By:
Connor Jones, AIM Student at Marquette University
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.
Summary:
• 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.
