Hydraulic Fracturing: A Quick Value Screen

Sep. 08, 2022 4:52 AM ETCFW:CA, CFWFF, CL1:COM, HAL, LBRT, NEX, OIH, SLB, SNVVF, STEP:CA, TCW:CA, TOLWF, VDE, WHD, XES, PUMP7 Comments
Thomas Prescott profile picture
Thomas Prescott
325 Followers

Summary

  • Exploration and production equities have already rebounded to multi-year highs. Many oil field services equities, including hydraulic fracturing equities have lagged the return of exploration and production.
  • EV/EBITDA plots show a sharp drop in late June across most hydraulic fracturing companies indicating improved earnings not yet reflected by price return.
  • Several hydraulic fracturing equities were screened using a value matrix with promising results; three smaller-cap hydraulic fracturing equities appear undervalued.

Value Buzzword Cubes with Magnifying Glass - 3D Rendering

porcorex

Why Hydraulic Fracturing

Exploration and production (E&P) equities have already rebounded to multi-year highs. In the US, production from tight reservoirs dominates with 70% of U.S. natural gas and 60% of U.S. oil produced from tight reservoirs according to the EIA. Metaphorically, maintaining production in tight reservoirs is more like mowing the lawn than planting a tree. New wells in tight reservoirs must be drilled and fractured in order to maintain production. At the same time, many oil field services (OFS) equities including hydraulic fracturing companies (HFCs) have lagged the recovery of E&Ps.

On July 19th, Halliburton (HAL), the world's biggest provider of hydraulic fracturing, reported Q2 results with solid beats on earnings and revenue. Seeking Alpha reported North American Q2 revenues grew 55% Y/Y and quoted CEO Jeff Miller:

In North America, I expect Halliburton to uniquely maximize value in this strong, steadily growing, and all but sold-out market. Pricing gains across all product service lines supported significant sequential margin expansion.

Given that HAL, the largest provider of hydraulic fracturing recently posted a big quarterly beat, my thesis is HAL's fabulous earnings trend might soon extend to other HFCs.

E&Ps have rebounded to multi-year high with OFS lagging

5-Year Price History: Crude Oil & Energy ETFs

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Seeking Alpha

5-Year price return is plotted for crude oil (CL1:COM), Vanguard Energy ETF (VDE), VanEck Vectors Oil Services ETF, (OIH), and SPDR S&P Oil and Equipment & Services ETF. Comparing the performance of VDE over the last 2 years to that of crude oil, even E&P's might still be undervalued. OFS, represented by OIH and VDE, are lagging even further behind crude oil over the same time period. Notably, XES is lagging its OFS peer OIH by over 7%.

Market Cap Distribution: OIH and XES

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Author, BOA Data

I recently analyzed OIH and XES in light of US production from tight reservoirs and rated both a buy. Both are 100% OFS ETFs, but OIH holdings are dominated by giant and large caps including SLB, HAL, and BKR while XES holdings are distributed towards medium and small caps.

Haliburton and Smaller Cap Hydraulic Fracturing Peers

5-Year Price Return

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Seeking Alpha

5-year price return is plotted for six hydraulic fracturing companies (HFCs): HAL, NexTier Oilfield Solutions (NEX) ProPetro Holding Corp (PUMP), Trican Well Service (OTCPK:TOLWF), STEP Energy Services (OTCPK:SNVVF), and Calfrac Well Services (OTCPK:CFWFF). Most are rebounding from 2020 lows, yet all are still below 5-year highs.

Historical EBITDA (TTM)

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Seeking Alpha

EBITDA (TTM) is plotted over 3 years for the same six HFCs. TOLWWF EBITDA has grown over 400% since Late 2020. The other 5 HFCs have increased EBITDA about 50% since mid-2020.

EV/EVITDA (TTM)

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Seeking Alpha

EV/EVITDA is plotted for the same six HFCs over 6 months. The steep decline in late June is concurrent across all six HFCs and the beginning of crude oil's slide from a short-term peak of about $111/bbl to less than $90/bbl presently. The sharp drop in EV/EBITDA is amplified by increased EBITDA not yet reflected by price return. Based on EV/EBITDA, the smaller cap HFCs are each more favorably valued than HAL. Unrecognized value appears to be indicated and a further screen could be useful.

Hydraulic Fracturing Companies: Value Matrix

EV/EVITDA is a common value metric and is the primary factor for the value matrix. Smaller EV/EBITDA values are most favorable. The value matrix and its factors were designed and calculated by the author within a downloadable Excel spreadsheet with Seeking Alpha sourced data. The value matrix is designed to enhance the primary factor (EV/EBITDA) by subtracting secondary factors: growth, profitability, ownership, and debt. My intention is that the matrix identify those HFCs with the most value, growth and profitably. Further, ownership and debt factors are considered at 1/2 weight. Please note NEX source data for growth was unavailable and that value is tabulated as zero.

Value Matrix Chart

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Author, Seeking Alpha Data

In addition to those HFCs previously discussed, Cactus (WHD) and Liberty Energy (LBRT) are included in the value matrix screen. For each HFC: the value matrix, its primary factor - EV/EBITDA, and its secondary factors are plotted on the Value Matrix Bar Graph below.

Value Matrix Bar Graph

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Author, Seeking Alpha Data

Value matrix is represented by the dark green bar, and is the sum of the factors.

EV/EBITDA - the primary factor (the blue bar).

Growth Factor - this secondary factor (the purple bar) is normalized by dividing each HFC's EBITDA YoY by the average of that metric, its weight is 1.

Profitability Factor - this secondary factor (the light green bar) is normalized by dividing each HFC's EBITDA Margin by the average of that metric, its weight is 1.

Ownership Factor - this secondary factor (the light blue bar) is normalized by dividing each HFC's Insider % by the average of that metric for, its weight is 1/2.

Debt Factor - this secondary factor (the red bar) factor is normalized by dividing each HFC's Quick Ratioby the average of that metric, its weight is 1/2.

Investor Takeaways

Based on the value matrix, those investors who hold WHD, HAL, and LBRT may wish to review their positions; HFCs with lower matrix score may hold more promise. These include PUMP, CFWFF, and SNVVF. However, the matrix and/or its factors may not forecast future price return of any of the HFCs screened. The performance of factors considered may not be repeatable going forward; eg exceptional growth may not be repeatable. Every investment decision regarding an individual equity should be based on comprehensive analysis of that equity.

Pump has recently been covered by Fluidsdoc in a thorough and well written analysis. SNVVF was recently covered by Laurentian Research in an exceptionally well written and rigorous analysis. Be on the lookout, I may cover CFWFF soon.

Investors should consider the value matrix a screen only. The matrix; primary factor; secondary factors, normalization method, and weights could all be adjusted and yield different results. Some readers may conclude that I have created a horrifying monster. I would appreciate their feedback: download the Excel spreadsheet and work it over to better screen HFCs given current market conditions & available data. Or modify it completely and apply it to whole new set of fuzzy data. I hope some readers find it interesting and I look forward to comments.

Wonder is the beginning of wisdom - Socrates

This article was written by

Thomas Prescott profile picture
325 Followers
I most often base my analysis on company fundamentals, industry specific data, and broader economic trends. I read company quarterly presentations, but very rarely cut and paste presentation content and include it my analysis. Those presentations are put together specifically to present company data and results in the most favorable way limited only by SEC regulations. I have not seen a single company presentation advising investors to sell.I sometimes work with fellow Seeking Alpha author Badsha Chowdhury.

Disclosure: I/we have a beneficial long position in the shares of PUMP, XES either through stock ownership, options, or other derivatives. 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.

Additional disclosure: As investors, we do a lot of reading and it can become tedious. I hope investors find my writing to be useful, actionable, and even less-than-painful to read. I write not only to share my own views but also to expose my analysis to criticism. I look forward to reader comments in opposition to my views most of all.

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