Since the start of Q3 2018, many companies in the oilfield equipment & services (or OFS) industry have had positive returns in the stock market so far. In this series, we will analyze the top three companies in the OFS industry by stock market returns in the past three months. However, this analysis excludes the offshore drillers. I have selected 39 OFS companies that are part of the VanEck Vectors Oil Services ETF (OIH), the SPDR S&P Oil & Gas Equipment & Services ETF (XES) as well as a few names outside these ETF holdings.
Top three OFS companies by returns
From June 29, 2018, until October 8, 2018, Solaris Oilfield Infrastructure (SOI) saw the highest rise in stock prices in the OFS industry. SOI provides supply chain management and logistics solutions to the energy industry, including mobile and permanent infrastructure that increases proppant throughput capacity. Compared to SOI’s 28.5% returns in this period, the VanEck Vectors Oil Services ETF (OIH) witnessed -1.3% returns. OIH tracks an index of 25 OFS companies.
NOW, Inc. (DNOW) saw the second highest rise in stock prices in the OFS industry. Since the beginning of Q3 2018, its stock price increased by 25.7% until October 8, 2018. DNOW distributes maintenance, repair and operating (or MRO) supplies to the upstream, midstream, and downstream industries. In comparison, the SPDR S&P Oil & Gas Equipment & Services ETF (XES) saw 3.0% returns during the same period. XES tracks an index comprising of companies in the oil & gas drilling sub-industry and the oil & gas equipment & services sub-industry.
Helix Energy Solutions Group (HLX), which provides specialty services to the offshore energy companies, ranks third in terms of stock market returns in the OFS industry. Since June 29, its stock price increased by 22.6% until October 8.
Why did returns vary?
The West Texas Intermediate (or WTI) crude oil has remained steady in the past quarter, holding onto the gains it made since the recovery in the past one-and-half years. The US rig count, too, remained steady, increasing by five during this period. OFS companies’ revenues and profitability typically improve when the upstream companies’ exploration, drilling, and production activities pick up, although it will also depend on the business model of the OFS companies.
What caused SOI’s stock price to a surge in Q3?
SOI’s capacity enhancement: The efficient storage of materials at oil and natural gas well sites is a critical factor in the successful implementation of fracking operations. SOI’s six-silo system contains three times the on-site sand storage capacity than occupies smaller space than a conventional SandKing system. For more substantial frac requirements, SOI has developed a 12-silo system that can store 5 million pounds of proppant and can deliver sand at an average rate of 23,000 pounds per minute. The increased storage capacity can achieve complete approximately 50% more frac stages per day and reduce completion time by three wells per day. Plus, the added storage capacity further alleviates logistics bottlenecks that are threatening crude oil production growth in shales like the Permian.
Location is the key: As of June 30, 2018, approximately 28% of SOI’s systems were located in the Delaware Basin, 25% in the Eagle Ford, 21% in the Midland Basin, 13% in the SCOOP/STACK of Oklahoma, 7% in the Haynesville, 5% in the Marcellus/Utica and 1% each in the Rockies and the Barnett. It also plans to foray into new basins including the Bakken in Canada. So, SOI has positioned itself to benefit the most from the flurry of activities in the unconventional shales.
New revenue source: SOI’s Kingfisher transloading facility became operational at the first stage in January 2018. SOI has seven-year sand storage and transload agreement with a third-party customer for Kingfisher. The facility is located at the strategically important SCOOP/STACK formations in Oklahoma. Because of its location a Class I rail line, Kingfisher will have an ability to unload a unit train of 120 rail cars and load more than 10,000 tons into trucks in a 24-hour period.
How did SOI’s fundamentals look like in Q2 2018?
In Q2 2018, SOI’s revenues increased 252% over Q2 2017 following an increase in the number of systems (177% up) and an increase in total system revenue days. Transloading revenue at the Kingfisher facility in Q2 more than doubled compared to Q1.
In Q2 2018, SOI’s net debt (total debt less cash) was negative. So, improved top line contributed and a strong balance sheet has contributed to SOI’s outperformance. For further analysis on SOI, click here.
Why did HLX’s stock price increase so fast in Q3?
Higher vessel utilization: In Q2 2018, HLX’s vessel utilization went up to 88% from 77% in FY2017. Typically, HLX’s utilization rates for the vessels located at the North Sea are at the highest during the summer and falls during winter. So, there are a couple of quarters left for HLX in 2018, including the third quarter, to benefit from high utilization.
In Q2 2018, Helix’s ROV vessel utilization increased to 70% from 56% in just two months. This reflects increased activity level for HLX’s vessels as it completed numerous projects in different geographies and commencing the trenching season. In comparison, OII’s management expects overall ROV fleet utilization to be in the low to mid-50% range in the second half of 2018. This gives us an idea about how superior HLX’s ROV fleet management has been in the recent quarters.
Offshore project boost: HLX’s projects in the Gulf of Mexico, Brazil offshore, and the North Sea will get a boost if the offshore industry begins to deliver on the promises shown in recent times. According to a report by Westwood, offshore E&P activity between now and 2022 is forecast to be higher, as producers are ready to pump in $28 billion in North America offshore. HLX has a lot riding on the rebound of the offshore energy market, which has attracted investors into buying this stock in the past three months.
How did HLX’s fundamentals look like in Q2 2018?
In Q2 2018, HLX’s revenues increased 36% over Q2 2017. This reflects higher revenues generated from its well intervention operations in all regions and higher trenching revenues and increased utilization of ROV support vessels.
HLX’s its net debt increased in Q2 vis-à-vis a year ago. So, improved top line contributed to HLX’s outperformance, although the rise in net debt can turn out to be HLX’s concerns, going forward. For further analysis on HLX, click here.
Does DNOW’s outlook reflect its stock price appreciation in Q3?
DNOW’s advantages versus peers: DNOW’s products depth, cost-cutting methods, geographic diversity and ability to engage large and small U.S. and international clients give it an edge over the smaller players. Compared to some of its larger international competitors, DNOW’s offerings across the energy value chain, flexible operating model, and product-and-solutions bundling let it maintain a strong position in the market.
Pricing recovery: The energy price recovery in the past two years, and the resulting surge in the E&P activities particularly in the U.S. has enabled DNOW in improving its quotation and pricing processes, leveraging and optimizing inventory, and driving intra-company collaboration.
Improvement throughout the value chain: In the U.S., E&P activity rise in the Permian, Bakken, Northern Rockies, Eagle Ford, DJ Basin, and the Northeast contributed to DNOW’s revenue growth. In the midstream market, pipe and actuated valve activity remain active in the shale plays as the midstream operators continue to build out infrastructure to support increased production volumes. As domestic production ramps up, DNOW added customers in Arkansas and the Rockies. In downstream, a new large-scale refining customer was added to DNOW’s list. DNOW also added new aerospace and energy products manufacturing customers during Q2.
How did DNOW’s fundamentals look like in Q2 2018?
In Q2 2018, DNOW’s revenues increased 19.4% over Q2 2017. In Q2 2018, its net debt increased significantly vis-à-vis a year ago. So, improved top line contributed to DNOW’s outperformance, although the rise in net debt can turn out to be its concerns. For further analysis on DNOW, click here.
What are analysts’ ratings for SOI, HLX, and DNOW?
According to data provided by Seeking Alpha, ten analysts rated SOI a buy (includes strong buys), while one recommended a hold. The analysts’ consensus target price for SOI is $24.4, which at SOI’s current price yields 29.6% returns. Seven analysts rated HLX a buy (includes strong buys), while one recommended a hold. The analysts’ consensus target price for HLX is $11.0, which at HLX’s current price yields only 2% returns. Three analysts rated DNOW a buy (includes strong buys), while eight of them recommended a hold. The analysts’ consensus target price for DNOW is $17.3, which at DNOW’s current price yields only 2.6% returns.
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.