Just in time for the Super Bowl, DEP is out with our weekly thoughts and observations. Tonight’s note is relatively brief as the DEP team is knee-deep in THRIVE Energy Conference planning (i.e. panel question preparation, registration, etc.). Moreover, we’ve been on the road having just returned from Pittsburgh last night and now off to Midland first thing tomorrow morning. Therefore, tonight we touch on three earnings calls from last week as well as summarize a few industry data points.
Energy in Transition. Make no mistake, energy in transition is here. Just take a few minutes to read the transcripts from the NOV, LBRT and PTEN Q4 earnings calls. All of these companies set aside time in their respective prepared remarks to address company-specific efforts to participate in the energy in transition movement. Notably, NOV called out its product efforts for the wind power markets, designs for both the onshore and offshore markets. Whether it be new construction of towers or content for offshore vessels/platforms, NOV appears to have sizeable exposure over the coming years. PTEN meanwhile called out its EcoCell lithium battery hybrid energy management system as well as its Cortex power management system. The DEP team still has lots to learn with respect to PTEN’s new emerging products/services, but dumbing down the PTEN offering, the benefit of the EcoCell product is the ability to displace one of the gensets on a rig. This reduces both diesel consumption as well as emissions. Meanwhile, PTEN will continue to invest capex dollars into dual-fuel capabilities with its frac fleet. Lastly, LBRT highlighted its leadership role in testing/rolling out Tier 4 dual fuel engines as well as its soon-to-be-rolled out electric fleet solution, digiFrac. The company will dedicate roughly 35-40% of its 2021 capex budget on new technology, including electric and emission-friendly equipment.
Why does this matter? Simple. ESG-related demands from both customers and investors continue to grow. Emission-friendly technology and solutions are seemingly here, but what weighs down a rapid adoption is tension regarding who pays for these investments. This will eventually get worked out as OFS pricing will migrate higher, a function of the limited number of OFS companies who can actually afford to make the investments. In other words, while there is an abundance of OFS equipment today, there will be a shortage of solutions which can address E&P emission reduction needs. That, along with higher oil prices, will drive pricing higher. Separately, what we see from NOV is a recognition of a looming pivot given its positioning with new products designs for non-oil/gas businesses. As a leading OEM, NOV will build product/content that makes money. Very simple. For non-OEM’s such as the traditional OFS firm, the pivot is a bit more difficult; therefore, the ESG focus has to be on reduced emissions and knocking the cover off the ball on “S” and “G”. Positive free cash flow would help too.
Pressure Pumping Pricing: Fairly consistent commentary now from SMID-cap players LBRT, PTEN and RES. All report no pricing improvement to date. There is some divergence with forward pricing commentary as LBRT reports price increases have already been secured for later this year, while RES and PTEN were a bit less specific. What was clear, however, is messaging from all three that no more fleets would go back to work until pricing improves. Now, to be fair, some industry players have made this claim before, yet a dramatic rise in the U.S. frac fleet has transpired, thus far, with little incremental pricing. This will need to change going forward as industry returns remain anemic. Specifically, EBITDA/fleet metrics remain depressed – a function of both pricing and utilization, albeit it’s largely pricing related today.
LBRT, for example, reported an annualized adjusted EBITDA/fleet of $1.8M. Maintenance capex is roughly $3.5M/fleet. For LBRT, its calculation includes corporate G&A. If one were to simply use gross profit per fleet, this figure would improve to $5.3M. PTEN’s Q4 pressure pumping segment results imply an annualized EBITDA/fleet of $1.3M or ~$2.3M if reviewing on a gross profit/fleet. To be fair, the company posted annualized EBITDA/fleet numbers closer to $5M during Q3 (Q4 had excess white space). For 2021, PTEN’s capex budget includes $30M for pressure pumping, so incremental pricing will be required to allow PTEN to generate positive cash flow in this segment (Q4 EBITDA = $2.3M or $9.2M annualized). RES does not disclose EBITDA/fleet, but the company’s Q4 consolidated EBITDA totaled ~$8M, thus we don’t need to spin our wheels to realize the EBITDA/fleet metrics probably weren’t stellar. In the coming weeks, we’ll hear from the other public players, but it would seem reasonable to expect similar financial results for the group. These financial results are not sustainable, particularly for a capital intensive business. This is why NOV points to industry cannibalization because so few companies are investing in their fleets. Now, with the call for newer generation equipment likely to rise, there is no way the industry can meet this demand when EBITDA paybacks today would be nearly 5-10 years (based on recent Q4 results and dependent on whether one goes new vs. rebuild).
THRIVE Energy Conference. Shameless Plug. Our event is now three weeks away. We have just over 500 registered attendees from over 225 companies. At last check, we have about 10 open booth spots, two outdoor spots and a few open luxury suites, so we could use a tad more support. Let us know if you would like to showcase your company. There aren’t many marketing events out there this year and we actually think our event might just turn out ok. Moreover, headcount is expected to rise further this week as we know a bunch of you plan on attending, but haven’t officially registered yet (hint, hint). Please do so quickly as we will shut down registration early next week. All who are receiving this email should have already received the registration link, but in the event you deleted it, you’ll get it one more time, probably on Monday or Tuesday. If you don’t register, you can’t get in.
Cabot Oil & Gas 2021 Budget: COG announced its 2021 capex budget of $530-$540M. This guidance is consistent with prior company commentary. In keeping with a theme we’ve written about, the company spent $106M in Q4’20. Thus the 2021 budget represents a ~26% increase relative to the Q4’20 annualized spend of ~$424M. For the year, COG spent $570M in 2020, noting in its release the company slowed activity late in the year. As an aside, PTEN cited slowing activity in its Northeast operation during Q4, but an expectation it will improve in later 2021. We believe, but aren’t 100% sure, that COG is a customer for PTEN, potentially helping frame PTEN’s comments about slowing northeast activity.
NOV Q4 Earnings: Q4 was tough and the near-term outlook remains challenged, but NOV’s medium-to-longer term outlook is encouraging. Meanwhile steps to address recent market softness are significant. NOV took out $700M in cost in 2020 and has identified another $75M of cost out in 2021. Many of NOV’s OFS customers have deferred maintenance, cannibalized equipment and drawn down stocks of consumables, which is similar to what we have heard from the field level and other calls, especially with fluid ends. While NAM drilling activity has improved off the August lows, it is still down 58% vs year ago levels and this is weighing on inbound orders. NOV will be testing rig floor robotics later this year and hopes to have a commercial product by the end of the year. Ideal E-Frac offering will be tested in Q1 (we think by NexTier). We hope to learn more about this technology at our Thrive Energy Conference at Minute Maid Park later this month. The bigger message from NOV is its long list of Energy in Transition initiatives, both onshore and offshore. Grabbing the lion’s share of attention is NOV’s focus on wind. With NOV’s history of marine vessel design and industrial lifting, it’s a natural player in the development/construction of offshore wind platforms and towers. NOV is now building out its first commercial line to build tower sections for a major wind turbine manufacturer (NOV already has an order for 100 towers). This production will occur at NOV’s Pampa, TX facility. That’s a big statement in our view and is proof positive of the Energy in Transition theme. For those who may not know, Pampa is where NOV built many of its well service rigs. Assuming we are thinking of the same facility, this place is huge and it’s a testament of the move from old energy to new energy. We believe the production out of Pampa will serve onshore wind opportunities. For offshore, NOV noted its content for an offshore wind construction vessel is about $80MM/vessel and this business could approach the $200M revenue run-rate later this year. There was a lot of meat in the Q4 earnings transcript on the Energy in Transition topic so take a look as we just scratched the surface.
As for traditional energy, NOV noted that its CT coil tubing string business witnessed its second consecutive quarter of improvement. Inbounds for engine conversions are on the rise with NOV recently receiving an order to refurbish 35 pressure pumping units. As for an interesting product anecdote, NOV reported one of its 2.625 inch CT strings in the Permian lasted 64 runs on 48 jobs, reaching 1,266,489 running feet. Last time we focused our research efforts on the CT string business, we were told 1.0M feet was the max before replacement is needed. Assuming that’s still conventional wisdom, the NOV highlight shows a nice gain in efficiency.
LBRT Q4 Earnings: Revenue = $258M, +75% q/q. Adjusted EBITDA = $7.1M vs. $1.4M in Q3. The huge revenue jump with limited EBITDA pull through is indicative of current low pricing environment. Capex for 2021 is budgeted at $145M-$175M, up from $82M in 2020. The budget assumes maintenance capex of $3.5M per fleet while LBRT will invest $60M in Tier 4 upgrades, technology and digiFrac. The company is staffed for 30 fleets, a level which is likely to remain flat near-term until industry pricing moves higher. This includes the legacy SLB frac operation. LBRT contends the U.S. frac fleet will be flattish, but then rising in 2H’21 as privates increase activity. Cash = $69M with total debt = $106M.
PTEN Q4 Earnings: Revenue = $221M, +7% q/q. Adjusted EBITDA = $29.6M vs. $43.3M in Q3. Rig count averaged 62 in Q4, 67 in January and guided to average 69 rigs for Q1. The rig count includes 5 rigs idle, but contracted. The rate of change is in-line with commentary from private contacts. As we see it, in the month of December, PTEN averaged 64 rigs. The Q1 guidance calls for an average of 69 rigs which implies PTEN will exit Q1 around 71 active rigs, representing an~11% improvement. Recall from our most recent survey of private land drillers, the expected increase in rigs over the next couple months as little as ~7% to as much as ~26%. We lean on the low end of their comments, thus the PTEN commentary fell right in the fairway of expectations. The pressure pumping commentary is also consistent with the peer group. LBRT alluded to a flattish count of ~30 fleets, RES alluded to a flattish count of ~5 fleets while PTEN guided to a flattish ~7 fleets. In other words, the industry is leveling out on the completion crew count (for now) while the rate of growth in drilling activity is moderating as well. For 2021 capex, PTEN announced a budget of $135M, down from $145M spent in 2020, but a sharp uptick from the $10M spent in Q4.
Permian Frac Crew Count: Industry contacts now report ~90 active frac crews in the Permian. We’ll try to confirm this count when we get to Midland tomorrow.
BKR U.S. Land Rig Count. Up again, rising another 10 rigs this past Friday to 375 rigs. We are now up 144 rigs from the trough, or +62%.
Hope everyone enjoys the game tonight. Too bad the Steelers choked. As always, our note is not investment advice.