PUMP - ProPetro Shifts Focus To Capital Return As Permian Activity Sags

2023-11-30 15:15:17 ET

Summary

• ProPetro Holding Corp. reported better-than-expected Q3 2023 financial results, beating revenue and earnings estimates.
• The company provides oilfield completion services in the Permian Basin and targets exploration and production firms focused on unconventional extraction processes.
• Despite potential upside catalysts like increased stock buybacks and free cash flow generation, my outlook for ProPetro in the near term is Neutral [Hold] due to Permian Basin drilling activity constraints.

A Quick Take On ProPetro Holding

ProPetro Holding Corp. ( PUMP ) reported its Q3 2023 financial results on November 1, 2023, beating both revenue and consensus earnings estimates.

The firm provides a range of oilfield completion services in the Permian Basin in the United States.

Given the likelihood of a no-growth or even downtrend environment of drilling activity in the Permian Basin, my outlook on ProPetro Holding Corp. stock in the near term is Neutral [Hold].

ProPetro Overview And Market

Texas-based ProPetro was founded in 2005 to provide well completion services to the oil & gas industry using hydraulic fracturing techniques.

The firm is headed by Chief Executive Officer Sam Sledge, who joined the firm in 2011 as a field associate and has risen through various roles.

The company’s primary offerings include the following:

• Pressure pumping

• Cementing

• Wireline services.

PUMP acquires customers by targeting fracturing exploration & production firms that are active in the Permian Basin region and focused on unconventional extraction processes.

According to a 2021 market research report by Fortune Business Insights, the global market for hydraulic fracturing was an estimated $11.7 billion in 2020 and is expected to exceed $28.9 billion by 2028.

This represents a forecast CAGR of 9.5% from 2021 to 2028.

The main drivers for this expected growth are growing energy usage in the commercial and industrial sectors, changes in global energy markets, and the development of unconventional oil & gas resources in various regions worldwide.

Also, declining production from existing legacy wells will drive the need for additional exploration and production along with continued advancement of drilling technologies.

ProPetro’s Recent Financial Trends

Total revenue by quarter (blue columns) has continued to grow year-over-year; Operating income by quarter (red line) has plateaued in recent quarters:

Gross profit margin by quarter (green line) has trended higher in the last seven quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended slightly lower more recently:

Earnings per share (Diluted) have grown markedly in recent quarters:

(All data in the above charts is GAAP.)

In the past 12 months, PUMP’s stock price has fallen 15.26% vs. that of the iShares U.S. Oil Equipment & Services ETF’s ( IEZ ) gain of 5.01%, although the two stocks have a similar trajectory:

For balance sheet results, the firm ended the quarter with $62.5 million in cash, equivalents and short-term investments and $45.0 million in total debt, all of which was long-term.

Over the trailing twelve months, free cash flow was $37.2 million, during which capital expenditures were $393.3 million. The company paid $14.4 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For ProPetro

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Commentary On ProPetro

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted its decreasing CapEx spend, as the firm focuses on "robust earnings, increasing free cash flow, and building towards enhanced shareholder returns and value distribution."

The company has transitioned in the past few years from legacy equipment to more efficient equipment.

For example, PUMP deployed its first electric fleet ‘with high efficiencies and strong customer satisfaction.’

The firm is also seeing success from its acquisition of Silvertip for its wireline business, creating a "tailwind for our earnings power and free cash flow leverage."

In the earnings call, I tracked the frequency of various keywords and terms mentioned by management and analysts:

Management believes that the U.S. onshore upstream E&P industry is "in a slow-to-no growth environment, where the appetite for capacity expansion throughout the hydrocarbon value chain is low."

Also, the industry is consolidating, but management thinks it has the right strategy in place, namely focusing on efficiency-generating equipment and operational density within the Permian Basin to insulate it from other market volatility.

Leadership also intends to maintain a balance sheet that will enable it to be "opportunistic on value-accretive M&A transactions that will further accelerate free cash flow generation."

Clearly, management believes the industry is poised for a shakeout due to consolidation in the upstream E&P segment and continued "rationalization" of capital allocation activities.

This is a process that has been underway for several years and appears to be gaining speed more recently.

The company's financial position is strong, with ample liquidity, a small amount of long-term debt and good free cash flow.

Management appears to be focused on increasing operating efficiencies and generating solid cash flow to pay down debt and provide shareholder returns.

Potential upside catalysts to the stock could include increased stock buybacks and greater fracking activity in the U.S.

However, rig counts in the Permian Basin have shown a drop in recent months despite elevated oil prices, as this chart from Ycharts illustrates:

E&P companies operating in major U.S. fracking areas have shown greater spending discipline than in past years, likely due to the changing makeup of companies to larger, more capital-conscious players rather than smaller, more aggressive ones.

In light of continued capital discipline, for the time being, the firm’s growth rate is likely capped.

However, ProPetro Holding Corp. management’s capital efficiency efforts bode well for supporting the stock in the near term.

Given the likelihood of a no-growth or even downtrend environment of drilling activity in the Permian Basin, my outlook on PUMP in the near term is Neutral [Hold].

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