C&J Energy (CJES) just delivered their 2011 earnings report and conference call, and from my perspective, there is a lot of share price growth ahead. The current share price of around $20 is shockingly cheap in light of the amount of cash this company should earn in the next 12-24 months. The only reason I can think of at this point is the continued fear of a potential fracking moratorium. I first wrote about CJES only a few weeks ago with the stock price hitting the low $16 range. In the 2.5 weeks since that article, the stock has risen about 25% which might scare some investors, but I think after seeing the numbers the reader might conclude as I have that we have a long way to go before we reach fair value.
I plan to take a look at the numbers and make some projections based on what we know to be true today, and assume something about the future based on that knowledge. Understand that we can not know what the future holds by looking at the past, but as an investor and stock analyst, we can only do our best with the information that we have. That said, let's take a look at what we have.
CJES just reported net income for the 4th quarter of $53.4 million on revenues of $220.1 million. Revenues were a bit lighter than expected due to a customer using their own sand, but net profit was higher than expected as higher margin service revenue more than made up for the lower margin sand revenue they lost. A quick, back of the napkin calculation shows that CJES was able to turn each dollar of revenue into 24.26 cents of net profit. Last quarter they saw net margins of 20.2%. For our analysis I will use 22%, which is right in the middle of the last two quarters.
We also know that in the 4th quarter, CJES earned monthly revenue per unit of horsepower of $343, which was down quite a bit from Q3. On the conference call, management stated that, that number should stay consistent or be slightly higher moving forward. For sake of being conservative, we will use $340 as the number for analysis purposes.
Also, they will be delivering fleet 6B which consists of 36,000 HP (the second portion of fleet 6) in the next few days, bringing their total horsepower to 210,000. Fleet 7 will be online in April and fleet 8 will be delivered during the third quarter. Fleet 9 is not expected to be delivered until the end of Q4, thus having no impact on 2012 revenues.
With this information, we can begin to make some assumptions about the profitability of the company for 2012. If fleet 6B comes online March 1, and we are conservative and assume fleet 7 is online at the end of April, and fleet 8 at the end of the 3rd quarter, here are my revenue projections, assuming fleets 7-9 are 36,000 HP each:
Jan-Feb 174,000 HP X $340/mo = $118,320,000
Mar-April (2 months with 6B) 210,000 HP X $340/mo = $142,800,000
May-Sep (5 months with #7) 246,000 HP X $340/mo = $418,200,000
Oct-Dec (3 months with #8) 282,000 HP X $340/mo = $287,640,000
Total expected fracking revenues for 2012 are expected to be $966,960,000. Keep in mind this is assuming that all fleets are always working, which may not be possible with more and more equipment making its way into regions in which CJES operates, nor does it assume spot market pricing getting softer. We will take 10% of our totals to help compensate for these factors in a moment. At the same time, monthly revenue per unit of horsepower could go up as expected, and fleets 7 and 8 could come online sooner than my projections are accounting for, thus increasing the revenue number dramatically. But, again, for the sake of being conservative, we will hit the revenue number 10% to be safe. That leaves us with $870,264,000 in revenue from fracking.
Next, CJES has a coiled tubing business that produced $32,000,000 of revenue in Q4-11 with 17 units working in the quarter. While 2 of the units were probably not working the full quarter, we will assume they were, in order to bring the average revenue per unit down to stay on the conservative side. CJES ended the year with 18 total units and they have recently ordered 6 more that they expect to be online in 2012. Using Q4 numbers, we will assume each unit generates $625,000 per month in revenue. Not knowing when the 6 new units will be delivered and earning revenue, we will only count revenue for 20 units over a 12 month period of time. Using this number, we calculate $150,000,000 worth of revenue in 2012 from the coiled tubing units, which is probably $25 million to $40 million light. We will also hit the coiled tubing revenue for 10% to help account for unknowns, leaving us with $135,000,000 from the coiled tubing business.
Finally, the equipment manufacturing business brought in $11 million in the 4th quarter from 3rd party customers. We will assume no growth going forward, and actually use $10 million per quarter, giving us $40 million in revenue this year from that business line.
Based on these numbers, we are looking conservatively at a gross revenue number of $1.045 billion. Using our 22% net margin, we can hope that CJES will earn a net profit of $229,900,000 in 2012. If we throw a conservative price to earnings ratio of 8 on the company, that would put the market cap of CJES at slightly over $1.83 billion. Today, the market cap sits at $1.05 billion. Price wise, we would be looking at a $35.31 share price.
Here is where things start to get real exciting. Let's assume that once fleet 9 comes online at the end of 2012, CJES decides they will not add more fleets or coiled tubing units for all of 2013. Here is how the revenue numbers for 2013 play out:
318,000 HP X $340/mo = $1,297,440,000 in fracking revenue
24 Coiled tubing units at $625,000/mo = $180,000,000 in tubing revenue.
$40,000,000 in manufacturing revenue.
That is $1,517,440,000 in revenue for 2013. If we hit the number for 10% again, we are left with $1,365,696,000 in revenue. Using our 22% net margin in this scenario, we are left with $300,453,120 in net profits. Putting a price to earnings ratio of 8 on that number leaves us with a market cap of $2.40 billion, which equates to a share price of $46.14, or a 129% gain from the current price today.
Using a P/E of 10 on that 2013 number, we are looking at a stock price of $57.68.
Now imagine if they continue to grow successfully in 2013 instead remaining stagnant as per my example.
While there is no guarantee that we will see these kinds of numbers at the end of 2013, an investor is left to ponder the possibilities. If my assumptions prove to be too high, the current valuation allows an investor a bit of an error buffer as it currently is trading at a very cheap multiple based on current earnings, as well as forward earnings. A fracking moratorium would throw this entire analysis out the window. In the meantime, an investor has to wonder if the potential reward currently outweighs that risk. Based on my long position in CJES, I would argue that it is.