- The pricing differentials for NexTier Oilfield’s Tier 4 dual fuel equipment widen with the conventional frac spreads
- NEX’s natural-gas fleet offers significant fuel cost savings versus diesel-powered equipment
- Cash flows have improved over the past year
- However, a high debt-to-equity ratio remains investors’ worries
The Industry Drivers And Cost Advantages
NEX’s management opines that the significance of the US shale industry is growing as the world economy pulls out of the pandemic and Russia’s export dries up following the Ukraine invasion. With increased requirements for domestic energy production, energy operators and service providers like NEX will see higher demand for services and products. Recently, NEX has been focusing on a counter-cyclical investment strategy, which converts to natural gas-powered frac equipment. With that objective, it has rolled out the Power Solutions natural gas fueling business which blends field gas and CNG to fuel frac fleets. The integrated frac plus fueling model will enable next-generation equipment by integrating completion services like wireline, frac, last-mile logistics, and power solutions.
NEX deployed the legacy Tier 4 dual-fuel fleet and upgraded the Tier 4 dual-fuel fleet through the Alamo operations in Q1 2022, as I discussed in my previous article. Following the deployment of a natural gas-powered equipment fleet, it estimates to have the largest market share in the Permian Basin. The natural-gas fleet offers significant fuel cost savings versus diesel-powered equipment. Because the focus is increasingly on lowering emissions, the Tier 4 pumps are highly demanded. In this environment, NEX will target maximizing margins and returns. So, even without committing additional capital, the company has upside potential.
Q2 Forecast And The Pricing Strategy
As demand for fracking improves in the US, NEX will see net pricing gains, although it remains below the pre-pandemic level. Also, cost inflation continues to be a significant challenge. Given the dynamics, the company is likely to exit 2022 with a $330 million to $360 million of adjusted EBITDA, which means it expects EBITDA to increase by more than 200% compared to FY2021. In Q2, it can achieve annualized adjusted EBITDA per fleet of at least $15 million, assuming 34 deployed fleets. Total revenue can increase by 20% in Q2 compared to Q1, while the Q2 adjusted EBITDA is expected to be ~$130 million, or 56% higher than in Q1.
Because the frac fleets are in short supply, the environment is conducive for frackers’ pricing gains to outperform the underlying commodity price over the medium to long term. In particular, the pricing recovery for well-completion services and the frac fleet utilization can accelerate, given the demand-supply balance. The idle equipment is recommissioned while newbuilds are expected to come into the market in 2022. Newbuilds with Tier IV capability and electric fracs will also replace or enhance the legacy diesel-powered engines. NEX’s management believes that displacing diesel with natural gas can lower fuel costs on each fleet by more than $10 million per year. This trend estimates that the Power Solutions service can nearly triple its size in 2022.
Supply Cost Challenges and Margin Resolution
The supply chain bottlenecks, which started affecting the energy servicing capability in 2021, will continue to impact the industry’s ability to maintain existing equipment. As producers start increasing their capacity, it will add to the problem. To counter this, NEX’s natural gas-powered frac equipment pricing is drawing a premium over conventional diesel fleets. This is because the cost to fuel a frac fleet with diesel has increased steeply as the crude oil price increased over the past year. The fuel cost inflation of NEX’s Tier 4 dual fuel fleets has risen by only 50% of a conventional diesel fleet. So, the company should see its operating margin expansion in the coming quarters.
The Industry Drivers
In the past year, the drilled wells increased by 71% until April 2022, according to the EIA’s latest Drilling Productivity Report. The drilled but uncompleted wells (or DUC), in contrast, have declined by 38% during the same period. Higher West Texas Intermediate (or WTI crude oil) encouraged the drilled and completed well count hike.
According to Primary Vision’s forecast, the frac spread count (or FSC) reached 288 by mid-May and has gone up by 23% since the start of 2022. Year-over-year, NexTier’s FSC increased by 80% until February. In Primary Vision, we expect to see rig additions remain strong while frac spreads gain some momentum heading into June.
Analyzing The Q1 Drivers
In Q4 2021, NEX’s revenues increased by ~30% compared to Q3 2021 as pricing and volume increased. Revenues increased in both the Completions and Well Construction & Intervention Services segments. The number of active hydraulic fracturing fleets rose by one to 33 in Q1, including the Alamo portfolio. Also, the benefits of the integration efforts with Alamo helped improve the topline and operating profit.
Despite some seasonal slowdown, the reconfiguration of horsepower deployment to simul-frac and zipper frac fleets led to efficiency gains. Plus, sand-related downtime on fleets was minimal. NEX exited Q1 after it added another fleet to the count. However, the adjusted gross profit contracted marginally compared to a quarter earlier. The company is slowly reaching its goal as it achieved double-digit annualized adjusted EBITDA per fleet in March. Strong volume growth and pricing gains can lead to further benefits in the coming quarters in 2022.
Cash Flows And Liquidity
In Q1 2022, NexTier Oilfield’s cash flow from operations (or CFO) turned positive compared to a negative CFO a year ago. Higher revenues led to the CFO rise as rig count and fleet utilization improved, along with pricing ease in the frac market. Although its capex increased, it managed to pull through a mildly positive free cash flow in Q1 2022. The management estimates that it can generate a free cash flow of over $150 million in FY2022.
In 2022, the company will improve its working capital following a profitability improvement and the conclusion of its dual-fuel conversion program. It plans to use the positive free cash flow generation to reduce net leverage or other capital allocation strategy, which may include M&A. The company’s liquidity totaled $349 million as of March 31, 2022. Its debt-to-equity ratio (0.66x) is much higher than its competitors (BOOM, HLX, and DRQ).
Learn about NEX’s revenue and EBITDA estimates, relative valuation, and target price in Part 2 of the article.
