as sucking-up to the company, it’s not meant to be. Rather, the event allowed attendees tremendous time and access to company personnel, a nice learning environment. Throw in a couple beers and candid discussion away from the executive team and it was apparent the advertised high employee satisfaction wasn’t fake. Rather, there is a deep and capable bench.
As for detailed financial guidance, not much was provided. First, no earnings guidance was forthcoming, only plausible ranges and aspirations. With respect to capex, LBRT offered a three-year maintenance capex range of $345M-$350M, or roughly $115M per year. For our E&P readers, recall that LBRT’s Q1 adjusted EBITDA totaled $32M or $128M annualized. Consider LBRT enjoys a reputation as one of the more formidable and technical NAM frac providers and one should quickly realize the disconnect between current profitability vs. the company’s maintenance capex needs. Yes, Q1 was burdened by weather and yes, activity improvements in Q2 should distill into better results, but the larger point is the delta between cash flow and capex is miniscule (at least in recent quarters). It certainly is not generous enough to support equipment upgrades. To this point, LBRT’s growth capex, which would include engine upgrades and the rollout of digiFrac (displayed in Denver), is estimated to range between $220M and $625M. The wide range presumably suggests LBRT’s recognition it will need higher returns to support its customers ESG efforts. In fact, LBRT notes this need as it stated the growth investments will be discretionary and will be based on factors such as pricing and customer commitments (recall statement from NEX above as well as think about similar comments from HAL on a recent earnings call).
Looking towards the income statement, LBRT offered up a view on fleet profitability in a mid-cycle framework. Specifically, in an improved utilization environment, pricing improvements should lead to adjusted EBITDA/fleet rising to the $12M vicinity, up from $4M in Q1. Technology synergies from logistics, material handling and automation could potentially in increase fleet profitability to $15-$16M. No timeline was provided, but LBRT defined the mid-cycle framework as (1) 200-300 fleets; (2) $55+ WTI and (3) LBRT active fleets in the low 30’s to mid 40’s. Today, we estimate the U.S. frac fleet is in the 210-215 vicinity with Canada in the 15-18 vicinity (so ~225-235 in NAM); oil prices are north of $70/bbl and LBRT claims its active fleet count is in the low-to-mid 30’s. So based on LBRT’s range, we are basically at the point when LBRT should approach mid-cycle fleet profitability. Of course, DEP does not model companies and does not provide investment opinions, but one could infer the company’s commentary would imply company profitability reaches these levels in Q2/Q3. We would lean more towards Q3.
A key point to remember with LBRT’s EBITDA/fleet, it is not an apples-to-apples comparison with other peers as LBRT benefits from the ownership of in-basin sand mines, a small wireline business as well as revenue from services such as pump-down. We believe the company’s reference to EBITDA/fleet is measured by total company EBITDA/avg fleets. The company’s investor day slide deck which noted current $4M of EBITDA/fleet did not specifically define how the company calculates this measurement, thus we are left guessing. We also presume the reference was for Q1.
As for other guidance, LBRT believes the industry-wide frac fleet count will reach the mid-200’s working by year-end. For simplicity’s sake, we’ll assume LBRT defines active and working fleets as the same. Also, we should point out that during the Q&A, LBRT did not say its mid-200’s guidance was a view of 250 (per one questionnaire), rather it could be in the 240-260 ballpark. This range matters. If one agrees with our industry-wide fleet tally for NAM is now ~220-230 fleets, the company’s commentary would imply an improvement of ~20-30 fleets. Further, consider the fact that many of the NAM private frac companies are essentially sold out. If public companies stick to their proclamations of not adding any more fleets until pricing moves up, then LBRT’s forecast, if prophetic, would imply industry pricing leverage will come quickly.
Key Energy Services Update: A tad late relative to peers, but we’ll take it. This week KEG reported Q1 revenue of $52M, +11% q/q. The sequential improvement would have been better but impacts from winter storm Uri are estimated to have negatively impacted revenue by $3M. Performance in Rig Services drove the q/q improvement as Rig Services revenue climbed 12% q/q to $35M with Q1 rig hours totaling 89,600, +18% q/q. Fishing & Rental services revenue totaled $6M, +22% q/q; Trucking revs came in at $8M, +4% q/q while Coil Tubing revenue was essentially flat at $3M. No EBITDA or operating income metrics were provided.
With respect to operations, KEG averaged 104 well service rigs in Q1, up from 92 in Q4. The month of March saw an average of 118 rigs while April saw an average of 124 rigs. The continued improvement in KEG’s activity is emblematic of the positive operational trends we have been reporting in this sector. Also, KEG is pursuing a rig demolition strategy, a move which fellow industry players should pursue as well. The company entered 2020 with 850 well service rigs but has cut up ~300 rig in recent months. There are an additional 150 rigs which may be cut up following a review process. We say chop away.
Select Energy Services Operational Update. Team WTTR has been busy this quarter as the company announced multiple operational initiatives including (1) the construction of three new water recycling facilities; (2) the expansion of a Midland basin recycling facility; (3) a $2M equity investment into AquaNyx Midstream, a new enterprise targeting Mid-Con water infrastructure; and (4) an additional $1M investment into Deep Imaging, a downhole frac fluid tracking and monitoring enterprise. Items #1 and #2 were already contemplated in WTTR’s 2021 growth capex budget of $10-$20M, but the company noted it will likely spend towards the high end. What makes this operational update interesting to us is the fact that WTTR states the investments are back by contracts which support the underwriting of these projects. Exact terms were not disclosed, but that’s not the point. Rather, the fact that WTTR would have a contract is noteworthy, particularly when the OFS sector remains on its back and many companies are expending growth capex to support customers but getting very little in return.
BKR U.S. Land Rig Count. Up again, rising 9 rigs to 456 rigs.
Other Observations. (1) Social media posts indicate Straitline Pumps has commenced frac operations in West Texas – wouldn’t it be great if George headlined our Permian BBQ Cook-Off? (2) Highwood Equipment Technologies announced the rollout of its first automated well service rig (we are looking for more details). (3) Looks like the Legend Energy Services frac assets will be auctioned by Ritchie Brothers on July 20-21st. (4) The Ritchie Brothers site also shows a ton of CT assets for sale, most looks like Patriot Coil stuff.