SOI - Solaris Oilfield Reduces CapEx As Frac Industry Consolidates

2023-11-29 15:31:17 ET

Summary

• Solaris Oilfield Infrastructure, Inc. reported Q3 2023 financial results below expectations.
• The company provides sand supply and management services to fracking oil & gas well sites.
• Despite potential negative pressure on frac activity, the company's stock price and cash return to shareholders will be supportive of the stock in the quarters ahead.
• I reiterate my previous Buy outlook for Solaris Oilfield Infrastructure, Inc. shares at around $8.70 per share.

A Quick Take On Solaris Oilfield Infrastructure

Solaris Oilfield Infrastructure, Inc. ( SOI ) reported its Q3 2023 financial results on October 27, 2023, missing both revenue and consensus earnings estimates.

The firm provides various sand (proppant) supply and management services to oilfield well sites in unconventional fracturing operations.

I previously wrote about SOI with a Buy outlook on its integrated approach to service provisioning.

Although U.S. frac activity may be under negative pressure in the quarters ahead, the firm’s shift to returning more cash to shareholders combined with its reasonable stock price lead me to reiterate my previous Buy outlook at around $8.70 per share.

Solaris Oilfield Infrastructure Overview And Market

Texas-based Solaris Oilfield Infrastructure provides a variety of oilfield service equipment products focused on the hydraulic fracturing process of extracting hydrocarbons from unconventional geologic structures.

The firm is led by founder, Chairman and CEO William Zartler, who is also the founder and CEO of Aris Water Solutions, an oilfield service company that provides water solutions to fracking well-site operators.

SOI’s primary offerings include the following:

• Proppant management system

• Sand loading system

• Fluid management system

• Autoblender

• Automated control systems

• Last mile management.

According to a 2023 market research report by Maximize Market Research, the global market for proppant (as a proxy for the proppant equipment market) was estimated at $8.91 billion and is forecast to reach $14.22 billion by 2029.

This represents a forecast CAGR of 6.9% from 2023 to 2029.

The primary reasons for this projected growth are new technologies propelling the hydraulic fracturing industry to use more proppant in their well-site operations.

Also, ceramic proppants can outperform sand proppant as a specialty product in terms of stress and crush resistance.

The cost of ceramic proppant is around 50% higher than frac sand.

A breakdown of proppant type and related approximate market share in 2021 is shown below:

Solaris Oilfield’s Recent Financial Trends

Total revenue by quarter (blue columns) has continued to slide since a high in Q3 2022; Operating income by quarter (red line) has dropped in the most recent quarter:

Gross profit margin by quarter (green line) has trended higher; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have moved slightly higher in recent quarters:

Earnings per share (Diluted) have risen in recent quarters but have dropped materially in the most recent quarter, as shown below:

(All data in the above charts is GAAP.)

In the past 12 months, SOI’s stock price has fallen 20.58% vs. that of U.S. Silica Holdings, Inc.’s ( SLCA ) drop of 11.33%:

For balance sheet results, the firm ended the quarter with $3.5 million in cash and equivalents and $37.0 million in total debt, all of which was long-term.

Over the trailing twelve months, free cash flow was $11.4 million, during which capital expenditures were $79.0 million. The company paid $7.3 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Solaris Oilfield Infrastructure

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

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Commentary On Solaris Oilfield Infrastructure

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted Board approval of a 9% increase in its dividend.

However, fully utilized systems remained sequentially flat at 108 and the company followed 8% fewer frac crews, lower than previously anticipated.

Management believes that:

"industry activity bottomed in the third quarter and while current activity has modestly improved, we expect average fourth quarter activity levels to be roughly flat sequentially and could be down slightly depending on the impact from seasonality."

The company deployed six more top fill systems, for a total of 58 in the fleet, helping customers reduce the number of trucks and drivers needed to supply well sites and lower costs.

During the call, analysts asked leadership about technology adoption, oilfield activity levels and industry consolidation.

Management said that if fracturing activity rebounds in 2024,it could increase its system revenue per frac fleet to as high as $1.8 million from the current $1.6 million. It is focusing its CapEx spending on repairs and improving reliability within its new top fill system.

Oilfield activity is positive since commodity prices are supportive.

However, the frac market is continuing to consolidate, so management is forecasting a modest increase in activity in 2024. It believes that consolidation will favor its larger footprint, which can serve larger consolidated operations.

Total revenue for Q3 2023 fell by 24.5% YoY while gross profit margin increased by a full 9.0%.

Selling and G&A expenses as a percentage of revenue rose by 2.8% year-over-year and operating income dropped by 18.7%.

The company's financial position is moderate with some liquidity, higher long-term debt and free cash flow.

Looking ahead, management believes 2024 activity will be improved:

"from current levels and we plan to be ready for it…as operators will continue to push for increased efficiencies and reduce per well drilling and completions cost."

Expected capital expenditures will decrease by 70% in 2024, and management forecasted an increase in free cash flow as a result, returning the excess to shareholders in either dividends or share buybacks.

Forward revenue estimates peg 2023 revenue at around $300 million, which would be a contraction of around 6.2% from 2022’s $320 million.

The period ahead will essentially be one of tapering its significant investments over the past few years, returning cash to shareholders and seeking to take advantage of its integrated approach to pursue new customers in a consolidating environment.

A potential upside catalyst to the stock could include firming commodity prices.

My discounted cash flow calculation indicates the stock may still be undervalued at its current level of $8.68.

Although U.S. frac activity growth may be under pressure in the quarters ahead, Solaris Oilfield Infrastructure, Inc.’s shift to returning more cash to shareholders combined with its reasonable stock price leads me to reiterate my previous Buy outlook at around $8.70 per share.

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