Wednesday, January 2, 2019

An AIM Small Cap Equity Holding: ProPetro Holding Corp. (PUMP, $15.60): “PUMPed Up For 2019” By: Connor Jones, AIM Student at Marquette University

ProPetro Holding Corp. (PUMP, $15.60): “PUMPed Up For 2019”
By: Connor Jones, AIM Student at Marquette University
Image result for petropro services

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

ProPetro Holding, Inc. (NYSE:PUMP) is a growth-oriented oilfield services company providing hydraulic fracturing and other complementary services to upstream oil and gas companies engaged in unconventional oil and natural gas resources. They operate in two segments: pressure pumping and other services.

• Year-end fleet capacity increased by 64% to 690,000 hydraulic horsepower, or 16 fleets in 2017 and three more fleets have been deployed in 2018, bringing their HHP to 905,000 across 20 fleets.

• Maintained 100% fleet utilization since September, 2016 which helped drive revenue for 2017 to $981.9 million which is an increase of 125% from 2016.

• PUMP grew their adjusted EBITDA to $137.4 million from $7.8 million in 2016, representing an increase of over 1,600%.

• Proven cross-cycle financial performance has given PUMP the ability to increase margins and maintain pricing power through industry cycles that have hurt competitors.

Key points:
ProPetro’s efficiency in regard to fleet utilization has led to improved profitability. During an industry downturn in Q2, PUMP saw competitors having to divert maintenance capital and cannibalize their existing units for spare parts and idle HHP. This resulted in a tightening of hydraulic fracturing supply across the industry. However, PUMP’s 100% fleet utilization enabled them to increase their services provided while increasing their pricing power to take advantage of the excess demand. Cost of services decreased as a percentage of revenue to 73.9% in Q3 compared to 79.9% in Q3 of 2017.

This was driven by increased demand and pricing power and puts PUMP in a favorable position going forward in regards to their competition who were hurt by pricing pressure and low supply of hydraulic fracturing.

Continuing on the topic of efficiency and improving margins, the use of West Texas Regional Sand increased rapidly in Q3 to 57% of ProPetro’s sand pump by their fleet being sourced locally, compared to 35% in Q2. With more regional and sand production coming online in future months, this percentage is expected to increase well beyond the amount in Q3. This transition to regionally sourced sand has allowed PUMP to increase operational efficiencies for their customers due to improved supply chain and related logistics. This also drove the increase in margins and revenue and improving their position in the industry going forward.

Looking more into ProPetro’s position in the industry moving forward, their emphasis customer relations has immensely benefitted them. They have deep, local roots in the Permian Basin with many of their diverse customer base having worked with them since their inception. These relationships and the addition of new customers due to competition being unable to generate adequate supply of services. When the industry had a downturn, PUMP benefitted from their strong reputation with customers by retaining and adding clients as opposed to competitors losing customers to ProPetro and experiencing pricing pressure.

What has the stock done lately?
Over the past three months PUMP’s stock price has fluctuated between $14.57 and $19.61. In these past three months the stock has generated a return of 2.5%. The stock has seen significant volatility during this time too. This was expected as management predicted the industry would go through material changes this year with the goal of ending in a strong position for 2019.

Past Year Performance:
During the past year, PUMP’s stock price has gone from $20.31 to $15.60, representing a return of -23.19%. As seen in the last three months, the stock experienced significant volatility throughout the year. This was expected due to shifts in the industry and when factoring in the volatility in the overall market. This was a strategic year for ProPetro and if it goes as planned, they will have a strong 2019 that provides more stability in price for shareholders.

Source: Google Finance

My Takeaway
ProPetro Holding Corp has developed its reputation in the Permian Basin and placed a high emphasis on efficiency in their operations. This has paid dividends for PUMP lately as evidenced by the increase in demand for their services and their ability to maintain pricing power while their peers have faced pricing pressure. While the stock faced some volatility during the year and has declined in price, I believe the strategy that ProPetro implemented will allow them to have a strong 2019 mainly driven by their increasing margins, revenue growth, and fleet utilization.