TUSK - Mammoth Energy Services: Making Progress With Repayments From PREPA

2023-11-30 18:47:06 ET

Summary

• Mammoth's adjusted EBITDA is currently fairly minimal, excluding interest on its PREPA accounts receivables.
• It is facing challenges with weak demand for its pressure pumping fleets, and this may last well into 2024 given low natural gas prices.
• Mammoth has received around $22 million in PREPA repayments in 2023 so far, and has a high chance of receiving another $78 million.
• These repayments should more than offset the impact of weak near-term business results.

Mammoth Energy Services ( TUSK ) is facing some near-term business challenges. Weak natural gas prices have resulted in limited demand for Mammoth's pressure pumping fleets, and it achieved only 20% utilization for those fleets in Q3 2023 . While Mammoth had indicated that it expected to see increased demand in 2024 , I think that demand may not meaningfully pick up until mid-2024.

Until that pressure pumping fleet demand recovers, Mammoth is in a position where it is likely to barely generate positive adjusted EBITDA after excluding the accruing interest on its Puerto Rico Electric Power Authority (PREPA) accounts receivables.

On the positive side, Mammoth refinanced its credit facility debt and has pushed out its debt maturities until 2028, improving its ability to weather near-term business challenges. As well, it has received another $11.4 million in repayments from PREPA and appears to have a high chance of receiving another $78 million in repayments.

I have increased my estimates of Mammoth's value by $1 per share compared to my previous look at the company . Mammoth's near-term business challenges are likely to last longer than I previously anticipated, reducing its estimated value by $0.50 per share. However, I had previously attributed little value to PREPA repayments, and the improved outlook around that increases its value by around $1.50 per share. Thus I now estimate Mammoth's value at $5.50 to $6.00 per share.

More PREPA Repayments

Mammoth has been slowly receiving repayments from PREPA. It received $10.75 million in June 2023 and noted that it has received another $11.4 million (as of November 9th), resulting in $22.2 million in total payments from PREPA in 2023 so far.

PREPA informed the bankruptcy court on October 16th that it intended to submit to COR3 (the Central Office for Recovery, Reconstruction and Resilience) for reimbursement around $81 million in remaining approved but unpaid invoices. Between October 16th and November 9th, Mammoth received approximately $3 million in PREPA repayments. That leaves $78 million that Mammoth seems to have a fairly high chance of getting repaid.

This is better than I expected, as I had recently attributed relatively minimal value for PREPA repayments in my estimates of Mammoth's value.

In addition to that $78 million, Mammoth also is owed another $127 million by PREPA for services performed, plus $186 million in accrued interest. However, I am continuing to assume those amounts have a low chance of recovery.

Q3 2023 Results

Mammoth reported $13.4 million in adjusted EBITDA in Q3 2023, down from $16.4 million in Q2 2023 and $29.8 million in Q3 2022. The Q3 2023 adjusted EBITDA number also included $11.4 million in accrued interest on its PREPA accounts receivables, so adjusting for that would reduce Mammoth's adjusted EBITDA to only $2.0 million for the quarter.

It attributed the decline in results to weak customer demand in natural gas basins for its pressure pumping fleets. Benchmark NYMEX natural gas prices have stayed below $3 for most of 2023, resulting in activity cutbacks and deferrals.

Mammoth had an average of only 1.2 pressure pumping fleets active during Q3 2023, down from an average of 1.6 active fleets in Q2 2023. It also noted that it was currently operating one of its six pressure pumping fleets. This resulted in Mammoth's well completion services division only generating $1.0 million in adjusted EBITDA in Q3 2023, down from $2.1 million in Q2 2023. It appears likely that Mammoth's Q4 2023 results won't be much better.

Mammoth indicated that it had been seeing encouraging signs that 2024 activity will pick up. However since Mammoth's Q3 2023 earnings report, the 2024 strip for natural gas has gone down by around $0.50 and now is under $3.00. This increases the odds that natural gas development activity doesn't really pick up during the first half of 2024.

Credit Facility

Mammoth entered into a new revolving credit facility agreement and a new term loan agreement in October 2023, just in advance of the maturity for its old revolving credit facility. Mammoth repaid the balance of its old revolving credit facility and now (as of early November 2023) has $45 million in outstanding borrowings under its term loan and $28.2 million in borrowings under its new revolving credit facility.

Mammoth's liquidity (as of early November 2023) was $16.6 million, consisting of $9.7 million in cash on hand and $6.9 million in borrowing capacity under its new revolving credit facility (which currently has a borrowing base of $35.1 million).

Mammoth's credit facility and term loan debt now matures in 2028. It is paying an interest rate of SOFR+7.5% on its term loan debt and SOFR+2.25% on its credit facility debt at the moment.

The weighted average interest rate on Mammoth's debt appears to be around 11% now, which is one percent lower than the 12% interest rate it was paying on its old credit facility debt.

Getting its debt maturities pushed back by five years is a positive for Mammoth and should give it the ability to weather near-term business challenges.

Estimated Valuation

I previously estimated Mammoth's value at $4.50 to $5.00 per share, but have increased its estimated value to $5.50 to $6.00 per share now.

The demand for Mammoth's pressure pumping fleets is likely to remain depressed for longer than I previously modeled, and I now am assuming a pickup in activity in 2H 2024. The impact of the weaker near-term results reduces Mammoth's estimated value by approximately $0.50 per share.

However, I now believe there is a high chance that Mammoth will receive at least another $78 million in repayments from PREPA. This adds approximately $1.50 per share in value to Mammoth compared to my previous expectations.

The net effect is a $1 per share increase in my estimate of Mammoth's value.

Conclusion

Mammoth's Q3 2023 results were hit by poor demand for its pressure pumping fleets. With natural gas strip prices now under $3 until 2H 2024, I believe this poor demand is likely to continue well into the first half of 2024. Mammoth is thus projected to generate minimal adjusted EBITDA (excluding interest on PREPA receivables) for the next few quarters.

Mammoth has managed to push its debt maturities out to 2028 though, and is also making progress getting repayments from PREPA. It has received approximately $22 million in repayments during 2023 so far and has a high chance of seeing another $78 million in repayments trickle in.

I have increased my estimate of Mammoth's value to $5.50 to $6.00 per share due to the PREPA repayments, and despite Mammoth's near-term business challenges.

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