Summary
- NEX announced solid annual and quarterly results with increased revenues and income.
- The stock is at a key support level providing investors with a buying opportunity.
- The management has provided optimistic revenue guidance and expects to reach pre covid levels soon.
- I assign a buy rating on NEX.
NexTier Oilfield Solutions ( NEX ) provides well-completion and production services in the U.S. across active and demanding basins. Completion and well construction and intervention services comprise its two business divisions. They provide hydraulic fracturing services in the completion services sector to increase oil and natural gas output from formations with low permeability and restricted hydrocarbon flow, perforating, pressure pumping, sand hauling, and last-mile logistics activities.
They provide cementing services in the well construction and intervention services sector, utilizing specially designed mixing and blending equipment to ensure accuracy in supplying annulus isolation and hydraulic seal. It serves independent oil and natural gas exploration companies in the United States and internationally. NEX was founded in 1973. NEX recently posted its Q4 FY22 and FY22 results. I will evaluate their financial results and discuss their development potential in this report. I think they are undervalued, have significant development potential, and could soon offer shareholders respectable returns. Therefore, I give NEX a buy rating.
Financial Analysis
NEX recently announced its FY22 and Q4 FY22 results . They exceeded market expectations for EPS by 39.2% but fell short of expectations for sales by 0.4%. The reported revenue for FY22 was $3.2 billion, a rise of 128% compared to FY21. The revenue growth in the segments of completion services and well and intervention services contributed to a rise in net revenue in FY22. Revenue from completion services increased by 133.3% in FY22 compared to FY21, while revenue from intervention services increased by 55.8%.
The higher pricing strategy in comparison to the prior year and improved well-site integration strategy execution, in my opinion, were the primary drivers of both segments' revenue growth. In contrast to the net loss of $119.5 million in FY21, the net income for FY22 was $315 million.
The revenue for Q4 FY22 was $870.8 million, a slight decline of 2.8% compared to Q3 FY22. Because the management focused on lower revenue and higher return work compared to the Q3 FY22, I don't think it matters even if their revenue slightly decreased. The net income for Q4 FY22 was $133 million, a rise of 27% compared to Q3 FY22. In Q4 FY22 also, the management implemented a better pricing strategy, and the company also saw an increase in the demand for its services, and their natural gas fleet lowered fuel costs. I believe these were the reasons which helped them post solid quarterly and annual financial results.
Technical Analysis
NEX stock is trading at the level of $8.8. The company is currently consolidating and stuck in a range following a strong bull run that began in January 2022. Near $8, a significant support zone has developed. A small correction and consolidation period are necessary after a strong bullish momentum period, and the stock is currently correcting. Consolidation positions a stock for new upward momentum, which is a good indication. Therefore, I believe that one should begin accumulating this stock at the current price because I think that another bullish momentum period may be on the horizon.
Should One Invest In NEX?
Due to COVID-19, the business had two subpar fiscal years in FY20 and FY21 but is now back on track. The revenue in FY22 grew by 128% compared to FY21. I already mentioned the reasons for revenue growth in the financial analysis segment. Regarding FY23 revenue estimates, the management expects revenues to be around $3.89 billion, which is 20% higher than the FY22 revenue.
Given the rising demand for their services and the fact that there are almost 25 more frac fleets in demand than available, I believe they will meet their revenue goals, and the business has not yet reached pre-COVID financial and production levels. Because of this, I believe there is still much room for growth. In addition, I believe that because of the growing demand for their services, FY23 will be another financially successful year for them, with the potential to deliver sizable returns to their shareholders. So I provide a buy rating on NEX.
Talking about the valuation part, they have a P/E ratio ((FWD)) of 3.55x compared to the sector ratio of 8.29x. The second ratio is the Price / Sales ratio. They have a Price / Sales ratio ((FWD)) ratio of 0.54x compared to the sector ratio of 1.38x. These valuation metrics show that they are undervalued and have a lot of growth potential.
Risk
Crude oil and natural gas costs have historically been very volatile, and it is anticipated that this volatility will continue in the future. Various factors affect the price of oil and natural gas, like global economic and military conditions, level of supply and demand, pandemics and natural disasters, and an increase in demand for alternative energy. Therefore, weakness or volatility in gas and oil prices affects its business operations and might also affect customers' spending patterns. In addition, the company's financials may be impacted if there is a drop in customer demand due to volatility.
Bottom Line
The completion and intervention services segments performed well in NEX's annual and quarterly outcomes. The management is confident about revenue growth in the upcoming months and anticipates strong customer demand. They are also undervalued compared to the industry, and technically the stock is at a strong support zone providing investors an opportunity to invest. So after looking at all the aspects, I assign a buy rating on NEX.
For further details see:
NexTier Oilfield Solutions: Undervalued Gem That Could Provide Significant Returns