NexTier Oilfield Solutions: A Change In Frac Fleet Dynamics Will Retain Growth

NEX will increase the deployment of Tier 4 dual-fuel frac fleets to reduce carbon emission.

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Based on increased activities and added assets from the Alamo acquisition, revenues can increase by 25% in Q3 2021.

Pricing is unlikely to increase, which will keep margin under pressure in the short term.

Investors need to be wary of negative cash flow from operations and leveraged balance sheet.

NEX Is Staging A Revival

Source: Seeking Alpha

Based on increased economic activity and a better energy environment, NEX is set to increase the number of completion and fully utilized fleets in Q3. Among these are two Tier 4 dual-fuel simul-frac fleets, increasing efficiency, reducing emissions, and improving safety performance. It also explores the inorganic growth route when it acquired Alamo Pressure Pumping. The acquisition will not only bring advanced CAT Tier IV hydraulic fracturing fleets to its portfolio, but it will also complement NEX's geographic footprint in the Permian. In response to the activity growth since the past few months, the company has deployed additional pumps, introduced a slew of technological measures, and added significantly to its workforce. So, the stock outperformed the VanEck Vectors Oil Services ETF (OIH) in the past year.

However, topline growth will be limited to deploying the Tier 4 dual-fuel frac fleets because their cost structure remains too elevated for additional horsepower deployment. Also, there is not much scope for hiking prices for its offerings, given the continued pressure since the 2020 downturn. Plus, as activities surged, it drained its cash flows, which turned negative in 1H 2021. The stock is reasonably valued at this level.

The Growing Opportunities

Source: Company Presentation

In recent times, NexTier Oilfield Solutions has been transitioning toward a lower carbon footprint. In August, the strategy received a shot in the arm when it acquired Alamo Pressure Pumping for $268 million. The acquisition added approximately nine CAT Tier IV hydraulic fracturing fleets to its asset base. Most of Alamo's frac fleets are capable of natural gas blending or converted to Tier 4 DGB (dual gas blend). So, after the acquisition, more than half of the combined fleet will be capable of natural gas blending and offer a low total cost of ownership. In the Permian, the asset bases will complement each other as Alamo is predominantly Midland Basin focused while NexTier's existing assets are Delaware Basin centric.

The combined company will continue with the Alamo brand, which means minimum disruption to the existing customers or employees. NEX's digital capabilities, last-mile logistics, and power solution capabilities will also benefit the acquired assets. The shared asset pool will integrate the wireline pump-down perforating. The company's management expects to generate $10 million in synergies and generate additional revenue. Investors may note that in October 2020, C&J Energy Services merged with Keane Group to create NexTier Oilfield Solutions. Since then, NEX has expanded well site offering and diversified its geographic footprint, which provides an integrated platform at the well site.

The Q3 2021 Outlook

NEX is set to grow revenues by more than 25% in Q3 compared to Q2 because some of its legacy customers are expected to improve businesses in 2H 2021. It exited Q2 with 21 completions fleets while it deployed three additional frac fleets during Q2, including two simul-frac fleets. In Q3, the management expects to deploy two more Tier 4 dual-fuel simul-frac fleets. Investors may note that a simul-frac fleet requires a higher number of pumps than a regular zipper frac. The company is expected to improve the wireline, cementing, and cold tubing services lines in the near term. It also anticipates achieving a pre-defined range for the transitory operational factors and fleet activation cost such that margin is not affected dramatically.

Industry Drivers Influence Decisions

The industry indicators also indicate steady growth. In the past year, the drilled wells and the completed wells recovered sharply (more than doubled) until August 2021, according to the EIA's latest Drilling Productivity Report . The drilled but uncompleted wells (or DUC) (14% down), in contrast, have been weak (32% down) during the same period. Led by higher West Texas Intermediate (or WTI) crude oil price, the drilled and completed well count hike suggests an energy recovery is well underway.

Since NEX added assets primarily in the Permian, it is relevant to learn about the fracking activity in that region. In the Permian, frac spread count (or FSC) reached 131 in September – higher by 91% than at the beginning of 2021. According to Primary Vision's forecast , the total FSC reached 248 in September and has been steady over the past year, which augurs well with NEX's focus on hydraulic fracturing and pressure pumping in the Permian.

To respond to this higher activity level, the company added to its workforce from April to June. In Q2, NexTier launched simul-frac stage pairing, which is expected to improve the injectivity of the frac treatments and reduce equipment costs. From May through early July, it deployed over 100 pumps, most Tier 4 dual-fuel, while at least one was simul-frac. The company is removing the conventional diesel-powered engines. Plus, it is standardizing the fleet with frac MDT Control System, which strengthens digital interfaces with the equipment and lowers the cost of operations. In short, the company is gearing up to meet the challenges through better use of technology and various cost reduction measures.

Pricing Strategy And Challenges

Strategically, NFE was focused on maximizing the topline growth rather than profitability. Therefore, we will likely find gradual pricing improvements, and that too, off a low base because of the pricing concessions made in the 2020 downturn. However, the cost structure remains too elevated for deploying additional horsepower. So, the company's topline growth will be limited to deploying the Tier 4 dual-fuel equipment fleets. The management will try to maximize the earnings growth based on the incremental revenue growth. With the investments made in advanced technologies, the management expects profitability to improve sharply in 2022.

However, investors should be aware of the industry growth curve. Over the past few years, the industry activity went through a non-linear path. The volatility in the energy price and activity and the continued increase in frac intensity would challenge the oilfield services companies. On top of that, the cost of staffing can become more pronounced in 2H 2021, which can lead to higher transitory startup costs and lower margins.

Understanding The Recent Drivers

In Q2 2021, NEX's revenues increased by ~28% compared to Q1 2021. Improved capacity, increased activity levels, and improvements in net pricing resulted in revenue growth. The number of fully utilized hydraulic fracturing fleets risen from 15 to 18 from Q1 to Q2. However, the company accelerated the fleet activation cost for some Tier 4 dual-fuel simul-frac fleet, affecting operating margin in Q3.

In Q2, revenues went up by 29% in the Completion Service segment, while the adjusted gross profit increased by 32% from a quarter earlier. In the Well Construction and Intervention Services segment, adjusted gross profit increased sharply (64% up). The company gained market share in cement and coiled tubing business lines as the customer activity recovered. However, the profit margin can come under pressure due to the startup costs incurred to deploy the additional fleets in Q3.

Cash Flows And Leverage

In 1H 2021, NexTier Oilfield's cash flow from operations (or CFO) turned negative a year ago. Led by a 37% fall in revenues in this period, increased need for working capital due to the activity ramp up led to the CFO fall. As a result, the company's free cash flow (CFO less capex and acquisitions) also turned negative in 1H 2021. Currently, it is investing in investments in Tier 4 dual-fuel carbon-reducing technologies and power solutions business, and maintenance. Because the Alamo acquisition brought in high-valued assets to its portfolio, the company’s management believes that higher profitability will turn free cash flow positive in early 2022. The company's liquidity totaled $372 million as of June 30. Its debt-to-equity ratio (0.69x) is significantly higher than its competitors' (BOOM, HLX, and DRQ) average.

Linear Regression Based Forecast

The regression equation depends on the historical relationship among the US completed wells count, the crude oil price, and NEX's reported revenues. Based on the model, revenue is likely to increase sharply, particularly in the next 12-months (or NTM) and in the following two years.

Based on a simple regression model using the average forecast revenues, the company's EBITDA should improve sharply in the next 12 months (or NTM) 2022. The EBITDA can continue to increase rapidly in NTM 2023 and the following year.

Relative Valuation

Since NEX's EBITDA is negative, the relative valuation has been evaluated using EV/Sales to proxy EV/EBITDA. NEX's forward EV-to-Sales multiple contraction versus the adjusted trailing 12-month EV/Sales is steeper than its peers because sell-side analysts expect NEX's sales to increase more sharply than its peers in the next four quarters. This typically results in a higher EV/Sales multiple compared to peers. The stock's EV/Sales multiple is lower than its peers' (BOOM, HLX, and DRQ) average of 1.8x. So, the stock is undervalued versus its peers at this level.

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NexTier Oilfield Solutions: A Change In Frac Fleet Dynamics Will Retain Growth

Primary Vision Insights – October 13th, 2021

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NexTier Oilfield Solutions: A Change In Frac Fleet Dynamics Will Retain Growth

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Primary Vision Insights – October 13th, 2021

EIA UPDATE: OIL BUILDS, DIESEL DEMAND, AND OSP CUTS

Related Posts

STEP Energy Services: Q2 TAKE THREE

ProFrac Holding: Q2 TAKE THREE

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Monday Macro View: Will we see a frac’ing boom in Mexico?

ProPetro Holding: Q2 TAKE THREE

EIA UPDATE: OIL BUILDS, DIESEL DEMAND, AND OSP CUTS

CONTACT

PARTNERS

TRUSTED SITES

SOCIAL NETWORKS

POLICIES

Privacy Policy

Terms of Use