SOI - Solaris Oilfield Infrastructure: A Better Bet In The Oil Industry

Summary

• Solaris Oilfield Infrastructure has had another record quarter boosting both the top and bottom line. Current price might be able to offer some value to long-term investors.
• In an industry driven by the price of a commodity, Solaris Oilfield Infrastructure is hedged and can pass on expenses to the customers.
• Instead of revenues decided by the oil price, they are decided by the number of new facilities being built, and I expect the demand will stay strong for them.
• At the current share price of $9.93, it could offer some value for investors who want exposure to the oil industry but without all the commodity price driven companies.

The Investment Thesis

Solaris Oilfield Infrastructure (SOI) is operating in the oil industry. Here they are a provider of equipment to larger companies who will further deal with the refinement and processing of oil. At the current share price the downside seems limited and the upside favorable, which leads me to having a buy rating.

Some of the products from SOI are “Top Fill Systems, Proppant Systems, Fluid Systems and Integrated Electric Blender”. The management is quite outspoken that they are now focusing on growth and innovation instead of plateauing and becoming stale, as stated in their investor presentation.

The positive of investing into SOI instead of another oil company that focuses on the drilling and refining of oil is that SOI is not driven by commodity prices. Their revenue depends on their ability to sell their product to other companies in the sector. I believe this could help hedge against some potential volatility that the other companies otherwise would face.

Currently there are a lot of debates surrounding oil companies starting to drill more. A lot of licenses have been given out, but there is a hesitation whether or not it will be profitable enough. With such a large shift towards green energy, the oil industry faces challenges. The shift will take a long time and the demand for oil will likely still be with us for many years.

The idea I have about investing in Solaris Oilfield Infrastructure is that once these oil companies decide that now it's time to start new drilling projects on the licenses they have been given, then SOI will have a large customer base.

They are relatively new to the industry but have already managed to gather a large customer base. But demand might not come from other oil companies, but also from natural gas companies, as these are also a part of SOI's customer base. With a larger push at bringing back energy dependence to the US I think natural gas will continue seeing a wide use.

Company Highlights

Solaris Oilfield Infrastructure has a large fleet of vehicles they have manufactured to help unload, store and deliver both proppant and water to natural gas and oil sites in the US. The impressive thing is that this fleet is completely electric. Since its inception the company has managed to return a total of $112 million to shareholders. Currently they have an attractive dividend yield of around 4%.

Around 16% of all the shares are held by either management or employees. From an investor point of view that makes me feel safer as the people running the company appear to have invested interest in the success they have.

Company Financials

Looking at the financials of the company I think they are in a healthy position right now. The amount of cash they have stashed has gone down significantly from last year's levels, almost 50%. But they are still able to easily pay off all their debt which I see as a big bonus.

With $10 million in cash currently they are able to pay off any long-term liabilities such as “credit agreement” and “finance lease liabilities' '. Compared to last year, the inventory the company is holding has also seen a pretty large increase, going up almost 5x to $5 million.

At a closer look however it might seem unfair to say the cash has gone down so much, when the company has quite a large sum of revenues coming in. With $69 million in receivables I think they are still in good shape to tackle any potential financial issues down the road, if need be.

If we look at the rate at which assets are growing compared to liabilities, SOI has been able to quickly ramp up the amount of assets they have. The ratio between them being at 3.12. Since they are probably not going to go out of business in the short term, but I find this number interesting as it shows the amount of money that could be left over to shareholders if liquidated. I find it useful as I now know the company values to have a good shareholder equity and aren't being too risky taking on debt.

With cash flows being negative currently there is also a risk the company will begin to dilute shares to raise capital instead of taking on more debt. I think this could be likely as debt has become heavier to take on as interest rates rise more. In recent years however it seems SOI are more focused on keeping a focus on regaining their positive cash flows.

Valuing Solaris Oilfield Infrastructure

I think that SOI will be able to grow at quite a rapid pace as they are using more and more capital to gain market share and increase production. But I still hold quite conservative estimates in the case of disappointment.

With a terminal p/e rate of 8 I think I am staying in line with what the sector is and also taking into account the growth which SOI will have. In terms of profitability I think they can maintain current margins and also slightly increase them YoY. With capital investments, sometimes that can have an impact on net margins, but I think SOI can pass down their expenses onto the customers instead.

From current prices today you would expect a return of 71% for the next 5 years, if my calculations come true. That would be around 14.2% annual returns. I think these numbers are conservative and could be achieved. But there is always the risk of macro changes, and perhaps regulatory issues arise and SOI has a tougher time getting their product sold. The same could happen to their customers, which is why I always have conservative estimates to help reduce the potential downside risk.

Conclusion

Solaris Oilfield Infrastructure is a growing company that makes their revenues from selling mobile equipment to both oil and natural gas companies in the US. They have a large customer base which they have been able to build up during the rather short years the company has been operating.

The idea of investing into SOI is that you get exposure to both oil and natural gas sectors, but without some of the volatility the commodity prices bring. Solaris is driven by those prices. The push for renewable energy is very much here, but it will take time in my opinion until we are fully integrated.

I think that investing at these prices could prove favorable for the long-term. Perhaps you won't see a drastic increase in share appreciation, but the dividend of 4% could help offset some of that. For a less aggressive portfolio I think SOI would prove to be a stable and worthy long-term investment. With a favorable current share price I can see this being a good point to starting a position.

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