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Calfrac: Q2 2018 Solid But Guidance Gives Concern

Cornerstone Investments profile picture
Cornerstone Investments


  • 2018 Q2 results beat estimates on higher revenue and margin.
  • Management gave a cautious outlook for the second half of 2018.
  • Near-term outlook is clouded due to sector-wide pessimism but we continue to favor Calfrac as the best name in the sector.

When we published our analysis for 2018 Q1, we were seeing a strong start to 2018 from Calfrac (OTCPK:CFWFF) that included a major rebound in the U.S. business and upbeat guidance from management who dismissed the overbuild concern. However, despite the strong results, management turned cautious on the U.S. outlook for the second half of 2018 due to concerns of Permian bottleneck and oversupply in the fracturing industry. The stock turned lower sharply following the guidance that 3 of the U.S. fleets will not be fully utilized in the Q3 and Q4 this year, leading to concerns that margins have peaked during Q2. Management has not helped by citing concerns over any further pricing gains and uncertainty for maintaining its current utilization. We think Calfrac's problem is definitely not unique as we have been hearing cautious tone across all major fracturing providers. However, the stock is at a juncture where if overbuild concern materials we could see Q2 as the peak profitability for a while, however, the industry might also prove to be a lot more resilient and is able to adjust and absorb the additional capacities entering the market. We tend to favor the second view and continue to hold a position in Calfrac due to its unique torque to a recovery in fracturing demand.

(Source: Bloomberg)

2018 Q2 Quarter Review

Calfrac reported another strong quarter with revenue growing 67% from last year. However, gross profit margin slipped from 12% to 10%. The company is coming off a trough year in 2017 and investors are focusing on 2018 as a baseline year for the near future. Pressure pumping peers have mostly reported decent Q2 results but management has expressed various levels of concerns regarding the state of the fracturing market. Investors are getting concerned about the Permian pipeline shortages and the impact on fracturing demand. The one

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Analyst’s Disclosure: I am/we are long CFWFF. 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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