TUSK - Mammoth Energy Services: A Roaring Q1 2023 Revenue But Don't Get Trampled By Risk

2023-07-07 09:43:31 ET

Summary

• Mammoth's multi-segment business model has driven strong growth, but looming financial issues tied to PREPA litigation and a maturing credit facility cloud the future.
• Despite robust financial performance, potential PREPA default threatens Mammoth's accounts receivable and overall liquidity.
• With a credit facility maturing in October 2023 and rising federal interest rates, refinancing could lead to higher borrowing costs and strangle liquidity.
• Declining cash reserves and a low Return on Assets signal inefficient asset utilization and increasing financial vulnerability.
• High stock volatility demonstrates unpredictability, intensifying investor risk and deterring risk-averse shareholders.

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Upon analyzing the energy sector, it is apparent that its dynamism and complexity, driven by both global and local trends, can result in unpredictable scenarios. Among sector names, Mammoth Energy Services, Inc. (TUSK), an integrated energy services company, has managed to establish a unique niche by offering a broad range of services across diverse segments. Despite exhibiting robust financial growth and promising prospects, there remains a cloud of uncertainty over the company. This uncertainty, in our view, primarily stems from the potential financial difficulties associated with the debt of the Puerto Rico Electric Power Authority (PREPA) and the imminent maturity of Mammoth's revolving credit facility.

Our analysis, largely informed by Mammoth's most recent quarterly report , shows a positive financial trend, with the company transitioning to profitability. They reported a net income of $8.351 million in Q1 2023, up from a net loss of $14.817 million in Q1 2022. This increase is primarily attributed to a substantial rise in revenue and efficiently managed operating expenses. The firm's cash flow is also improving, with cash flow from operating activities transitioning to a positive $3.24 million in Q1 2023 from a negative $2.381 million in Q1 2022. The company faces operational hurdles, currently operating only 50% of its pressure pumping fleets due to market conditions and supply chain constraints. Nevertheless, Mammoth's strategic alignment across varied business segments such as Well Completion, Infrastructure, and Sand, coupled with an emphasis on capital expenditure, is bolstering operational efficiencies and revenue growth.

Yet, this optimistic outlook is offset by ongoing litigation with PREPA, a significant determinant of the company's financial performance and future trajectory. The litigation's outcome could dramatically affect Mammoth's accounts receivable ((AR)), with a large portion potentially at risk due to a possible PREPA default. This impending threat, coupled with diminishing cash reserves, inefficient asset utilization, and a low Interest Coverage Ratio, creates a precarious financial landscape.

The situation is further complicated by the October 2023 maturity of Mammoth's revolving credit facility. Given the current Federal interest rate of 5-5.25%, debt refinancing could lead to higher borrowing costs for Mammoth. The company's outstanding debt sits at $84.6 million, with a meager $17.4 million available for borrowing. We project that the potential repercussions of a PREPA default could further strain Mammoth's liquidity, solvency, and working capital, potentially prompting a reevaluation of the credit facility's terms by the lender and increasing future credit accessibility challenges.

Mammoth's stock price volatility presents another risk layer for investors, as per our analysis. With significant swings from a 52-week low of $1.615 in May 2022 to a high of $8.74 in January 2023, the stock's unpredictable nature might dissuade risk-averse investors. Our evaluation of the stock's volatility shows that the company's financial news sensitivity, particularly regarding the PREPA debt, signals potential future instability.

Given these circumstances, we believe Mammoth Energy's current situation is too risky for us to endorse a purchase recommendation. We advise investors to keep a close eye on the evolving situation, particularly the resolution of the PREPA litigation and the company's strategy to handle the forthcoming maturity of its revolving credit facility. Any investment decision should be based on a careful analysis of these impending issues and potential risks. We expect a clearer scenario by late July, suggesting that a reassessment of the company's investment potential may be appropriate at that time. Despite Mammoth's strong recent quarter, the stock's volatility makes it a risky prospect, and we recommend that potential investors proceed with caution.

Overview and Analysis of Business Segments

Mammoth Energy is an integrated energy services company that serves a variety of sectors in the energy industry, primarily operating in North America. The company's operations span across multiple business segments which are as follows:

1. Infrastructure Services: This division offers a comprehensive range of services, including engineering, design, construction, upgrade, maintenance, and repair of electric infrastructure. This includes transmission and distribution networks, substation facilities, commercial wiring, and storm repair/restoration. The services are provided across several regions in the US, including the Northeast, Southwest, Midwest, and West. The division has seen operational improvements in 2022 and crew count has increased, thereby enhancing service results. However, in Q1 2023, the average crew count dropped slightly from 93 to 88, but operational efficiencies improved the results. The division is focused on operation execution, pursuing opportunities, growing infrastructure service activities, expanding geographical footprint, and increasing the depth of projects.

2. Oilfield Services: This segment is tailored to serve the needs of the oil and gas industry, providing services like well completions, natural sand proppant, and drilling. The division experienced an upturn in 2022 due to increased commodity prices and a rebound in crude oil demand. For Q1 2023, they noted a decrease in crude oil and natural gas prices, which may slow completion activities and reduce well completion service demand.

3. Natural Sand Proppant Services: This division is dedicated to meeting the demand for frac sand in oil and gas extraction. It operates sand mines and processing facilities to produce high-quality, low-cost sand for use in hydraulic fracturing operations. In 2021, the division saw a modest rebound in demand, which further increased in 2022. Labor shortages have affected operations at West Texas in-basin mines, leading to an increase in demand for N. White frac sand. The demand in Western Canada and Marcellus Shale remains strong.

4. Aviation Services: The aviation division offers various air transportation services primarily to oil and gas companies. This includes transport of personnel, equipment, and supplies. The company holds a 49% equity investment in Cobra Aviation.

5. Equipment Manufacturing and Rental: This segment manufactures and rents a range of drilling and completion equipment. The segment serves well completions, drilling services, and other associated activities.

6. Remote Accommodations: Mammoth provides accommodations, catering, and other services for people working in remote locations such as oil and gas exploration and production sites, infrastructure construction sites, and disaster relief operations.

By maintaining a diverse portfolio across various segments of the energy sector, Mammoth Energy ensures multiple revenue streams and a resilient business model.

Revenue Breakdown

Total revenue for Q1 2023 amounted to $116.32 million, a significant increase from $62.3 million during the same period in the previous year. The segments' contribution to the total revenue and gross margin are:

Well Completion : Contributed $67.3 million (58% of total), with a gross margin of ~22%. This was a substantial increase of 181.5% year-on-year.

Infrastructure : Generated $28.28 million (24% of total), with a gross margin of ~20%. This was an increase of 22.9% year-on-year.

Sand : Contributed $12.47 million (11% of total), with a gross margin of ~37%. This was an increase of 35.8% year-on-year.

Drilling : Generated $1.83 million (1.6% of total), with a gross margin of ~-11%. This was a decrease of 36.1% year-on-year.

All Other : Added $7.03 million (6% of total), with a gross margin of ~33%. This was an increase of 48.6% year-on-year.

Significant shifts in the revenue share from different segments indicate strategic realignments within the company. Despite the lower contribution to total revenue, the Sand and All Other segments show high gross margins.

Mammoth managed to decrease its Selling, General and Administrative (SG&A) expenses by 3.3% year-on-year, showcasing effective overhead control. The company also decreased depreciation, depletion, amortization, and accretion expenses by 24.5% year-on-year, suggesting it might have retired or fully depreciated some assets.

Total capital expenditures increased by 410.7% from $1.18 million in 2022 to $6.04 million in 2023 due to fleet upgrades in the Well Completion Services segment and tooling and other equipment in the Infrastructure Services segment.

Cobra vs PREPA Litigation

The Puerto Rico Electric Power Authority (PREPA), a government entity responsible for electricity generation, power distribution, and power transmission in Puerto Rico, found itself amidst a financial crisis and filed for bankruptcy in 2017 due to overwhelming debt and deteriorating infrastructure. Complicating matters, Hurricanes Irma and Maria dealt a significant blow to the island's already fragile power grid later that year, necessitating substantial reconstruction efforts. PREPA contracted several companies, including Cobra Acquisitions LLC, for these services. However, the financial aspects of these contracts have since been caught in the crosshairs of legal and media scrutiny .

In our analysis of the " Disclosure Statement for First Amended Title III Plan of Adjustment of the Puerto Rico Electric Power Authority " filed on February 9, 2023, several key points stood out

1. PREPA initially engaged Cobra for emergency "storm restoration services" to repair their electric grid after Hurricanes Irma and Maria. The contract, which started at $200 million, was subsequently increased to $945 million through amendments.
2. A second contract was established with Cobra for more extensive restoration and reconstruction services, with a value up to $900 million.
3. Due to non-payment for services rendered, Cobra lodged an administrative expense claim of roughly $216 million, inclusive of accumulated interest.
4. All deadlines and actions pertaining to Cobra's claim have been halted due to ongoing criminal investigations involving fraud allegations and a conspiracy to commit bribery against Cobra's former president and two FEMA officials. Each of these officials pled conditionally guilty to lesser charges on May 18, 2022.
5. Despite Cobra's multiple attempts to modify or lift the legal hold, the court has consistently rejected these requests.
6. In relation to the first contract, FEMA ruled that around $21.5 million of costs were ineligible for reimbursement. This decision was confirmed by the U.S. Civilian Board of Contract Appeals ((CBCA)). Having already paid this sum to Cobra, PREPA must now reimburse FEMA.
7. As for the second contract, FEMA divided its review into two projects. The first project had $49.3 million confirmed as eligible for reimbursement. In the second project, approximately $233.7 million in costs were deemed eligible, and PREPA is expecting a reimbursement of $111.1 million for payments already made to Cobra.
8. PREPA is currently disputing certain FEMA decisions, resulting in several ongoing disagreements over payments and reimbursements.

With the complexity surrounding Cobra's payment situation remaining high, the resolution is still pending legal proceedings, FEMA investigations, and appeals. The main points of contention involve the eligibility of certain costs for FEMA reimbursement and the potential offsets that PREPA could utilize using the amounts denied.

In our assessment, FEMA's determination that some costs from both contracts are ineligible for reimbursement could significantly reduce the final amount that PREPA pays to Cobra. Furthermore, certain amounts that PREPA has already paid to Cobra exceed the FEMA-eligible amounts, implying that PREPA may not disburse any further funds for these costs associated with Cobra. Significantly, the document mentions that the collection does not currently meet the 'probability criteria.'

The unresolved criminal charges and the officials' guilty plea on lesser charges complicate this situation further. Until all legal proceedings and FEMA's investigations conclude, and all appeals are exhausted, the situation remains volatile and unclear.

Analysis

Upon examining Mammoth Energy's 2023 Q1 financial report, it is found that of as of March 31, 2023, Mammoth's AR value is a substantial $475.582 million. A considerable portion of this, $227 million, is owed by the Puerto Rico Electric Power Authority (PREPA) to Cobra, a Mammoth Energy subsidiary. This sum also does not take into account an extra $163.2 million in accumulated interest.

In a noteworthy development on June 15, 2023, Cobra Acquisitions LLC announced the receipt of a $10.75 million payment from PREPA. After adjusting for this payment, the total AR now stands at $464.832 million. Simultaneously, this payment reduces PREPA's outstanding debt to $216.25 million ($227 million - $10.75 million), which represents 46.5% of the total AR post-payment. When the accrued interest on PREPA's debt is factored in, the total amount owed by PREPA surges to $379.45 million ($216.25 million debt + $163.2 million interest). This forms a significant 81.6% of the total AR post-payment. Given the enormity of this percentage, the potential of nonpayment by PREPA presents a significant risk to Mammoth Energy, especially considering ongoing legal issues and a rejected FEMA claim.

Further probing into the company's financial metrics reveals an unsettling trend. Mammoth's cash reserves have contracted markedly, falling from $17.3 million in December 2022 to $11.7 million in March 2023. The company's Return on Assets (ROA) is at a meager 1.14%, highlighting inefficiency in asset utilization. Of significant concern is the company's Interest Coverage Ratio at a paltry 1.93, below the minimum standard of 2, casting doubts about Mammoth's ability to cover its future interest obligations.

The impending maturity of Mammoth's revolving credit facility in October 2023, along with a current Federal interest rate of 5-5.25%, could compound Mammoth's financial woes by increasing borrowing costs, should it choose to refinance the debt. Currently, the outstanding borrowing is $84.6 million, with a marginal available borrowing capacity of $17.4 million. The impact of a default by PREPA on Mammoth's financial health could be profound, dramatically reducing the AR and significantly affecting the company's balance sheet and liquidity. This could result in the current ratio plummeting from 2.14 to 0.50, signaling a high liquidity risk and potential solvency issues.

Mammoth's working capital scenario for Q1 2023 intensifies these concerns. Initially standing at $270.572 million, if PREPA defaults and its owed amount (including the recent $10.75 million payment) is removed from the current assets, the adjusted working capital could plummet to a negative -$108.878 million. This starkly indicates Mammoth's potential struggle to meet its short-term obligations if its short-term liabilities were to exceed its assets.

As of March 31, 2023, the company's outstanding borrowings stood at $84.6 million in the revolving credit facility, with an available borrowing capacity of $17.4 million. This is after accounting for $6.4 million in outstanding letters of credit and a $10.0 million reserve requirement. The fourth amendment to the credit agreement on February 28, 2022, facilitated changes to financial covenants, an increase in the applicable interest margin, and certain sale-leaseback transactions.

In conclusion, a default by PREPA could force lenders to reassess the terms of the credit facility, potentially making it harder or more expensive for Mammoth to secure credit in the future. In a worst-case scenario, lenders could demand immediate repayment of outstanding borrowings, pushing Mammoth towards bankruptcy if it fails to meet this obligation. It is clear that Mammoth is currently navigating through a critical phase of financial uncertainty. We eagerly anticipate the next status report, due on July 31, 2023, for additional insights into this matter.

Upside Risks and Scenarios

While we acknowledge the considerable financial challenges Mammoth Energy Services, Inc. faces, our analysis also explores potential upside risks and scenarios that may counter the prevailing narrative. These possibilities, although contingent on a variety of factors, may alter the company's financial trajectory and potentially offer speculative investors an attractive opportunity.

Realization of Accounts Receivable

From our perspective, the most advantageous scenario for Mammoth would be the full realization of the AR from PREPA. If PREPA can repay its entire debt (principal + interest), the impact on Mammoth's financial stability would be significant. This would drastically improve the AR balance, alleviate liquidity risk, and potentially revive investor confidence. However, the odds of this scenario coming to fruition are subject to numerous external factors such as PREPA's financial standing, legal environment, and the final outcome of the ongoing FEMA investigation. Based on the information currently available to us, the probability of full AR realization appears relatively low.

Partial Debt Repayment

From our analysis, a more plausible positive scenario is that PREPA repays a substantial portion of its owed amount. This development would ease some financial pressure on Mammoth, freeing up capital for operational expenses and debt servicing. It could positively influence the company's cash flow, balance sheet health, and overall investor sentiment. Although it doesn't provide the complete relief that full AR realization would, this scenario is likely more probable, especially given the recent $10.75 million payment made by PREPA.

Speculative Buying

From an investment perspective, the question of speculative buying is highly relevant. Should one speculate on Mammoth's stock considering these potential scenarios?

Speculative buying inherently carries high risk and, in our view, should only be undertaken by investors who fully understand the risks involved and are comfortable with their level of risk tolerance. If an investor believes in the likelihood of either of the scenarios mentioned above, speculative buying could offer significant upside. If PREPA can successfully clear a significant portion of its debt, it could spark a positive reaction in Mammoth's stock price, potentially yielding high returns for those investors comfortable with such risk.

However, considering the serious implications of a PREPA default, any such strategy must be approached with substantial caution. We suggest a more balanced approach might involve closely monitoring the situation and gradually increasing exposure to Mammoth stock as evidence of AR realization becomes more apparent. Investors should also keep in mind the relatively low percentage of float shorted (at 1.06%), the company's operational efficiency, the status of the revolving credit facility, and the broader market sentiment towards the energy sector.

It is due to these considerations that we recommend a 'hold' strategy for those already invested in Mammoth. This stance allows investors to maintain their positions while closely monitoring the evolving situations. It offers an opportunity to respond swiftly should the situation improve, while also providing some level of protection against the potential downside risks associated with a PREPA default and other uncertainties.

Stock Volatility

Mammoth Energy Services, Inc.'s stock ((TUSK)) has been embroiled in high volatility over the past year, posing a substantial risk to investors. This risk was distinctly observed when the stock price drastically oscillated from a 52-week low of $2.10 in May 2022 to a peak of $8.79 in January 2023. From our analysis, such unpredictable swings paint a picture of considerable uncertainty, making the stock a potentially hazardous proposition for investors, especially those with low risk tolerance. It is important to note that trading volumes have mirrored this volatility, signaling shifts in investor sentiment and interest in the stock. The trading volume witnessed a massive surge to 20,862,072 in March 2022 before dramatically retracting to 1,890,274 in July 2022. To us, this flux implies potential instability in investor trust that could precipitate sharp price movements.

From our perspective, another significant detail is TUSK's apparent sensitivity to financial news releases. The stock's notable price changes at the start of each month suggest high reactivity to financial reports, as evidenced by the response to the company's Q1 2023 report. Additionally, looming concerns around the PREPA debt could be a catalyst for additional volatility and risk. Given the magnitude of this debt, any news or changes in expectations about repayment could have a significant bearing on TUSK's stock price.

Despite the stock showing signs of recovery in recent months, with the price rising from $3.54 in May 2023 to $4.765 in June 2023, we perceive the potential risk linked to these fluctuations and news about the PREPA debt to make TUSK a particularly volatile investment. This, combined with the company's erratic trading volumes and high reactivity to financial news, leads us to deem the stock as potentially unstable.

Conclusion

In our analysis, Mammoth Energy Services, Inc. unquestionably represents a perplexing investment landscape. While the company's assorted business segments have put forward commendable financial performance, we perceive the possible financial implications emanating from the ongoing Cobra-PREPA litigation as a potential risk to the investment outlook. This looming threat, coupled with the company's dwindling cash reserves and solvency woes, paint an unsettling financial picture to us. These elements could pose a severe risk to the firm's fiscal stability. Furthermore, the high volatility of the stock, characterized by drastic price oscillations and susceptibility to news bulletins, adds another layer of risk in our view. This instability becomes particularly concerning for prospective investors, as it intensifies the unpredictability of the investment returns.

Given these factors, and in line with our commitment to provide you with judicious investment advice, we position ourselves to rate Mammoth Energy Services, Inc. as a 'hold'. This perspective is shaped by the considerable uncertainties looming around the PREPA case, the company's liquidity scenario, and the volatile temperament of its stock. We suggest that investors maintain a sense of caution, closely observe the situation, and hold off on additional investment until these issues gain more clarity. From our analysis, we view TUSK as currently too volatile and risky for new investment.

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