ProPetro: Entering Turmoil From A Position Of Relative Strength (NYSE:PUMP)
ProPetro (PUMP) is taking a hit at the moment of writing, as oil stocks are falling in the aftermath of the much anticipated OPEC meeting and agreement. High hopes have not completely been fulfilled, causing oil prices and related stocks to move another leg lower.
While this is far from a beneficial situation, there is a silver lining here and that is that unlike many peers and other related service stocks, ProPetro has a somewhat resilient balance sheet, making me interested to check out the prospects for the name going forward.
To see how and where we have ended up, let’s move back in time and quickly run through the key developments since the public offering, as the company finds itself in a near perfect storm, yet unlike some peers has a few life boats aboard.
The Thesis, The Events
ProPetro went public in March 2017, little over three years ago, and I covered the prospects on the stock in this article. I recognized the lack of demand for the shares, as I wondered about the profitability of the business.
At the time of the offering, the company had a capacity of 420,000 horsepower of hydraulic fracturing and related services. Founded in 2005, the company has solely focused on the Permian which has been a wise decision as this region, including the Midland and Delaware, has the best economics of the energy business, yet even these basins are not of sufficient quality to allow profitable drilling here.
The company sold 20 million shares at $14 in the offering back in 2017, although most of the proceeds benefited selling shareholders, including previous private equity owners. With little over 80 million shares outstanding, these shares were valued at $1.2 billion on their opening day as shares quickly rose to $15, or $1.1 billion after accounting for the pro-forma net cash position.
The company specifically cited strong growth opportunities, yet the results did not match with the promised growth and solid operating conditions. Going public early 2017, the 2016 results revealed sales down 23% to $437 million. The company reported a sizable operating loss of $67 million and a $38 million loss if we adjust for losses related to asset sales and impairment charges.
This was disappointing as the company claimed to run at 100% capacity at the time of the offering, although it is important to recognize that the full-year results for 2016 were not based on 100% utilization rates. The uncertainty on the P&L, utilization rates and planned capacity expansion into 2017 made me intrigued, as the lack of information made that I was not a buyer given the uncertainty. Hence, I concluded to wait for the first quarterly earnings reports as a public company before making my mind.
By March 2018, the company reported its 2017 results. The company grew capacity by 64% to 690,000 HPP and maintained the 100% utilization rate. This resulted in revenues being up 125% to $982 million. Adjusted EBITDA came in at $137 million and net earnings at $13 million. This translated into earnings of $0.16 per share, which translates into sky-high multiples, although one has to recognize that fourth-quarter earnings came in at $0.12 per share, indicating strong momentum on the bottom line.
A year later the 2018 results were released, and they revealed further revenue gains, but moreover some leverage on the margin front as well. With capacity increasing to 905,000 HPP, revenues were up 74% to $1.7 billion. EBITDA improved to $388 million, as net earnings exploded to $174 million, for an earnings number exactly equal to $2 per share, as further growth was anticipated following a massive purchase from pumping assets from Pioneer, boosting capacity further.
The Latest Numbers
Amidst the full impact of the Coronavirus and related consequences, the company reported its 2019 results. Full-year sales rose further to $2.1 billion, driven by the Pioneer deal, yet fourth-quarter sales fell a fifth to $435 million, for a run rate just in excess of $1.7 billion with capital spending budgets of clients being exhausted towards the end of last year.
Despite the growth in full-year sales, margins were taking a beating. Full-year earnings fell from $174 million to $163 million as the increase in the share count following the deal with Pioneer made that earnings per share fell at a steeper pace, with earnings per share down from $2.00 per share to $1.57 per share. That $2.00 share number for 2018 earnings was released in spring of 2019, prompting shares to rise to $23 at the time. This optimism faded throughout 2019 with shares ending the year around the $10 mark as operating conditions in the industry were deteriorating amidst continued pressure on oil prices, which still traded around the $50 mark.
The sequential deterioration throughout 2019 was very evident in the fourth-quarter numbers as earnings fell from $34 million to $23 million, with other earnings metrics down as well.
As oil prices began to free fall in March and fell to the low-20s, shares were decimated to just $1.50 at some point in time. With a share count of about 100 million shares, the equity was valued at just $150 million at the time while equity and the book value of the property stands at roughly a billion. While the outlook is very harsh and is hard to estimate, reality is that the company operates with a modest net cash position and traded at just 1 times earnings reported in 2019, when shares traded at their lows.
With WTI now trading at $23 as the agreement with OPEC and other players is not satisfying the market, one has to recognize that the great oversupply makes it hard to get a stable situation.
Despite the lack of a real structural solution, shares have recovered to levels around $4 per share, in part because equity markets have recovered (while oil-related stocks have seen a modest recovery) and in part because some investors seem to have gone bottom-fishing, including billionaire Dan Wilks. I furthermore like the fact that the company is unleveraged (on a net basis) while many peers are quite leveraged and on an enterprise basis trade at a higher valuation.
On the conference call, the company furthermore provided a little more clarity on the financial position, with cash totaling $143 million at the end of the first quarter, with another $50 million available on the credit facility with a balance of $110 million, although the borrowing base will be impacted by the current conditions and anticipated performance. Nonetheless, this sound financial position in combination with the anticipated costs savings and substantial capital spending cuts makes that this company will survive longer than its peers as the risk-reward seems somewhat balanced.
While the outlook is outright terrible and it is hard to see what the pro-forma P&L and/or cash flow position looks like, I like the combination of a net unleveraged balance sheet in combination with the fact that even after more than doubling from the lows, shares trade at just 2-3 times trailing earnings.
Hence, a small speculative position seems like a reasonable bet, solely based on a relative sound balance sheet with other peers having to close their doors sooner than this business, making it a relatively nice house in an outright terrible neighborhood. Rather than being outright optimistic, I furthermore recognize that excessive volatility in its share price creates for decent trading conditions as well, with the market being moved by rumors and news facts both towards the up and downside.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PUMP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.