Mammoth Energy's Frac Sand Mining Costs Are Among The Best In The Industry

Todd Akin profile picture
Todd Akin
2K Followers

Summary

  • Mammoth Energy is diversifying away from the volatile oil & gas industry, with industrial sales now representing a much higher percentage of revenues than in previous years.
  • Pressure pumping and sand pricing are showing signs of a recovery, even in the fourth quarter of 2018.
  • Since issues surrounding the stock remain temporary, the recent dip in TUSK’s shares are posing a buying opportunity.

Mammoth Energy (NASDAQ:TUSK) has seen its share price fall with the rest of its peers in the oil & gas sector due to lower commodity prices and overall market weakness. But, these events are not necessarily indicative of a deterioration in fundamentals for TUSK.

After all, earning a net income of $70 million in the third quarter, despite experiencing a challenging pressure pumping environment, shows the power of TUSK's earnings potential when completion activity resumes again.

There were other positives to take from the third-quarter call, such as TUSK's infrastructure business that continues to grow and diversify its earnings stream (infrastructure represented 64% of revenues in the last 12 months). In fact, more M&A is expected to occur in the industrial space in order to complement TUSK's existing businesses and diversify earnings further from oil & gas.

So, these were positives, indeed. However, the key takeaway from Mammoth's call was the fact that not only is its infrastructure business sustainable and growing (judging by the move into the continental U.S. from Puerto Rico), but its sand and completions segment is expected to rebound in 2019. As most volatility in TUSK's share price is tied to oil & gas at the moment, we will discuss these developments in sand and completions further below.

Pressure Pumping Expected To Rebound

To echo what countless others have said, TUSK’s pressure pumping is set to rebound in 2019 when E&P budgets are reset, and the fourth quarter is already showing signs of a recovery as additional pipeline capacity is starting to become available. This bodes well for TUSK’s pressure pumping segment, which has three fleets located in the Marcellus, and another three in the mid-continent.

Other business lines will benefit as well, including crude transport and frac sand. TUSK’s relatively new crude transport business segment sports 44 fleets with 20% margins, and contract winnings in this space are expected to increase. However, its frac sand business showed some temporary weakness.

Sand Segment Showed Weakness

Mammoth idled its higher-cost Muskie frac sand plant due to weaker pricing in the third quarter, which was $37.88 per ton on average. Production costs of $10 to $12 per ton at its lower cost Piranha and Taylor mines, which compete with some of the best in the industry, are expected to fall further to $10 or $11 once activity ramps and new manufacturing techniques are implemented.

The company thinks it can get that number down even further, actually, which would take its Piranha and Taylor costs down below $10, and overall cost per ton down from $14.50, allowing for current EBITDA per ton to appreciate from $23. Needless to say, the possibility for future innovations to drive costs down is not only a plus for Mammoth, but for the frac sand industry as a whole.

Much like pressure pumping activity, the weaker pricing environment for frac sand is expected to rebound in 2019. In fact, pre-fills will already be occurring in the back half of 2018, according to TUSK, and this is perhaps due to more pipeline capacity being added or activity from 2019 being pushed ahead.

So, pre-fill orders, along with over 15 million tons of frac sand being idled by other industry players, should allow pricing to rebound modestly from the $30s in the fourth quarter. This, in turn, should boost margins. Even if pricing stays weak, contracts for multiple grades were still inked for several years out to ensure a destination for its 4.4 million tons of annual capacity.

Risks

Risks to Mammoth’s story are elevated as sentiment remains poor in the oilfield services space. This is due to a number of reasons, including a lack of pipeline capacity and weaker pricing for various business segments like frac sand. However, these issues are all transitory and are expected to be resolved in 2019.

Sand contracts were also broken last quarter as cheaper spot rates from other miners were more attractive for E&Ps to use than TUSK’s contracts inked at higher prices. But, the contracts are long term and TUSK’s customers remain committed. Customers will need to stay contracted with TUSK in order to offset higher spot prices coming when oil & gas activity resumes in 2019.

On the financial side of things, we already mentioned above that net income was strong for a company operating in such a tough environment. TUSK’s balance sheet carries zero debt, and cash flow is only expected to increase. Last but not least, TUSK is working with MSCI on changing its categorization as an oilfield services company to that of a safer, industrial company, which should attract a more stable investor base in the future.

So, with a strong financial condition, diversified business model, and transitory issues that are expected to dissipate, TUSK’s risks remain in check at the moment.

Conclusion

Mammoth is seeing temporary weakness in its oilfield services segments that should remain throughout 2018. However, the turnaround is coming in 2019, and signs of a recovery are already expected to occur in the fourth quarter of 2018.

Even if activity remains slow due to pipeline delays, TUSK is diversifying revenue streams with a strong industrial business and is also lowering costs at its frac sand plants to increase margins. As a result, the recent pullback from $30 to $20 is proving the buying window investors have been waiting for, assuming the recovery in 2019 goes as expected.

This article was written by

Todd Akin profile picture
2K Followers
Graduated from the University of Houston- Downtown with a degree in Finance. My site, Wallstreetstocksolutions.com, focuses on portfolio management and unique investment opportunities.
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Disclosure: I am/we are long HCLP. 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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