Future Growth Opportunities Push Solaris Oilfield To Reduce Capex

Badsha Chowdhury profile picture
Badsha Chowdhury


  • Solaris is unlikely to add to the proppant solution system fleet in 2H 2019.
  • The last mile proppant supply system can push the company’s growth upwards in the medium-term.
  • It has lowered capex guidance to improve free cash flows in FY2019.
  • The company’s balance sheet, which has a zero-debt, will give it an advantage if the energy price declines.
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Solaris Is Unlikely to Recover Soon

Solaris Oilfield Infrastructure (NYSE:SOI) provides supply chain management and logistics solutions to the energy industry, including mobile and permanent infrastructure that increases proppant throughput capacity. Given the current headwinds in the energy market, I do not think the stock price will exhibit positive momentum in the short-turn. In the medium to long term, I expect the company to increase market share, which will lead to higher returns from the stock.

SOI is integrating the Last Mile trucking with the well site rental equipment, which can become the growth catalyst. Its operating margin is expected to hold relatively steady due to potential re-contracting at more favorable rates and the application of the fully delivered systems.

The primary challenge for SOI is the tightness in the upstream companies’ capex budget. To increase free cash flow, the company plans to reduce capex in FY2019. As growth hit the ceiling, the company has started focusing on shareholder returns by initiating dividend payment. A zero-debt balance sheet and ample liquidity ensure that the company has the ability to carry out business even if the energy market environment deteriorates.

How Is SOI Delivering Value?

The specialized rental business typically has high margin and payback periods are low. So, the company is trying to position itself as a premium provider for bundled solutions. While the commoditized rental business (premium drill pipe) generates ~60% EBITDA margin, the manufacture-owned specialized rental products yield ~70%. You may note that the company’s customers include operators, pressure pumpers, sand companies, and logistics companies. In Q2, SOI recorded 63% EBITDA margin on this business. So, if it can gain market share as a premium provider, there is an opportunity to improve margins as well.

Although offering bundled solution constituted only a minor portion of the total revenues (5% of

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This article was written by

Badsha Chowdhury profile picture
I have more than 14 years of experience in analyzing and writing on stocks. I write on both long and short sides in an unbiased manner. I have been covering the energy sectors for the past 7 years, with the primary focus on the oilfield equipment services sector. I also cover the Industrial Supply industry. I occasionally co-author with Seeking Alpha contributor Thomas Prescott.

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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