2023-12-04 17:09:54 ET
Summary
- Newpark Resources, Inc. reported a 9.7% YoY contraction in revenue for Q3 2023.
- The company is divesting its Fluids division, with results expected in 1H 2024.
- My outlook for Newpark Resources is a Hold, with the potential for share buybacks from the sale of the Fluids segment in 2024.
A Quick Take On Newpark Resources
Newpark Resources, Inc. ( NR ) reported its Q3 2023 financial results on October 31, 2023, with revenue contracting by 9.7% year-over-year.
The firm provides a variety of well-site-related products and services for E&P companies worldwide.
Management is proceeding with divesting its Fluids division, although we won’t know the results of that until 1H 2024.
With a constructive backdrop to drilling activity expected to remain in place and the potential for share buybacks from the sale of the Fluids segment, my outlook on NR is a Hold.
Newpark Resources Overview And market
The Woodlands, Texas-based Newpark Resources was founded in 1932 to provide exploration & production firms with various drilling and related products and services.
The firm is headed by President and CEO Matthew S. Lanigan, who has been with the firm since 2016 and was previously Managing Director of Custom Fleet Services in Australia for GE Capital Corporation and has extensive experience in the oil & gas industry.
The company’s primary offerings include the following:
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Well-site mats and integrated services
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Downhole fluids systems (in the process of sale).
Newpark acquires customers via its direct sales and marketing efforts and has operations worldwide.
According to a 2023 market research report by Mordor Intelligence, the global market for oilfield services was estimated at $114 billion and is forecast to reach $146 billion by 2028.
This represents a forecast CAGR of 5.13% from 2023 to 2028.
The primary reasons for this projected growth are the growing development of gas reserves and the continued development of new technologies.
North America is expected to be the largest market through 2028, due to high production activity in shale fields.
Volatile hydrocarbon prices may act as a temporary brake on investment, depending on the severity of change.
Newpark Resources’ Recent Financial Trends
Total revenue by quarter (blue columns) has fallen somewhat; Operating income by quarter (red line) has trended higher in recent quarters:
Gross profit margin by quarter (green line) has increased recently; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended slightly higher in recent quarters:
Earnings per share (Diluted) have been volatile since 2022, remaining positive in each of the last four quarters:
(All data in the above charts is GAAP.)
In the past 12 months, NR’s stock price has risen by 80.9% vs. that of the iShares U.S. Oil Equipment & Services ETF’s ( IEZ ) gain of 6.86%:
For balance sheet results, the firm ended the quarter with $26.6 million in cash and equivalents and $76.8 million in total debt, of which $24.8 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $36.2 million, during which capital expenditures were $30.7 million. The company paid $6.7 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Newpark Resources
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 0.9 |
Enterprise Value / EBITDA | 9.7 |
Price / Sales | 0.8 |
Revenue Growth Rate | 4.8% |
Net Income Margin | 3.0% |
EBITDA % | 8.8% |
Market Capitalization | $612,630,000 |
Enterprise Value | $689,960,000 |
Operating Cash Flow | $66,910,000 |
Earnings Per Share (Fully Diluted) | $0.27 |
Forward EPS Estimate | $0.34 |
Free Cash Flow Per Share | $0.41 |
SA Quant Score | Hold - 3.47 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Based on the DCF, the firm’s shares would be valued at approximately $7.75 versus the current price of $7.22, indicating they are potentially currently fully valued.
Commentary On Newpark Resources
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted continuing to execute on its "multiyear business transformation strategy."
Management continued to invest in its Industrial Solutions segment by expanding its fleet size by 12% as it "continued to gain share in the multibillion-dollar market."
Leadership believes its investment will enable it to generate double-digit revenue growth as it focuses on "accelerating demand in the utilities and critical infrastructure markets."
The firm is "pleased" with acquisition interest for its Fluids division, and management expects "substantial completion" of the sale process in 1H 2024.
In the earnings call, I tracked the frequency of various keywords and terms used by management and analysts:
The chart refers to challenges in the company's Fluids division in the U.S., at least in the near term.
Analysts asked leadership about the impact of rising interest rates and conservatism in its Q4 2023 guidance.
Management replied that it is not seeing any material impact from higher interest rates on project financing, but it is monitoring closely.
Leadership said that it is seeing encouraging quote activity, but is being prudent on guidance until orders are booked, with late-in-the-quarter activity being hard to predict.
For the quarter’s results, total revenue for Q3 fell 9.7% YoY, while gross profit margin increased by 5.3%.
Selling and G&A expenses as a percentage of revenue rose by 2.5% year-over-year, but operating profit grew by an impressive 63.0%.
The company's financial position is reasonably solid, with ample liquidity, some long-term debt but strong free cash flow.
Looking ahead, 2023 full-year consensus revenue growth estimates suggest an overall decline of 7.7% versus 2022’s results.
If achieved, this would represent a reversal in revenue growth rate versus 2022’s growth rate of 32.7% over 2021.
According to valuation firm Mercer Capital , some players in the oilfield services industry expect firming activity in 2024 as demand remains constructive, although consolidation among upstream E&P firms may affect vendor choice and capital allocation may focus on returning capital to shareholders.
A potential upside catalyst to Newpark Resources, Inc. stock could include an exit from its Fluids division, utilizing some or most of the cash to repurchase shares.
We likely won’t know the outcome of the sale process until sometime in 1H 2024, but for investors who want to wait until then, my outlook on Newpark Resources, Inc. stock is a Hold.
For further details see:
Newpark Resources Continues Multiyear Business Transformation