ProPetro - Lack Of Demand For This IPO, But What About Current Profitability?

| About: ProPetro (PUMP)

Summary

ProPetro has seen soft demand for its IPO, as oil has been under pressure in recent weeks.

The company operates in the Permian and has been running at full capacity for over six months, yet the S1 filing does not reveal the current profitability of the business.

While full utilization rates and strong capacity growth appears nice, I would be very eager to see a quarterly earnings report before reconsidering my neutral stance.

ProPetro (Pending:PUMP) is an oilfield service company with an appropriate ticker symbol, which has ill-timed its IPO as oil markets have seen a correction recently. The company has some appealing features including the focus on the Permian and growing capacity, although the company lost money both in 2015 and 2016.

The interesting feature is that the company claims to have been running at full capacity from September 2016 onward, yet I do not see quarterly P&L data in the S1-filing. Given that the business has run at full capacity from September of 2016 onward, I would be very curious to see if the company has regained profitability.

As its CEO compared the past two years with ¨waterboarding¨ and he sees reasons to be upbeat, the picture could change dramatically in 2017. This follows the 100% utilization rate and the prediction that 2017 exit capacity will be roughly 50% higher compared to 2016.

A Permian Play

ProPetro provides hydraulic fracturing and related services to E&P companies which operate in the Permian Basin. Some of these producers are well-known names such as Callon Petroleum (NYSE:CPE), Diamondback Energy (NASDAQ:FANG), Parsley Energy (NYSE:PE) and Pioneer Natural Resources (NYSE:PXD), among others.

The company believes that it is the largest provider of these services in this area with a capacity of 420,000 hydraulic horsepower, consisting of 10 fracturing units. The company claims that this fleet has been fully used from September of 2016 onward, and the ordering of 2 additional units will add another 90,000 of hydraulic horsepower capacity from April of this year going forward. Furthermore, two more units are scheduled to be delivered in the second half of the year.

The company was founded back in 2005 by CEO Dale Redman. Since 2009, it has solely focused on the Permian which appears to have been a wise decision. The Permian, including the Midland basin and the Delaware basin offers the best economics. As wells go deeper, include more frac stages and involve more proppant being used as well, ProPetro can really make a difference for its customers.

The economics of the Permian are undisputed, as the region has seen continued production growth, even throughout the plunge in oil prices while the Bakken and Eagle Ford have seen a real setback in terms of production.

The Offering

ProPetro sold 20 million shares in the IPO at a price of $14, raising $280 million in gross proceeds. Only 10.6 million shares were sold by the company itself, with the remainder of the shares being offered by selling shareholders. This selling shareholder is Energy Capital Partners, a private equity firm which still holds nearly 50% of the shares following the IPO.

The shares rose to $15 on their opening day of trading, giving the company a $1.21 billion market value with 80.4 million shares outstanding. Operating with a net debt load of $26 million ahead of the public offering, the enterprise value comes in around $1.1 billion after incorporating the offering proceeds. The recent drop in crude below $50 per barrel has weighted on the offering, as the company previously aimed to sell shares in a $16-$19 price range, but that valuation was too demanding in this environment.

Given the turmoil in early 2016, it is no surprise that ProPetro saw pressure on topline sales. Revenues were down 23% to $436.9 million as the company posted a sizable operating loss of $67.4 million. Even if I back out $22.5 million in losses as a result of asset disposals and $6.3 million in impairment expenses, the company posted a sizable loss. This is disappointing as the company claimed that it achieved a 100% utilization rate from September onwards.

Final Thoughts

There are a few things to like about ProPetro. This includes the focus on the Permian, rapidly growing production and rig activity in that area, the fact that its equipment has been 100% utilized for half a year by now, and the fact that capacity is expected to increase even further.

On the other hand, the valuation remains anyone´s guess as the company loses money, while price/sales multiples are in line, or actually a bit rich compared to the rest of the industry. Other risks, besides losing money, includes a recent leg lower in oil prices, stiff competition and reliance on key customers. Other risks to take seriously are environmental and regulatory impact on the practice of fracking.

The real issue is that it is very hard to gauge what the current financial performance looks like, as the S1-filing does not include quarterly income statements. In particular, I would like to see the Q4 numbers, as the company claims to have run at a 100% utilization rate for that quarter.

If the company was profitable during the final quarter of 2016, enthusiasm surrounding the business could be running high in the coming year. This is certainly the case as exit rate capacity for 2017 is projected to be nearly 50% higher compared to 2016.

As such I have no stance at this moment, as I am looking for the quarterly statements. For now, I will await the coming quarterly results with great interest in order to gain a clue about the profit potential of the business, before making up my mind about the business.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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