TUSK - Mammoth Energy Services Slashes Capex Due To Slowing Well Completion Demand

2023-05-31 12:34:02 ET

Summary

• Mammoth Energy Services, Inc. reduced its capex budget from $64 million to $24 million.
• This is due to a slowdown in well completion services demand, affecting both utilization and rates.
• With its reduced capex budget, I believe Mammoth can reduce its net debt to $40 million by the end of 2023.
• Mammoth also has an October 2023 credit facility maturity to deal with.
• Mammoth Energy Services could also receive a partial payment from PREPA at some point, as FEMA approved various invoices.

Mammoth Energy Services, Inc. ( TUSK ) indicated that weak natural gas prices have now started to affect the utilization and rates for its pressure pumping fleets, resulting in a roughly $3 million decline in annualized EBITDA per spread, plus more calendar white space.

This has resulted in Mammoth slashing its capex budget from around $64 million to $24 million to preserve its ability to generate free cash flow and reduce its debt. This should actually result in it generating more 2023 free cash flow than what I had projected for it before, despite the effects of weak natural gas prices on its business.

Mammoth does have an October 2023 credit facility maturity to deal with, which does have the potential of resulting in dilution or less favorable debt terms. If Mammoth can avoid dilution, I estimate its share value at $4.50 to $5.00 now, with additional upside if it can receive a partial payment from PREPA.

Q1 2023 Results

Mammoth generated $30.7 million adjusted EBITDA in Q1 2023 , including $11.2 million for the interest on PREPA's delinquent accounts receivables. I typically exclude that interest when looking at Mammoth since its ability to collect on the principal (let alone the interest) is quite uncertain. Without that interest, Mammoth would have generated $19.5 million in adjusted EBITDA. This compares to $16.8 million adjusted EBITDA in Q4 2022 and $19.3 million in adjusted EBITDA in Q3 2022, both excluding the interest and extraordinary items.

Mammoth's well completion services division reported $12.6 million in adjusted EBITDA for Q1 2023, in-line with what it did in Q4 2022. It had an average of 3.6 fleets active in Q1 2023. Mammoth's natural sand proppant services division reported $4.2 million adjusted EBITDA, up from $2.9 million adjusted EBITDA in Q4 2022. Its infrastructure services division (excluding PREPA-related interest) generated $1.7 million in adjusted EBITDA (versus $0.1 million in Q4 2022), while other services generated $1.5 million in adjusted EBITDA.

The improvement in Mammoth's adjusted EBITDA compared to Q4 2022 was mainly driven by its natural sand proppant services division and its infrastructure services division. Mammoth's well completion services division remains the primary contributor to its results.

Slowdown In Well Completion Services Demand

While Mammoth's well completion services division initially held up relatively well despite lower natural gas prices, it is seeing more of a slowdown in activity now. It exited Q1 2023 with three of its six pressure pumping fleets operating and noted that there was more calendar white space with its fleet scheduling as customers have delayed completions in response to weak near-term natural gas prices.

The activity slowdown has also reduced the annualized EBITDA expected per spread by approximately $3 million to a revised range of $12 million to $15 million.

Thus if Mammoth now has an average of three pressure pumping fleets active at a time, that would generate around $40 million in annualized EBITDA per year, down about 20% from levels during the last two quarters.

Debt And PREPA

Mammoth has slashed its capex budget in response to the slowdown in well completion services activity. It originally budgeted $64 million, but has now reduced this to $24 million for 2023. Mammoth may be able to generate around $25 million to $30 million in free cash flow (excluding the impact of changes in working capital) in 2023 now with that reduced budget.

This would allow it to reduce its net debt to approximately $40 million by the end of 2023. Mammoth also still needs do deal with its credit facility, which currently matures on October 19, 2023. There are risks around dilution and/or less favorable debt terms there.

There is a chance that Mammoth gets paid some money from PREPA before the credit facility matures, which would help it eliminate its net debt. Mammoth's subsidiary Cobra was notified in March 2023 that FEMA had approved $233 million in Cobra invoices, of which the federal cost share was $210 million. Of that, $111 million is intended to reimburse PREPA and $99 million is intended to pay Cobra for outstanding invoices.

However, PREPA and Cobra do not have a good relationship, so PREPA so far hasn't drawn down the available funds to pay Cobra.

Notes On Valuation

I now estimate Mammoth's value at approximately $4.50 to $5.00 per share. This factors in the slowdown in well completion services activity, but does not factor in potential dilution (to deal with its credit facility) or any payments from PREPA.

If Mammoth does receive the approved $99 million from PREPA, that would increase its value by a bit over $2 per share, assuming that Mammoth did not issue additional shares by that time.

Conclusion

Mammoth Energy Services, Inc.'s Q1 2023 results were quite good, with adjusted EBITDA (excluding PREPA interest) nearing $20 million. However, it is now seeing a slowdown in well completion services activity, resulting in lower pressure pumping fleet utilization along with lower rates.

As a result, Mammoth Energy Services, Inc. has reduced its capex budget by over 60%, which should allow it to pay down its net debt to around $40 million by the end of 2023. Mammoth also needs to deal with its credit facility, which matures in October 2023. If Mammoth receives some ($99 million) of the money it is owed by PREPA, then it would be able to fully pay off its debt.

I now estimate Mammoth Energy Services, Inc.'s value at approximately $4.50 to $5.00 per share with the slowdown in well completion services. However, if Mammoth Energy Services, Inc. receives $99 million from PREPA, its estimated value is increased to around $6.50 to $7.00 per share.

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