PTEN - ProPetro Holding In Holding Pattern

2023-12-11 07:30:00 ET

Summary

• ProPetro Holding Corp. is a nearly $1 billion market cap company in the oilfield pressure pumping (fracking) business.
• The company does not pay a dividend, but has a share repurchase program.
• ProPetro is upgrading its equipment but faces stagnant oilfield services demand due to high US production, increased efficiency, and downward pressure on oil prices.

ProPetro Holding Corp. (PUMP) is a Permian basin-only pressure pumping (fracking) and oil field services company. It has a good balance sheet and profitability; insiders hold 16% of the company's equity. While bargain-priced, it is affected like others in the sector by reduced near-term demand for US oilfield drilling and pressure pumping services.

ProPetro does not pay a dividend, and so is not recommended to dividend-hunters. While US oilfield service sector prospects are not bright for the next several months, ironically in part because of the sector's tremendous efficiency, the company is bargain-priced for those who think oilfield services may pick up sooner or for those looking for a short-term trading play.

I rank ProPetro as a hold.

Third Quarter 2023 Results and Guidance

For the third quarter of 2023, ProPetro's net income was $35 million, or $0.31/diluted share. Adjusted EBITDA, a non-GAAP measure, was $108 million or 25% of revenue and capital expenditures were $59 million.

Net cash from operations was $118 million and free cash flow was $27 million.

Frac fleet effective utilization was 15.5 fleets, compared to 15.9 fleets in 2Q23.

The company deployed its first electric-powered hydraulic fracturing fleet and expects to deploy three more shortly. This new technology reduces emissions and ProPetro reports good customer acceptance, even a preference for electric frack fleets. An electric fleet burns natural gas instead of diesel, using electric motors instead of diesel. Not only are emissions reduced, according to CEO Sam Sledge, but electric motors are longer-lived and require less maintenance than diesel motors.

For the full-year 2023, ProPetro expects capital expenditures of $300 million compared to $365 million in 2022. Frac fleet effective utilization is expected to be 13-14 fleets during 4Q23.

According to the company's most recent investor call, "Over the past two years we have made significant progress transitioning our hydraulic fracturing assets to more efficient and lower-emissions equipment and we expect our total investment to reach nearly one billion dollars by the end of the year as we bring additional state of the art technologies and services to ProPetro. With these investments largely behind us, we are poised to begin fully realizing the benefits of our fleet transformation going forward... We now have 7 Tier IV DGB dual-fuel fleets and one FORCESM electric fleet operating, and the demand for our next generation services remains strong."

The company has also entered the wireline service business through the acquisition of Silvertip Wireline in November 2022 and is expanding its cementing business, as its just-announced acquisition of Par Five demonstrates.

Acquisition of Par Five Energy Services

On December 4, 2023, ProPetro announced the acquisition of Par Five Energy Services, saying, "Specializing in cementing services in the Delaware Basin, Par Five's business complements ProPetro's existing cementing business that operates predominantly in the Midland Basin region of the Permian Basin." ProPetro expects the acquisition to add $10 million of adjusted EBITDA in 2024.

Macro

While OPEC extended 1.3 million BPD of supply cuts, the additional 0.9 million BPD are voluntary, so may well not occur. Prices picked up slightly on news the US might buy a few million barrels to initiate refilling the SPR.

The COP28 climate conference in Dubai has been notable for pushback by oil-producing countries against the rhetoric about (note immediate and complete ) transition away from hydrocarbon fuels-the same fuels that provided 82% of the globe's primary energy in 2022.

Chinese oil demand has trended weaker.

Oil Prices and Production

The graph shows that in addition to the macro factors mentioned above, the most recent US production of 13.1 million BPD for the week ending December 1, 2023, is near an all-time high. The US oil producing sector has done a heroic job of efficiently increasing production. The Permian Basin is the major contributor, with an estimated 6.0 million BPD of production in December 2023.

The December 8, 2023, NYMEX futures closing price for the January 2024 delivery of West Texas Intermediate ((WTI)) crude oil at Cushing was $71.23/barrel. The forward curve is remarkably level.

The most recent Short-Term Energy Outlook from the Energy Information Administration graphs a 5-95 confidence interval for WTI prices at the end of 2024 of $40-$140/bbl.

Competitors

ProPetro is headquartered in Midland, Texas. According to CEO Sam Sledge, it is one of the top three pressure pumping companies in the Permian Basin.

Competitors include Liberty Energy Inc. ( LBRT ), NOV Inc. ( NOV ), Halliburton ( HAL ), Weatherford International ( WFRD ), RPC, Inc. ( RES ), and Patterson-UTI ( PTEN ).

Governance

On December 1, 2023, Institutional Shareholder Services ranked ProPetro's overall governance as 6, with sub-scores of audit (7), board (6), shareholder rights (7), and compensation (6). In this ranking, a 1 indicates lower governance risk and a 10 indicates higher governance risk.

Shorts were 7.5% of the float on November 15, 2023.

Insiders hold 15.9% of shares.

Beta is 2.3, representing a higher-than-market-average level of volatility, but to be expected from a company that depends on activity in a single basin around commodity oil prices.

On September 29, 2023, the four largest institutional stockholders, some of which represent index fund investments that match the overall market, were BlackRock (16.7%), Vanguard (10.6%), Dimensional Fund Advisors (6.3%), and State Street (4.1%).

Of these, BlackRock and State Street are signatories to the Net Zero Asset Managers Initiative, a group that, as of December 4, 2023, manages $57 trillion (down from $64 trillion on September 30, 2023) in assets worldwide and which limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050.

Financial and Stock Highlights

ProPetro's market capitalization is $923 million at a December 8, 2023, stock closing price of $8.37 per share.

The 52-week price range is $6.33-$11.37 per share, so the closing price is 74% of the one-year high and 65% of the one-year target of $12.80/share.

Trailing twelve months' ((TTM)) EPS is $1.03 for a current price/earnings ratio of 8.2. The averages of analysts' 2023 and 2024 EPS estimates are $1.09 and $1.10, respectively, for a forward P/E ratio range of 7.6-7.7.

Returns on assets and equity are 11.6% and 12.5%, respectively.

The company's trailing twelve months' operating cash flow was $431 million, and levered free cash flow was -$96 million.

On September 30, 2023, the company had $445 million in liabilities, including $274 million of current liabilities and only $45 million of long-term debt. Together with $1.472 billion of assets, this gives ProPetro a comfortable liability-to-asset ratio of 30%.

ProPetro pays no dividend, however, it has a $100 million share repurchase program underway. Since the plan began in May 2023, the company has repurchased 4% of its outstanding shares.

The average trading volume is 1.5% of outstanding shares, so reasonably liquid.

The mean analyst rating is a 1.8, or "buy," leaning toward "strong buy" from thirteen analysts. At least one analyst considers it significantly undervalued.

The company's book value per share is $9.25, more than its stock price, indicating negative investor sentiment.

TTM EBITDA is $408 million. With an enterprise value ((EV)) that matches its market cap of $952 million, this gives a bargain EV/EBITDA ratio of 2.8.

Positive and Negative Risks

Both positive and negative, ProPetro is not geographically diversified, so it will track Permian activity and oil prices. Nonetheless, the Permian is the largest and most prolific US oil basin.

Recommendations for ProPetro Holding Corp.

ProPetro Holding will not appeal to dividend hunters because it does not pay a dividend. Value investors may consider the lower-priced entry point and investor-friendly share repurchase program.

Operationally, the company is advantageously located in the heart of the huge Permian Basin and is upgrading its frac fleets to lower-emissions, lower-maintenance electric fleets.

Financially, it has a good balance sheet, bargain EV/EBITDA ratio, moderate current and future price-earnings ratios, and a 53% upside to the one-year target price.

However, ProPetro faces sector-wide oilfield services demand stagnation, US volumes already at historic highs, lots of pressure-pumping competition, and a lack of strong oil (or gas) price incentives for expanded US unconventional production. It may appeal to short-term traders or some value investors who expect a faster uptick in OFS demand.

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