Mammoth Energy Services Part 2: Estimates And Relative Valuation

Mammoth Energy Services Part 2: Estimates And Relative Valuation

Our regression equation suggests a steep revenue growth for TUSK in NTM 2023 and steady growth afterward.
EBITDA, too, can increase sharply in NTM 2023 and continue to move up in NTM 2024.
The stock is reasonably valued versus its peers.

Part 1 of this article discussed Mammoth Energy’s (TUSK) outlook, performance, and financial condition. In this part, we will discuss more.

Linear Regression Based Revenue Forecast

Based on a regression equation between the key industry indicators (crude oil price and rig count) and TUSK’s reported revenues for the past seven years and the previous four quarters, I expect its revenues to nearly double in the next 12 months (or NTM) 2023. The growth rate can moderate in NTM 2024.

Based on the same regression model and the forecast revenues, I expect the company’s EBITDA to increase by 185% in NTM 2023. The model suggests that the EBITDA growth rate will decelerate to 73% in NTM 2024.

Target Price And Relative Valuation

Returns potential using the forward EV/Revenue multiple (0.60x), as derived from the revenue forecast, is much higher (9% upside) than the returns potential using the past average EV/Revenue multiple (20% downside) from the stock.

Relative Valuation

Mammoth Energy’s current EV/Revenue multiple is 1.2x. The stock’s past five-year average EV/EBITDA multiple was 0.81x. So, it is currently trading at a premium to its past average.

TUSK’s EV/Revenue multiple is higher than its peers’ (EXTN, WTTR, and PUMP) average of 0.77x. Because TUSK’s forward EV/Revenue multiple is contracting more steeply than its peers (because the revenue growth is higher), it typically reflects a higher EV/Revenue multiple than its peers. So, the stock is reasonably valued at the current level.

What’s The Take On TUSK?

As the economy and energy industry faces uncertainty over the Ukraine war, global economic slowdown, or a possible recession, Mammoth Energy takes prudent measures. It held on to the number of frac fleets in Q3, although it disclosed to add a couple more by Q1 2023. The sand business faced a hurdle related to railroad logistics, adversely affecting volume. However, there were plenty of opportunities recently as hydraulic fracturing activity strengthened in the US. TUSK cashed in with its vertical integration model. A competitive advantage achieved through a wet sand pile can boost its pricing capability in the sand business. So, the stock outperformed the VanEck Vectors Oil Services ETF (OIH) in the past year.

Similarly, the company’s infrastructure will benefit from seasonal storm restoration services and overall infrastructure project opportunities. The company’s balance sheet is free from any immediate impending risks, although negative FCF can a concern. Given its reasonably well-placed relative valuation, investors might want to hold the stock in the short term.