TUSK - Mammoth Energy: $10.75 Million From PREPA Helps Offset Well Completions Slowdown

2023-09-17 09:59:04 ET

Summary

• Mammoth is experiencing a slowdown in well-completion services activity due to weak natural gas prices.
• Its active pressure pumping fleets went down from an average of 3.6 in Q1 2023 to 1.6 in Q2 2023.
• Well-completion services demand is expected to rebound late in 2023.
• Mammoth also received $10.75 million from PREPA, helping to mitigate the impact of weak well completion services demand.

Mammoth Energy Services ( TUSK ) reported Q2 2023 results that were weaker than I expected . It had indicated that its pressure pumping fleet utilization was declining due to weak natural gas prices, but the roughly 56% decline in average active fleets in Q2 2023 (compared to Q1 2023) was surprisingly large.

Mammoth has reduced its 2023 capex budget (which was initially at $64 million) further from $24 million to $18 million to help deal with this period of low utilization. Mammoth also received a $10.75 million repayment from the Puerto Rico Electric Power Authority (PREPA), so that helps its finances out a bit too.

I am keeping Mammoth's estimated value at $4.50 to $5.00 per share, with the minor PREPA repayment helping to offset Mammoth's weaker than expected near-term results.

Q2 2023 Results

Mammoth's adjusted EBITDA went down considerably in Q2 2023 compared to Q1 2023. It reported $16.4 million in adjusted EBITDA in Q2, 2023, which included $11.3 million in interest on PREPA's accounts receivables. Excluding that interest, Mammoth generated $5.1 million in adjusted EBITDA in Q2 2023, down from $19.5 million in adjusted EBITDA (excluding PREPA interest) in Q1 2023.

This decrease was primarily driven by a sharp drop in the adjusted EBITDA generated by its well completion services division. This went down to $2.1 million in Q2 2023 compared to $12.6 million in Q1 2023. While Mammoth had indicated that delayed completions were reducing its pressure pumping fleet utilization, the sheer magnitude of the decline in utilization was surprising.

Mammoth had an average of 3.6 fleets active in Q1 2023 and mentioned having three operating fleets in its Q1 2023 earnings report. For Q2 2023 it only had an average of 1.6 fleets active and had only one operating fleet at the beginning of August. Mammoth noted that its fleets are concentrated in the Northeast, and weak natural gas prices resulted in a significant slowdown in completion activities in the Utica and Marcellus Shale areas.

Mammoth expects completion activities to remain subdued during at least Q3 2023, but expects activity levels to improve after that, with natural gas prices anticipated to recover heading into the winter. The current NYMEX gas strip for November 2023 is approximately $3 and the December 2023 futures are around $3.45.

Mammoth's other divisions didn't see as much of a decline in results, but were still weaker than in Q1, 2023. Its natural sand proppant services division generated $3.6 million in adjusted EBITDA in Q2 2023, compared to $4.2 million in adjusted EBITDA in Q1 2023.

Mammoth's infrastructure services division reported negative $1.2 million in adjusted EBITDA (excluding the PREPA interest) in Q2 2023, while the comparable number for Q1 2023 was positive $1.7 million.

PREPA Repayment

Mammoth's subsidiary Cobra received $10.75 million from the Puerto Rico Electric Power Authority (PREPA). While this is only 5% of the total amount it is owed (excluding interest) or 3% of what it is owed including interest, this is still a modest positive for Mammoth. I had previously allocated zero value for PREPA recoveries in my base-case valuation scenario for Mammoth.

Credit Facility

Mammoth's current revolving credit facility matures on October 19, 2023, and it reported having $59 million in borrowings under that credit facility at the end of Q2 2023.

Mammoth noted in early August that it "entered into two non-binding agreements with lenders to repay and refinance its existing revolving credit facility". These transactions are expected to close before October 19, although there is always some risk that the transactions can't be consummated.

Getting the credit facility maturity sorted out will be a positive for Mammoth, although there is also currently uncertainty around the terms of the refinancing.

Estimated Valuation

I am keeping Mammoth's estimated value at $4.50 to $5.00 per share for now. This valuation assumes that Mammoth's well completion services division recovers late in 2023 and that it has an average of three pressure pumping fleets active after that point, generating $3 million to $4 million in quarterly EBITDA per active fleet.

This valuation also incorporates about $10 million in value for future PREPA repayments. I've kept expectations around future repayments low to be more conservative. The recent $10.75 million PREPA repayment and this $10 million in future PREPA repayment value offsets Mammoth's weaker than expected well completion services performance in Q2 2023 and (as projected) Q3 2023.

Conclusion

Mammoth's Q2 2023 results were disappointing as its well completion services division saw a significant slowdown in activity. It had an average of 1.6 pressure pumping fleets active during the quarter, compared to an average of 3.6 pressure pumping fleets active in Q1 2023.

This slowdown is expected to extend through Q3 2023 as well, but Mammoth expects that business to improve later in 2023. On the positive side, Mammoth received a $10.75 million payment from PREPA, and it also expects to get its credit facility refinanced soon.

I am maintaining Mammoth's estimated value at $4.50 to $5.00 per share, with the disappointing Q2 2023 results and likely weak Q3 2023 results being offset by the PREPA repayment. This repayment was a bonus since I hadn't allocated value for potential repayments before.

For further details see: