- The company booked a loss of $15.2 million in Q3 2021 as interest expenses topped $10 million.
- Net debt is over $300 million and the shareholders’ equity is deep in the red.
- The fracking fleet sector has significant capital requirements and many companies, including U.S. Well Services, have struggled to generate profits even during good years.
- I continue to be bearish, and the short borrow fee rate stands at 14.4% as of the time of writing.
In May and August, I wrote bearish articles on U.S. Well Services (NASDAQ: USWS). The company doesn’t seem to be in danger of insolvency anymore but it posted weak results for Q3 2021, with a loss of over $15 million. Interest payments and dividends on preferred shares were equal to over a quarter of revenues. Some of the issues have been fixed but the problem is that net debt is over $300 million and the shareholders’ equity is deep in the red.
Overall, I just don’t see much value left for the investors in common shares, and I expect the company to carry out a capital increase in the near future to repay loans. In view of this, I continue to be bearish on U.S. Well Services. Let’s review.
Overview of the recent developments and Q3 financials
U.S. Well Services owns one of the largest electric fracking fleets in the USA and it ceased operations of its last active conventional diesel fleet in August 2021. It currently has a total of five active electric fracking fleets.
(Source: U.S. Well Services)
These e-frac fleets use the company’s patented Clean Fleet technology, which it claims can cut emissions by 99% and generate operational cost savings of over 90% of fuel costs.
However, the financial performance of U.S. Well Services has been dismal for a long time and Q3 2021 was no exception. What was interesting this quarter was that the company didn’t even manage to book a gross profit as revenues were lower than the cost of services excluding depreciation and amortization. Another issue was that the increasing debt burden is starting to really take its toll as interest expenses topped $10 million. In addition, dividends to the owners of its preferred shares stood at over $5 million.
(Source: U.S. Well Services)
On a positive note, all Series B preferred shares were converted into 25,565,707 common shares on September 17.
So, why are the Q3 results so weak? The issue is certainly not the revenue side as revenue per fully utilized fleet went up by 13% quarter-on-quarter while the service and equipment revenue per pump hour was the highest in a year. This is to be expected as e-frac fleets attract premium pricing relative to conventional diesel fleets. Then we must turn our attention to the costs. The company still maintains high staffing levels in anticipation of the deployment of its new 60,000 hydraulic horsepower Nyx Clean Fleet in 2022. On September 30, U.S. Well Services revealed that the first one of those should be delivered in late Q1 2022. Another three are expected to be delivered by early Q3 2022.
(Source: U.S. Well Services)
Looking at other factors for the large Q3 loss, U.S. Well Services revealed at its Q3 earnings call that it was seeing rising labor costs across the industry and that it implemented a 15% increase in hourly pay rates for its field employees near the end of the quarter. The company also spent around $2 million for the transition of some fleets to an outsourced power generation business model and to prepare conventional diesel equipment for sale. There were also $1 million write-downs in the value of spare parts inventory related to conventional diesel-powered equipment. Overall, U.S. Well Services incurred around $5.5 million of one-time costs in Q3. The company also pointed the finger at rising costs of inputs as well as services including trucking. The issue is that U.S. Well Services doesn’t seem able to pass much of this inflation to its customers, at least for now.
There were also those over $10 million in interest expenses that I mentioned. Overall, I don’t think the business is sustainable with the structure of the current balance sheet. As of September, U.S. Well Services had net debt of $334.3 million and its shareholders' equity was minus $108.5 million.
(Source: U.S. Well Services)
Considering CAPEX is expected to come in at between $5 million and $10 million in Q4, the company isn’t at any risk of insolvency. However, the situation could become dire in the first half of 2022 as the remaining CAPEX for the Nyx Clean Fleet is about $85 million to $90 million. U.S. Well Services mentioned in its Q3 earnings call that it’s looking at a combination of licensing, sales, financing, and equity to fund that CAPEX, so I think you can expect more stock dilution here in the near future. Take into account that U.S. Well Services has significant incentives to bring down the outstanding principal on its senior secured term loan. Bringing the latter down to $132 million by the end of 2021 will decrease the interest rate to 0% for Q1 2022. If the outstanding principal drops below $103 million by the end of Q1 2022, the interest rate for Q2 through Q4 of 2022 will be 2% and 1%, respectively.
Looking at the Q4 2021 results, keep in mind that this industry is seasonal which means that they shouldn’t be strong. I’m not expecting any fireworks for 2022 either as there are now several companies entering the e-frac business which should drive down margins. U.S. Well Services introduced the first all-electric fleet in 2014 and has been a pioneer in the field but I think the reason that many competitors stayed away from this business until recently was that it wasn’t feasible from a financial point of view. Overall, I don’t see how the e-frac sector will be able to generate significant free cash flow in the future without significant consolidation.
This was another quarter to forget for U.S. Well Services as the company posted a loss of over $15 million and the shareholders’ equity continues to be deeply in the red. The company can significantly decrease the interest payments on its senior secured term loan if it manages to pay off a large chunk of the outstanding principal, which is why I expect a capital increase in the near future to fund this operation.
The remaining CAPEX for the Nyx Clean Fleet is about $85 million to $90 million and I doubt the margins will be impressive by the time those are completed. This is a sector with significant capital requirements and many companies, including U.S. Well Services, have struggled to generate profits even during good years.
Overall, I continue to think U.S. Well Services is significantly overvalued and investors can take advantage of this by short-selling the shares. According to data from Fintel, the short borrow fee rate stands at 14.4% as of the time of writing.
In my view, the main risk for the bear case continues to be share price volatility. The shares of U.S. Well Services have a relatively low trading volume and there have been several spikes in the share price over the past year.
(Source: Seeking Alpha)
This article was written by
Gold Panda has been working as an M&A analyst for over 11 years. He's been investing since 2007. Preferring value to growth, he tends to take a relatively conservative approach in his investing. His focus is on small and micro-cap stocks, which he believes is the area which offers the greatest opportunity to exploit market mis-pricings.Gold Panda is part of the team that runs the investing group Microcap Review. He provides a real-time portfolio to the group. Microcap Review focuses on three areas of opportunity in the micro-cap space: arbitrage and special situations, net-nets and undervalued stocks. Learn more.
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