• Solaris Oilfield’s number of fully utilized systems can go up by 10% to 15% in Q2
• Its top fill system and AutoBlend technology can increase volume and profit per frac crew under the last mile model
• Higher volume, price hike, and cost absorption can maximize profit in FY2022
• However, increased capex can drain SOI’s free cash flow in FY2022

Solaris Is Close To The Inflection Point

In 2022, demand for Solaris Oilfield Infrastructure’s (SOI) integrated e-blender and belly-dump capable top-fill systems exceed supply, leading to profit maximization. In Q2, the number of fully utilized systems can increase by 10% to 15%, reflecting sustained demand for its services in the fracking market. Added contribution from new technologies, the last mile logistics offering, and system cost absorption due to activity growth will contribute to the margin expansion.

However, rising investment in top fill and AutoBlend technology can surpass its ability to generate cash flow from operations, thus draining free cash flows. Despite the concerns, it has a robust balance sheet that can offset the risks. The company has no debt, while it has liquidity. The stock is reasonably valued versus its peers. Given the momentum, investors might want to buy to gain in the medium-to-long term.

Technology Upgrade And Improved Sales Mix

SOI’s top fill system for the higher payload bottom or belly dump truck trailers allows increased flexibility and reliability. Please read my previous article to understand the company’s business better. Per the company’s estimates, its customer can increase payload capacity per truckload by 10% to 15% using these systems. The added value prompted increased demand for such service, leading to higher profitability based on volume and per frac crew under the last mile model. Demand for the top fill solution exceeds current availability. So, the company is investing heavily into it. In effect, the company achieved higher volume by deploying belly dump trucks and an improved job mix.

On the technology side, since the introduction of AutoBlend (an integrated all-electric blender technology for cleaner power sources), it has deployed several units. Solaris’s electric AutoBlend eliminates the complex components of the traditional blenders while bringing in the power of automation. These resulted in reduced non-productive time, while it has increased reliability and minimized well site footprint. AutoBlend and top fill equipment can likely drive pull-through sand system revenue.

What’s The Q2 Outlook?

SOI expects its new technology deployments to fulfill the additional demand created by the growth in completion activity. Since Q1, the US rig count and the frac spread count have increased by 9% and 5%, respectively, as estimated by Baker Hughes rig count and Primary Vision. In Q2 2022, it expects the number of fully utilized systems to be up by 10% to 15% compared to Q1.

Margin is also likely to improve in 2022 following a price hike. Added contribution from new technologies, the last mile logistics offering, and system cost absorption due to activity growth will contribute to the margin expansion. However, SG&A expenses can increase marginally due to increased headcount and administrative expenses.

Analyzing The Q1 Drivers

In Q1 2022, Solaris Oilfield Infrastructure’s total revenues increased by ~24% compared to Q4 2021. During Q1, the demand for the company’s services outpaced the completions market growth. In particular, demand for 9- and 12-pack configurations helped customers resolve the sand supply shortages and delays. Also, the company’s energy customer base increased by 10% in Q1.

In Q1, SOI’s fully utilized systems increased by 19% compared to Q4 2021. The growth represents commodity price inflation, customer base expansion, and increased demand for 9- and 12-pack configurations. Improved last-mile profitability, increased pricing, and fixed cost absorption resulted in a 21% higher gross profit margin per system in Q1. The EBITDA margin was inflated by 590 basis points in Q1 sequentially.

Free Cash Flow, Capex, And Dividend

As of March 31, 2022, SOI’s cash & equivalents were $36.5 million, while it has no debt. The company also has $50 million available under an undrawn credit facility, which takes its total liquidity to $75 million. The liquidity should suffice working capital and growth needs in 2022.

SOI’s cash flow from operations (or CFO) doubled in Q1 2022 compared to a year ago. However, its capex also doubled, resulting in negative free cash flow (or FCF). Led by additional investment in top fill and AutoBlend technology, capex is expected to be between $20 million and $30 million in 1H 2022. In FY2022, it plans to commit between $40 million and $60 million in capex, which would be a 200% increase compared to FY2021.

SOI’s forward dividend yield is 3.04%., Schlumberger (SLB), the largest oilfield services company, has a forward dividend yield of 1.5%, while Halliburton’s (HAL) dividend yield is 1.2%.

Learn about SOI’s revenue and EBITDA estimates, relative valuation, and target price in Part 2 of the article.