SOI - Atlas Energy Solutions Scales Permian Operations As E&P Consolidation Continues
2023-12-08 16:28:24 ET
Summary
- Atlas Energy Solutions Inc. reported Q3 2023 financial results, beating revenue but missing earnings estimates.
- The company provides proppant products and services for fracking in the Permian Basin.
- With its growing margin advantages, prospects for scale growth and a proforma dividend yield of 4.7%, my outlook for Atlas Energy Solutions Inc. is Bullish [Buy] at around $17.00.
A Quick Take On Atlas Energy Solutions
Atlas Energy Solutions Inc. ( AESI ) reported its Q3 2023 financial results on October 30, 2023, beating revenue but missing consensus earnings estimates.
The firm provides oil & gas exploration and production firms with proppant (sand) and related services for use in fracking in the Permian Basin.
With its growing margin advantages, prospects for further scale growth and 4.7% pro forma dividend yield, my outlook for AESI is Bullish [Buy] at around $17.00.
Atlas Energy Solutions Overview And Market
Texas-based Atlas Energy Solutions Inc. provides proppant products and services to E&P companies in unconventional oil & gas fields in the Permian Basin.
The firm is led by founder, Executive Chairman and CEO Ben M. “Bud” Brigham, who was previously founder of Brigham Resources and Brigham Minerals.
Management continues to make progress in developing its "Dune Express," a "long-haul overland conveyor system to deliver proppant" from its facilities into the Northern Delaware Basin, thereby reducing truck traffic on public roadways and increasing its delivery efficiencies.
According to a 2023 market research report by Maximize Market Research, the global market for proppant was estimated at $8.91 billion and is forecast to reach $14.22 billion by 2029.
This represents a forecast CAGR of 6.9% from 2023 to 2029.
The primary reasons for this projected growth are new technologies propelling the hydraulic fracturing industry to use more proppants in their well-site operations.
Also, ceramic proppants can outperform sand proppants as a specialty product in terms of stress and crush resistance.
The cost of ceramic proppants is around 50% higher than frac sand.
A breakdown of proppant type and related approximate market share in 2021 is shown below:
Maximize Market Research
Atlas Energy’s Recent Financial Trends
Total revenue by quarter (blue columns) has risen sharply since the middle of 2022; Operating income by quarter (red line) has also risen accordingly:
Seeking Alpha
Gross profit margin by quarter (green line) has varied within a range with no discernible trend; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended slightly higher in recent quarters:
Seeking Alpha
Earnings per share (Diluted) have moved sharply higher more recently:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, AESI’s stock price has fallen 1.12% vs. that of Solaris Oilfield Infrastructure, Inc. ( SOI ) drop of 14.95%, although the two stock charts appear to be following each other in terms of trajectory:
Seeking Alpha
For balance sheet results, the firm ended the quarter with $264.5 million in cash and equivalents and $172.5 million in total debt.
Over the trailing twelve months, free cash used was $17.6 million, during which capital expenditures were $281.1 million. The company paid only $3.8 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Atlas Energy
Below is a table of relevant capitalization and valuation figures for the company:
| Measure (Trailing Twelve Months) |
| Amount |
| Enterprise Value / Sales |
| 4.2 |
| Enterprise Value / EBITDA |
| 8.1 |
| Price / Sales |
| 1.6 |
| Revenue Growth Rate |
| 61.4% |
| Net Income Margin |
| 40.6% |
| EBITDA % |
| 52.1% |
| Market Capitalization |
| $1,710,000,000 |
| Enterprise Value |
| $2,610,000,000 |
| Operating Cash Flow |
| $263,540,000 |
| Earnings Per Share (Fully Diluted) |
| $1.35 |
| Forward EPS Estimate |
| $2.52 |
| Free Cash Flow Per Share |
| -$0.30 |
| SA Quant Score |
| N/A |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be Solaris Oilfield Infrastructure:
| Metric (Trailing Twelve Months) |
| Solaris Oilfield Infrastructure |
| Atlas Energy Solutions |
| Variance |
| Enterprise Value / Sales |
| 1.3 |
| 4.2 |
| 220.6% |
| Enterprise Value / EBITDA |
| 4.6 |
| 8.1 |
| 76.9% |
| Revenue Growth Rate |
| 11.3% |
| 61.4% |
| 445.6% |
| Net Income Margin |
| 7.9% |
| 40.6% |
| 413.0% |
| Operating Cash Flow |
| $90,430,000 |
| $263,540,000 |
| 191.4% |
(Source - Seeking Alpha.)
Atlas Energy has produced a higher revenue growth rate and higher net income margin, so it has been rewarded with higher valuation multiples than SOI.
Commentary On Atlas Energy Solutions
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted the growth of its logistics platform despite a 10% fall in Permian Basin rig count since the start of 2023.
CEO Brigham also noted the firm’s high margins, which he believes are underappreciated, even as the company continues to reduce its operating costs on a per-ton basis.
AESI has acquired or contracted for 90% of the equipment and materials and 80% of installation services for its "Dune Express" long-haul (42 miles) proppant conveyor project.
Management believes that its production and delivery expansion will enable the firm to scale to match the consolidation at the E&P level, which may otherwise create undue pricing power by larger E&P firms.
Also, having a greater scale will continue to differentiate the firm in its business development efforts with larger players.
I prepared a chart showing the frequency of various terms and keywords used by management and/or analysts on the most recent conference call:
Seeking Alpha
The chart indicates heavy use of the word "Drop" in various contexts, including a drop in rig counts.
Analysts questioned the leadership about contract renewals, 2024 volume outlook and the effects of E&P M&A activity.
Management said there are a lot of contract renewals coming up in the first half of 2024, and the company is currently in progress on contracts that would "far exceed" its previous tonnage run rate.
About 2024, leadership said they are "highly confident…there is going to be a meaningful uptick in activity in 2024. It’s just a question of how much."
The company expects E&P M&A to play to its strength of growing logistics services scale.
For the quarter’s results, total revenue rose by 11.2% year-over-year while gross profit margin slid by 0.5%.
Selling and G&A expenses as a percentage of revenue increased by 2.9% YoY, but operating income was flat compared to Q3 2022’s results.
The company's financial position is good, with plenty of liquidity, some long-term debt and moderate free cash used in the trailing twelve-month period.
Notably, the firm’s proforma dividend of $0.80 per share annually represents a 4.7% yield.
Looking ahead, full-year 2023 revenue is expected to grow by 30.2% over 2022, while 2024’s revenue estimates suggest a 23% growth rate in the year ahead.
Atlas appears to be well positioned to take advantage of the ongoing shift to a larger scale in the Permian Basin as E&P consolidation continues apace.
With its growing margin advantages, prospects for further scale growth and 4.7% pro forma dividend yield, my outlook for AESI is Bullish [Buy] at around $17.00.
For further details see:
Atlas Energy Solutions Scales Permian Operations As E&P Consolidation Continues