RNGR - Ranger Energy Services: Anticipating Further Margin Expansion As Operations Improve

2023-11-07 04:42:47 ET

Summary

• Ranger Energy Services Inc is a service provider in the oil and gas industry with a diversified product line.
• RNGR operates through three segments: High Specification Rigs, Wireline Services, and Processing Solutions and Ancillary Services.
• The company has shown strong revenue growth and margin improvements, with room for further upside in the short term.

Investment Rundown

Oil and gas are some investment areas that are still worth looking into in my opinion, even as more and more investments are pouring into green energy and challenging these traditional energy methods. One of the better ways of getting exposure to the industry is in my opinion to go via a service provider or a company that makes a product or software used by large businesses like Chevron (CVX) or Shell (SHEL) for example. One company that ticks that box right now is Ranger Energy Services Inc (RNGR) which has during its years of operations managed to diversify its product line. Over the last 5 years the top line has expanded by over 20% each year, and going forward I think we can expect similar double-digit top-line growth in the next several years as RNGR lands more and more customers. One key area that has improved very much in the last few years is the profit margins of the business which are right now at 18% gross and 5% net. Seeing as the net margin has averaged a negative percentage over the last 5 years these are strong steps and I think RNGR has more to give, which is why I am rating it a buy now.

Company Segments

RNGR specializes in delivering a range of vital services to onshore exploration and production companies in the United States. Its core offerings include high-specification well service rigs, wireline completion services, and a host of complementary solutions crucial for efficient good operations. The company operates through three key segments: High Specification Rigs, Wireline Services, and Processing Solutions and Ancillary Services.'

Under the High Specification Rigs segment , RNGR provides comprehensive well-service rigs, along with complementary equipment and services, catering to diverse needs throughout the entire lifecycle of a well. The company's commitment to ensuring optimal good performance is further bolstered by its portfolio of well-maintenance services, emphasizing its dedication to the seamless functioning of critical energy assets. This is also the segment that is responsible for the largest amount of revenues in the company at 48% of the total amount, around $315 - $330 as projected for FY2023.

One key feature of RNGR in the last few quarters has been the steady climb in net margins for the business, now it seems to be consistently staying at a positive level which has the market reassured about the potential shareholder value here. The company is quite new and is still not very large at a market cap under $400 million, which means that in some cases issuing shares to fuel expansions is common and not necessarily something bad either. The margins have risen and so have the shares. I do think there will be an inflection point where RNGR is generating enough net income that diluting more shares won't be necessary, at that point the company will most likely begin buying back and enabling early investors like myself to reap the benefits of sticking around.

Markets They Are In

RNGR has done a very good job of growing its addressable market and delivering strong margin improvements. There is a steady need for new drilling in the US seeing as oil still makes up a significant portion of all the energy being generated there. Most if not all new rigs require significant high-spec rigs is ensures that RNGR still has a massive market to address and grow its revenues at the back. There is also a shift back to onshore drilling for the US as the market there has been steadily climbing the last few years and seems to be continuing this trend as well.

Seeing as RNGR focuses on production it has an annual market size of $10 billion. With the estimated revenues for 2023 being just over $600 million for the company that leaves a significant amount of room to grow still. Furthermore, the company is also exposed to the key markets as well, as completion and decommissioning which both bring strong revenue growth possibilities to the company. The latter market contains some very fast-growing ones that I think RNGR can quite quickly take advantage of and drive short-term revenue growth from.

Earnings Highlights

It was not that long ago that the company delivered its last report for investors. The Q3 report contained some very strong results in my opinion as revenues came in at $164 million, a 1% increase QoQ and a slight decrease YoY. There has been some volatility to the commodity prices during those 12 months which may slightly skew the numbers. But what I am looking at mostly is that RNGR continues seeing revenues trending upwards.

Right now they are moving in the right direction and it seems the bottom line is also expanding faster than the top line. YoY the EPS grew nearly 50% for the company and landed at $0.38, up from $0.24. Because of the company's increased profitability, they have also managed to start buying back more shares. The last quarter resulted in $2.7 million being used for buybacks.

As far as the valuation goes I think RNGR has room for the upside right now in the short-term. The 5-year average has been 14x earnings for the company, and it's currently at 9 on an FWD basis. I do think an 11x earnings multiple is applicable given the history and the margin expansion the company currently is showcasing. This leaves us with a target price of $16 for the company, or an upside of 22%. This is certainly appealing enough for investments and underlines why I am rating the company a buy right now.

Risks

RNGR's primary focus remains strongly tethered to the oil sector, making its performance closely intertwined with the dynamics of oil prices . Any significant downturn in oil prices, which might be instigated by weakened demand stemming from sluggish economic growth, has the potential to weigh down on the company's stock valuation. Furthermore, a more severe and extended decline in rig count, particularly if unforeseen, could inflict adverse effects on the stock's overall performance.

The company's fortunes are intrinsically linked to the oil industry's ebbs and flows, and as such, it must contend with the inherent risks and fluctuations of this sector. Successfully navigating these challenges requires a vigilant approach to market conditions and a proactive strategy to mitigate the impact of external factors on its share price.

The market often places high expectations on companies that have demonstrated strong margin improvements in the past, and any perceived slowdown in this regard could lead to a reevaluation of the stock's valuation. As a result, investors must be cognizant of this risk, which could affect the stock's trajectory.

Final Words

The margins have been on a steady trend upwards the last several quarters for the company and I do expect this to continue for RNGR. In the short term, the company offers a 22% upside which makes a buy here reasonable. The revenue is well diversified with no overexposure to the way commodities sift in price. The market cap of the business is quite small but the market opportunity is massive. I think RNGR can deliver a fantastic return for investors over the long term right now.

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