NR - Liberty Park Capital - Newpark Resources: Worth Multiples Of Its Current Value

2023-07-26 08:45:00 ET

Summary

• Newpark Resources is expected to see significant earnings growth from its DURA-BASE® composite mat over the next decade, potentially making the company worth multiples of its current value.
• The company's industrial segment, which primarily derives its revenues from the rental and sale of worksite access matting systems, is expected to grow at a high-single-digit/low-double-digit rate for the next several years.
• As the Fluids segment shrinks, management has been able to reduce corporate costs and fund growth in the Industrial segment, and over time, the Industrial segment is expected to overtake Fluids.

The following segment was excerpted from this fund letter.

Newpark Resources ( NR )

Newpark Resources should see significant earnings growth from its DURA-BASE® composite mat over the next decade. Combine that earnings growth with the potential for multiple expansion as the legacy oilfield fluids business is divested or shuttered and you have a company that could be worth multiples of its current value in the next few years.

Today, Newpark has two operating segments: Fluids and Industrial.

The industrial business primarily derives its revenues from the rental and sale of worksite access matting systems (aka DURA-BASE®). These engineered thermoplastic mats are designed to lock together to form a structurally-sound work surface that provides protection for workers and equipment. Composite mats are displacing legacy work surface technologies like timber.

Traditional timber ground protection mats only last up to three years, are prone to rotting, contain splinters and nails, do not lock together, and weigh 3x as much per square foot covered. Composite mats can be laid faster with less people and equipment, conform to the ground, can be cleaned after use, and can be infinitely recycled once they reach the end of their 12-year life. Worksite mats are used by over twenty different industries, but the industry driving the growth is power transmission.

Composite mats currently have only ~15% share of the worksite access market (and most of this adoption has occurred over the past 5 years) while the rest of the market belongs to timber. We expect composite will continue to take market share from timber.

Combine the share gains with the high-single-digit growth we expect from the power transmission market, and Newpark should be able to grow its industrial segment at a high- single-digit/low-double-digit rate for the next several years. Moreover, the industrial segment generates EBITDA margins above 30%. We believe these margins should be sustainable over the medium-term given the demand for composite mats and Newpark’s scale advantages.

The Fluids business sells drilling, stimulation, and completion fluids to oil and gas markets. This business is profitable, but it is capital-intensive and very cyclical. Fluids accounts for most of Newpark’s revenues and assets, but a small percentage of the company’s profits. Management is in the process of shrinking this business and has announced strategic alternatives for the division.

The Fluids segment has $210 million dollars of working capital, a large portion of which should be released as cash as the business is right-sized or paid for by an acquirer.

Management has pulled $100 million in cash out of this business over the past year and used the proceeds to fund growth in the Industrial segment and to buy back stock.

Additionally, as the Fluids segment has shrunk, management has been able to reduce corporate costs (down 27% versus 2019). Over time, we expect the Industrial segment to overtake Fluids in revenue; we also expect industry classification systems such as Bloomberg and MSCI to reclassify Newpark as an industrial company.

In our view, the industry reclassification will bring in new investors and cause Newpark shares to re-rate closer specialty rental peers like WillScot Mobile Mini ( WSC ) and McGrath RentCorp ( MGRC ), which trade at low-double-digit EV/EBITDA multiples. (Newpark trades below 7x today, and closer to 4x if you give the company credit for the value of the Fluid segment’s working capital.)

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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