The market is rapidly moving towards the industrialization of land drilling, in search of optimized, lowest cost repeatable drilling performance. For PDS, scale and technology will enable them to be an industrialization leader, pushing the limits of technology automation in aspiration of ultimately developing a closed loop drilling system that automates the entire well construction process.
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Decent print and ok guidance lead to some outperformance today (5/2/17) (FI +1.6% vs OSX -1.2%). YTD FI down 26% vs OSX -19%. Maintain UP rating as FI, despite trading near all-time lows, is still trading at 16.4x our ’19 EBITDA. Reducing YE18 PT slightly to $9.0 (12.5x WR’19 EBITDA) from $9.50 on modesty lower ’19 EBITDA.
Excluding $3.1mm in other charges and $5.7mm equity compensation, FI reported Adjusted EBITDA of $1.5mm (-$4.2mm EBITDA after deducting equity comp), above Consensus/WR of $0.7mm/$0.5mm. Revenue of $111mm (+3% q/q) was above Consensus/WR of $108mm. Every segment’s revenue, excluding US Services where GoM fell 15% q/q, beat WR estimate. In terms of EBITDA, International and Tubular Services Adjusted EBITDA of $5.3mm and $2.3mm, respectively, beat WR International/Tubular Services EBITDA of $4.5mm/$0.0mm. International revenue and margins benefited from West Africa work and Tubular Services benefited from lower costs and slightly higher revenue than WR expected. US GoM commentary indicated both loss of high margin work and competitive pricing impacted results. 1Q CFO/FCF were -$9.4mm / -$21.2m. See variance below.
FET closed down 6.5% Friday (4/28/2017) vs OSX -0.4%, now down 16% this month. While we like FET’s exposure to US onshore consumables, which likely continues to benefit from reactivation of less maintained equipment, the stock is currently trading 17.9x/11.5x on our ‘18/’19 EBITDA, a 50% premium to its onshore levered service peer group, above the historical average of ~30%. And despite a $23 mid-cycle value, implying an 11% CAGR to 2020 (our mid-cycle yr), we maintain PP rating due to our more cautious ’18 view, where we see ~30% downside to Consensus. YE18 PT to $18 (11.5x WR ’19 EBITDA) from $21.
Despite ’17 Consensus EBITDA decreasing ~5% last week after BHI’s 1Q results, shares finished the week up 3%, outperforming OSX (-2%) and HAL/SLB (-3%), both OP rated. Following the merger with GE O&G, ~50% of New BHI EBITDA will be generated from oilfield equipment type businesses, which typically have less cash flow volatility as cycles turn. Thus, as investors grow more concerned about the sustainability of the current recovery, BHI should outperform other diversified service peers. So no surprise that since the recent selloff in energy, which started back in early Jan, BHI is down only 7% vs SLB/HAL down 16%/19%. On our ’18 pro forma EBITDA estimate, BHI is trading at 12.6x vs HAL/SLB at 12.2x/14.0x, with further relative multiple expansion (vs HAL) possible as we expect the New BHI to be a transformational leader during The Age of Optimization. Based on SOTP (Exhibit 4), new/old PT of $68/$70.
Big fan of new CEO, Mr. McCollum. But for us the hang up remains the balance sheet, especially given our overall cautious view on ’18. We see a path to $3bn of net debt – still implies 1.8x leverage ratio on normalized EBITDA – but it is based on a confluence of events that likely need supportive oil prices, which includes 1) monetizing OneStim equity interest for $1.35bn (see note for analysis), 2) selling land drilling rigs for $400mm, 3) $543mm cash from warrants ($6.43 exercise price & 5/21/19 maturity), and 4) treating the $1.27bn converts (‘21 maturity) as equity. Regardless, even on our below-Consensus estimates we see no covenant/liquidity issues, although they may have to draw on revolver depending on timing of OneStim closing – so they have time, and Mr. McCollum said no need to issue equity. But if our outlook on ’18 plays out, investor aversion will grow for companies with substantial debt, particularly if they continue to burn cash (WR ‘17/’18 FCF = -$202mm/-$146mm). Maintain PP and YE18 PT of $6.50 (see Exhibit 2).
$84mm EBITDA vs Consensus/WR of $88mm/$84mm. Excluding $0.13 of charges, EPS of -$0.32 also missed Consensus/WR of -$0.31/-$0.30. Revenues of $1.39bn (-1% q/q) beat Consensus/WR by 2%/3% while EBITDA margins of 6.1% (+130bps q/q) were slightly below Consensus/WR of 6.5%/6.2%. Land Drilling margins drove the miss vs Consensus. The miss was widely expected (note Consensus EBITDA was ~$105mm a month ago) and since it was mostly Land Drilling, which is a non-core business, likely less impactful to the stock today. FCF was -$219mm (CFO = -$179mm & Capex = $40mm) before accounting for $240mm spent on purchased leased pumping equipment. As such, net debt increased to $6.99bn from $6.55bn See variance below.
Lowering our 2Q17/’17/’18 EBITDA estimate to $102mm/$463mm/$487mm from $124mm/$547/$534mm. Guidance implied ~$100mm 2Q EBITDA, based on 146 rigs at $6k/d and $275mm pumping revs at flat GPM (1Q = 15.7%). On our numbers, SVNT contributes ~$20mm to 2Q EBITDA (71/91 days). Long-term opportunity to leverage PTEN’s larger infrastructure to improve margins, synergy tgt remains $50mm by YE17. Combined company is nearly fully utilized on 100 Super Specs rigs (handful idle) and 98 (remaining Apex [198 total]) potential rig upgrades). Reiterate OP; reduce PT to $24 from $26 PT (9.0x WR ‘19 EBITDA).
Adjusting our 2Q’17/’17/’18 EBITDA estimate to $136mm/607mm/831mm from $124mm/549mm/860mm, mainly on better Wellbore Technology margin progression. We are now roughly in-line with Consensus for ’17 EBITDA but >30% below for ‘18. NOV continues to pivot towards a land narrative (now 57% of revs) as it attempts to replace offshore EBITDA. We see difficulties in pivoting organically; however, M&A can help bridge the gap. The onshore rig market is beginning to improve (for now) with small contractors interested in newbuilds and larger E&Ps and IOCs focused on upgrades until day rates reach a sustained +$20k/d area. Drill pipe bottomed in 1Q but C&P (60% land/40% offshore) is still fighting declining backlog for its offshore business. Maintain Peer Perform (PP) with new PT of $38 (10.5x ’19 EBITDA) vs $41 previously.
Excluding $1.4mm restructuring & transaction expense and $1.8mm Fx loss, FET reported EBITDA of -$3.4mm vs Consensus/WR of -$2.5mm/-$2.3mm and EPS of -14c share (ex 2c items list above) vs Consensus/WR = -16c. Revenues of $171mm (+16% q/ vs +10%-15% q/q guidance) were slightly above Consensus of $164mm, with all segments slightly above. Consolidated EBITDA margins were -2.0% (10% seq incrementals), missing both Consensus/WR of -1.5%/-1.3%. P&I was the largest contributor to the modest miss. Corporate expense of $7.4mm (4Q16 = $6.5mm) came in below guidance of ~$9mm. See variance.
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