Introduction
Mammoth Energy Services (NASDAQ:TUSK) is an oilfield services provider with its fingers in a number of other pies. Over a dozen business entities are contained in its corporate structure. The former primary business, its legacy pressure pumping and frac sand operation for the oil industry, forms the original piece. Through their subsidiaries Higher Power and 5-Star they provide civil engineering and infrastructure reconstruction services for municipalities and regional governments. Of note is the work 5-Star/Cobra did of this type for FEMA/PREPA in Puerto Rico several years ago. (Work for which they are now in litigation hoping to receive due compensation.)
And, if that wasn't enough for a legacy fracking company to bite off and chew, they also have another subsidiary, Aquawolf, that pursues Engineering, Procurement, and Construction, (EPIC) type work. Notably with some recent success! Just a few weeks ago they announced a substantial EPIC contract with an unnamed utility worth $40 mm to provide services of this type. The secrecy here is curious... but, we're not going to dwell on it at present.
They also have minor businesses that provide ancillary services like helicopters, coiled tubing, drilling rigs, and a host of other services. These were largely dependent on Gulfport Energy (OTCPK:GPORQ) with whom they have, shall we say, a "complicated relationship." We will elaborate on that a bit, but not go into any detail on these other services.
So the task here is to decide is the current price for their shares an attractive discount from future value or a reflection of a troubled business model. It's noteworthy that at a time when energy shares, generally speaking, are surging with the rise in oil prices, shares of TUSK are down. In fact during the few hours I've been writing this article the companies stock is down 8%, and appears headed for further decline today when the market opens.
Do we, or don't we? And, if we do...at what price?
A bit of preamble
I'm going to go out on a limb and suggest that Wishin' and A Hopin', a song written by the formerly famous song writing team of Hal David and Burt Bacharach, and made popular by Dusty Springfield in 1964... has been recorded for the last time. The sentiments evinced in the lyrics have long been discarded by society. For good or ill remains to be seen, but I don't see Taylor Swift recording this one... I just don't.
So much for the trip down memory lane! We are gathered here today to discuss Mammoth Energy Services, a company with a very strawberries and daffodils view of the usual outcomes of the American bankruptcy process. Hence the reference to this golden oldie from the 60s. It popped into my head when I was reviewing the recent TUSK SEC filings in the research for this article. It's hard to imagine anyone in the oil industry is doing more wishin' and hopin' than the good folks at TUSK. I'm referring of course to their optimism about eventually collecting hundreds of millions from PREPA, the Puerto Rican Electric Power Authority, an entity now in Chapter 11 bankruptcy proceedings. Collecting money from entities in bankruptcy proceedings is a fairly common theme at TUSK as we will discuss a bit further down the column.
TUSK is repositioning itself to replicate its early success in infrastructure repair business and that could very possibly be its salvation. This is a business that's primed to grow exponentially over the next few years thanks to the new political regime's commitment to spending of this type. Toss in a few hurricanes and tornadoes, and this business could really rip in the near future.
The thesis for TUSK
The company is involved in two core businesses that are on an ascendant arc. The fracking business is enjoying a substantial recovery as we have noted in recent articles on frackers. I will link them here for new readers. Investing in companies in a business that is on the rise is a good way to build some capital, subject to a couple of provisions. I will point these out later.
TUSK is a very marginal player in the frack business with a total of 6-frac spreads, a couple of sand mines in Wisconsin - one of which is shutdown and the other operates at 12% of nameplate capacity, and an assortment of other equipment available for rental. In 2020 the Oilfield Services segment contributed about $128 mm of their revenue. The company did mention in their recent call that they are receiving increased bidding opportunities as we head into the second quarter of '21. This is good as they are at loggerheads with their former principal client-Gulfport Energy.
Worth noting on pressure pumping is conversion of their pumps to DGB-Dyanamic Gas Blending which enables the switch from diesel to LNG. This would probably have a reduced carbon footprint from before, and might increase the attractiveness of TUSK's fleet. I don't see it as much of a game changer as electric frac pumps though. I could be wrong here though.
As discussed, the EPIC business also is going to do well. The government, once it settles the current COVID relief package, will very likely begin deliberating a huge multi-trillion dollar infrastructure package that could very well benefit companies like TUSK. Rising tides lift all boats! Now, I could try and describe their prowess at securing this sort of work, but I would never do as well as some old older articles by a former contributor who helped to put this company on the map.
I'm referring of course to Mr. Bert, a now deceased, retired Wall Street trader who devoted a good bit of his early writing to TUSK. These are worth reading as Mr. Bert went into great detail as to why TUSK would be successful in the E&C business as well as the fracking business. Ignore his financial projections as of course the thesis fell apart as the oilfield service industry imploded over 2019-20. Focus instead on the very elaborate detail he provided on the core of the EPIC business that TUSK proved they could capture. Mr. Bert was one of a kind, and I miss his voice on this site.
"Mammoth Energy Services update"
"Mammoth Energy Services: A Massively Profitable..."
In 2020 infrastructure services contributed ~$155 mm or almost half their revenue. This is down a good bit from 2019 and we can lay much of the responsibility for this at the pandemic's door.
So with that preamble, there are only a few things we need to review. Liquidity, growth prospects, and timing.
Financial metrics: Liquidity and cash flow trends flash danger signals
TUSK has ~$15 mm in ready cash and about $39 mm on a revolver that adjusts to the LIBOR, raising a spectre of increased interest payments if rates rise. It's noteworthy though in a depressed market they raised cash over the same period of a year ago. This is could be due to working capital adjustments that struggling companies often make to stave off insolvency, or make their balance sheets a little more palatable.
With cash from operations of ~$7 mm for 2020 and expenses north of $350 mm over this period, TUSK did not enter 2021 on a good note. Some this expense is asset and goodwill impairments, but the lack of real revenue in excess of the cost to generate said revenue is an ongoing issue for the company.
Some concerns about ownership
The bulk of TUSK's common stock, collectively about 66% is held by two entities, Wexford Capital and Gulfport Energy - which also is their largest fracking and sand client and in which is also in bankruptcy proceedings, and with which they are also in litigation over breach of contract to the tune of about $46 mm. This is pretty tangled up in my estimation and raises a lot of red flags. The question is are they priced in to the stock at this point?
PREPA money
I have not made an exhaustive analysis of this whole matter. What I can say is the company seems to have summarized it fairly well in their annual report. To my mind, it paints a fairly gloomy picture for any future recovery by TUSK, and should be disregarded by investors evaluating taking a position in it.
As of December 31, 2020, PREPA owed the Company approximately $227.0 million for services performed, excluding $74.3 million of interest charged on these delinquent balances as of December 31, 2020. The Company believes these receivables are collectible. PREPA, however, is currently subject to bankruptcy proceedings, which were filed in July 2017 and are currently pending in the U.S. District Court for the District of Puerto Rico. As a result, PREPA's ability to meet its payment obligations is largely dependent upon funding from the FEMA or other sources. On September 30, 2019, Cobra filed a motion with the U.S. District Court for the District of Puerto Rico seeking recovery of the amounts owed to Cobra by PREPA, which motion was stayed by the court. On March 25, 2020, Cobra filed an urgent motion to modify the stay order and allow the recovery of approximately $61.7 million in claims related to a tax gross-up provision contained in the emergency master service agreement, as amended, that was entered into with PREPA on October 19, 2017. This emergency motion was denied on June 3, 2020 and the court extended the stay of our motion. On December 9, 2020, the Court again extended the stay of our motion and directed PREPA to file a status motion by June 7, 2021. In the event PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to the Company or (iii) otherwise does not pay amounts owed to the Company for services performed, the receivable may not be collectible.
There also are legal complaints that have been filed by various entities against current and former executives of TUSK and their Cobra subsidiary. Some of the other litigation is founded in suspicions of malfeasance in regard to the PREPA work.
It will surprise me greatly if TUSK ever sees a dime from PREPA. Now it's fair to say the company disagrees with this sentiment and believes these amounts are collectible. Time will tell.
Your takeaway
Pretty much everything about TUSK in the recent past screams stay away, but the share price. So if we decide to take a flier on them what should we be willing to pay?
I don't see them being much of a factor in the fracking business due to their small size. That doesn't mean they couldn't find a client willing to pay for these DGB units though. The sand mines in Wisconsin are an outlier. They turn out a great product, but the industry isn't willing to pay much for sand quality these days. I really don't see a lot of value in this segment where there are really too many players for the still substantially reduced market from a couple of years ago.
The future of the company is undoubtedly in the EPIC/Infrastructure business for which they have shown an ability to secure work, and is growing and will continue to grow for the foreseeable future.
CEO, Arty Strelha comments on this growth opportunity:
Our infrastructure operating subsidiaries, Higher Power and 5 Star, are well respected by the utilities they work for and are expanding their customer base. Aquawolf, our engineering business, is expected to expand both the number of engineers and breadth of work performed following the recent signing of a multi-year contract with a major utility.
On an EV/EBIDTA basis the company is trading on adjusted basis at ~6X suggesting they are reasonably valued at current levels. Given the entangled business structure they now have and the adversarial relationship with one of their largest shareholders, I'm not inclined to put much faith in this as a basis for determining the true value of the company. With only about 45 mm shares outstanding, if either one of their two largest shareholders were to sell a substantial portion of their stock smaller shareholders could be adversely affected. The company also could use this opportunity to raise capital which if successful might dilute current shareholders.
It's also difficult to say if TUSK will be broadly successful in securing infrastructure work in this country. Most of their historical revenue of this type has been from PREPA and associated with their original contract and extensions. As such I'm not going to infer any revenue gain to justify an incremental value above an arbitrary $1.00 per share.
If the stock were to sink to this marginal level it might be worth taking a stake, as the book value of the company ~$550 mm would cover liabilities of $263 mm with a substantial bit left to pick over at the Sheriff's auction
Bottom line. TUSK is a company in substantial disarray with litigation on a number of fronts, much of which doesn't appear to be going their way. Not only are they suing and being countersued by the various entities we've discussed, they are being sued by the company who feels they should have gotten the PREPA work, Mastec Renewables. They also have class-action shareholder lawsuits underway, as you might be expect.
If this is a pond you think you would like to swim in, what else can I say... you've been warned. Only the hardiest of investors, prepared to lose their entire investment, should consider taking a position in TUSK. As previously noted, I think there's a lot of "wishin' and hopin'" in the C-Suite at TUSK.
