Keane Group (FRAC) is saying what every other pressure pumper and E&P has been saying, that the slowdowns experienced (due to lack of pipelines and exhausted budgets) are temporary, and that 2019 should be a strong year.
Revenues for Q3 totaled $558.9 million, which was a decrease of approximately 3% sequentially. Gross profit was $122.3 million, and on a per-fleet basis, annualized adjusted gross profit was $20.5 million. These are not the signs of a struggling company.
In fact, if it weren't for bad weather, exhausted E&P budgets, lack of pipelines, and efficiencies (which are actually causing pressure pumpers to outpace E&P's rig activity), then no white spaces on the calendar would have been created. These are transitory, industry problems. Not company specific. One cannot blame FRAC for being too efficient, while the industry struggles from growth pains.
So, due to the market dislocation seen in shares of FRAC, as the company's fundamentals are improving while the sector grapples with good problems to have, people who are invested should remain long shares. FRAC also has a number of catalysts to drive earnings in 2019, which we will discuss below.
Once again, one cannot really blame a company for being too efficient. Unfortunately for Keane, when there are slowdowns in the oil & gas community, being too efficient can lead to idle crews. Here's what Keane had to say about their efficiencies:
Our completion efficiency is outperforming our original plan, and in the third quarter led to some cases where our completion crews were catching up with our customers' drilling rigs, creating white space in our frac schedule. As highlighted in our updated guidance, we achieved 89% utilization of our 27 deployed fleets, resulting in the equivalent of 24 fully utilized fleets.
Not only are completion crews becoming more efficient and catching up to drilling rigs, they are also keeping pace with rising DUC inventories. This is a testament to the strength of their operations, but if they finish one pad too quickly and move on to the next pad before the E&P is ready, then their crews will have to standby and wait for work. This problem can offset efficiency gains with rising labor costs.
To be fair, slowdowns in completions, bad weather, and exhausted budgets lead to E&Ps pulling back the reigns on their operations. So when activity resumes in 2019 (Q4 is expected to be slow again). Keane should have no trouble finding more work their crews, even if they get ahead of themselves again and drive more efficiencies.
Even though the commodity price environment remains strong and is forecasted to be $69 per barrel in 2019, according to the EIA, Keane has other catalysts to drive its future earnings.
For starters, just as E&P budget exhaustion was a detriment to FRAC, when budgets get reset to higher oil prices in the beginning of 2019, a wave of new completion activity should occur for pressure pumpers like Keane. One customer of Keane's said that they had to slowdown in November, but would start back up in January. So, by this rationale, other E&Ps should follow suit.
Also, rig counts are growing DUC inventories while completions slow. This is not only a good use of E&P's time, but provides more business to Keane when completion activity resumes. Zipper fracs, which are coming to the Permian now, will accelerate those DUC counts considerably.
More frac sand will be needed, as a result, to complete those new DUCs. Thankfully for Keane, deflation in frac sand pricing seen in the Permian, due to the abundance of local sand, will lower raw material costs for their frac spreads. This could have dramatic impacts on their bottom line, as sand is one of the most expensive parts of a completion job.
Last but not least, Keane acquired RSI last quarter, and that added horsepower that they received in the transaction should incrementally increase revenues once completions resume. So, higher oil prices, budgets resetting, added DUCs, deflation, and more horsepower should all drive earnings for Keane in 2019.
Keane bought back $29 million worth of stock in the 3Q and has plans to repurchase $18 million more in the fourth quarter, equating to $88 million of company stock purchased in total since the inception of their buyback program.
However, Keane increased their buyback capacity up to $100 million, which is the second increase authorized in 2018. The program was also extended to September of 2019 from February 2019, which will allow more wiggle room for Keane to optimize their share repurchases.
Keane also believes that negativity in their share price has been overdone. Therefore, the buyback program represents a great opportunity to return the highest amount of wealth possible to shareholders. If efficiencies can continued to be gained, and oil prices remain strong, buying back shares here in the teens seems like a no-brainer for the company. Here is more what the company had to say about their buyback program.
We agree, by the way, that stock price correction is already got kind of the worst side, down side in already. When you look at Q2 and you look at the efficiency levels that we were generating at that time, we did improve upon that a bit in Q3, and despite white space in the schedule, we still managed to deliver the over $20 million in gross profit per fleet. I think there's more efficiencies to be had in the market, in our pumping hours per day or frac generated per fleet per month, but there's also going to be some more pricing opportunities once the market influx and activity begins to go up again.
The future is bright for Keane. While efficiencies gained are actually adding white space on their calendar, once oil & gas activity resumes, these problems should subside. Other catalysts, such as buybacks, budget resets, more takeaway capacity, zipper fracs coming to the Permian, rising DUC counts, deflation of frac sand, and added horsepower should all act as tailwinds to Keane's share price. As a result, investors who are long Keane should stay long. Management agrees, and they are putting their money where their mouth is to prove it.
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Disclosure: I am/we are long EMES. 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.