This analysis of C&J Energy Services (CJES) was provided to TradingIPOs subscribers in advance of its IPO. On July 28, the company announced that its initial public offering of 11.5 million American depositary shares was priced at $29 per ADS.
C&J Energy Services plans on offering 13.225 million shares at a range of $25-28. Goldman Sachs, JP Morgan and Citi are leading the deal, Wells Fargo, Simmons and Tudor co-managing. Post-IPO, CJES will have 52.35 million shares outstanding for a market cap of $1.387 billion on a pricing of $26.50. IPO proceeds will be used to repay all outstanding debt as well as assisting to pay for hydraulic fracturing fleets.
Energy Spectrum Partners will own 7% of CJES post-IPO. Ownership roster here is quite varied with numerous entities owning between 2-6% of CJES.
From the prospectus:
"We are a rapidly growing independent provider of premium hydraulic fracturing and coiled tubing services with a focus on complex, technically demanding well completions."
Conventional and unconventional well completion, with unconventional pushing growth. CJES focuses on the most complex hydraulic fracturing projects. What does CJES mean by complex? Long lateral segments and multiple fracturing stages in high-pressure formations. CJES sees itself as a "technical expertise" operation.
The direct play here is on the recent increase in horizontal drilling, thanks to recent technical advances. These advances have lowered recovery costs and made harder to reach deposits more viable in potential long term profits. Essentially CJES has the expertise and equipment to complete these difficult to drill wells. 57% of US drilling rigs are now horizontal rigs, up from less than 20% in 2007.
The fracturing process consists of pumping a fluid into a cased well at sufficient pressure to fracture the producing formation. It's a highly technical process, and in addition to equipment, CJES services also include determining the proper fluid, proppant and injection specifications to maximize production.
CJES operates four modern, 15,000 psi pressure rated hydraulic fracturing fleets with 142,000 aggregate horsepower. CJES has four more fleets on order, and this will increase aggregate horsepower to 270,000 by the end of 2012.
Hydraulic fracturing equipment is designed to handle well completions with long lateral segments and multiple fracturing stages in high-pressure formations.
In addition, CJES also operates a fleet of 14 coiled tubing units, 16 double-pump pressure pumps and nine single-pump pressure pumps.
Operations are concentrated in South Texas, East Texas/Louisiana and Western Oklahoma. Customers include EOG Resources (EOG), EXCO Resources (XCO), Anadarko Petroleum (APC), Plains Exploration (PXP), and Chesapeake (CHK).
In the first quarter of 2011, CJES completed 633 fracturing stages and 638 coiled tubing projects. The plan is to continue acquiring hydraulic fracturing fleets. CJES believes its coming four units will be in strong demand in its current geographical areas of operations. The current fleet is under contract though. from mid-2012 to mid-2014.
Revenues are derived from monthly payments for fracturing fleets plus associated charges for handling fees for chemicals and proppants. In addition CJES derives market rates for coiled tubing, pressure pumping and other related well stimulation services, together with associated charges for stimulation fluids, nitrogen and coiled tubing materials.
Hydraulic fracturing accounts for 80% of revenues.
On April 28, CJES acquired Total E&S, a manufacturer of hydraulic fracturing, coiled tubing and pressure pumping. Total consideration was $33 million. While this purchase will not directly expand their fleet, CJES believes it will be cost effective in the long run to own the manufacturing capacity.
Obvious one here. CJES is growing like gangbusters and adding hydraulic fracturing fleets over the next year to nearly double capacity. Anything that negatively impacts horizontal drilling activity and equipment capacity utilization could easily erase CJES' strong growth and cash flows. We've seen it before: Companies expanding right at the peak of the sector. My feeling here is, as these fleets are very expensive and demand has been strong, that it would take something highly unusual for CJES to run into capacity utilization issues over the next year or so. Mid-term-plus, however, there is a risk that the sector sees a glut of these fleets a few years from now. A glut would drive the revenue per month price down, possibly significantly.
Includes Halliburton (HAL), Schlumberger (SLB), Baker Hughes (BHI) and Frac Tech (FTS).
No significant cash on the books post-IPO as the bulk of cash's going to repay all debt. No debt post-IPO.
Monthly revenue of $383 per unit of horsepower. Assuming CJES can sustain this rate, horsepower growth alone should account for an impressive $40 million in additional revenue in the second half of 2011, $200 million in 2012 and $500 million in 2013.
2010: $244 million in revenues, a 264% increase from 2009. The financial crisis and recession put a lot of new drills on hold, so 2009 was not an impressive year for CJES. However, it still managed a GAAP operational profit in 2009. Additional fleets contributed to 2010 growth as well as a much stronger pricing environment. Gross margins of 37%, operating margins of 29%. Strong operating margins here. Plugging in taxes, net margins of 18%. EPS of $0.83.
2011: A ridiculously good start to 2011 for CJES. Looking at the first half and plugging in new capacity, total revenues should grow to $650 million, a stunningly strong 166% increase from 2010. This might be a bit conservative as well, as CJES has put up $300 million in the first half of 2011 with new capacity coming online in August that should add $45 million on top of current capacity for the rest of 2011. That $650 million number is plugging in sequential declines from 2Q's blowout $180 million in revenues.
Gross margins look to improve to 40%. Operating margins of 33%. 22% net margins. EPS of $2.83. On a pricing of $26.50 CJES would trade 9 1/2 X's 2011 estimates.
Before we get too carried away, I would surmise that the second quarter of 2011 represents pricing much closer to the top in this sector than the bottom. CJES cannot continue to see this strong a pricing environment without it eventually cutting a bit too deep into the drillers themselves. I attempted to be conservative with 2011's numbers in the back half of the year.
No pure play competitor as those public companies playing the hydraulic fracturing fleet space tend to be much larger and varied. They all tend to trade 15-22 X's 2011 estimates with a 30% or so growth rate. CJES is coming 11 1/2 X's 2011 estimates with a 165% growth rate.
When you see this type growth in what is historically a cyclical sector, the first thought is that the group must be near a cyclical top. That may be so, tops in cyclicals are much easier to see in hindsight. Regardless, CJES looks to me to be a $50+ stock in the shorter run. Currently it has strong pricing power, full utilization with new capacity coming online nearly every quarter through the end of 2012. CJES does not even need to match pricing from the first half of 2011 to increase earnings in 2012. Strong recommend here short term. Mid-term plus we'll have to follow the sector as this sort of massive growth usually means the beginning of a cyclical move or near the end of one. I wouldn't worry about that too much over the next four quarters though, CJES is poised to put up some impressive numbers over the next year.
Note: The blowout second quarter results are tentative at this point and should be officially released shortly after the IPO. They are ridiculously good.