By:
Ben Schmidt, 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
• Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) manufactures and
primarily rents it mobile proppant and chemical management systems that unload,
store and deliver proppant and chemicals at oil and natural gas wellsites.
• Since the start of
2017, SOI has increased its mobile proppant management system offerings from 77
to 161.
• They posted YoY revenue
growth of 193% totaling $197.196 million. This was mainly attributable to an
expanded fleet of mobile proppants that led to a record 40,256 revenue days.
• The company introduced
its AutoHopper technology on 25% of its current fleet and is expected to
retrofit its remaining fleet within the next 12 months. This technology
eliminates the need for personnel to man the control system.
• Gross margin increased
to nearly 60% in 2018 contributing to their bottom line and subsequent EPS
growth
Key points:
In December, SOI and its
main customer amended their contract at the Kingfisher logistics facility. They
received $26m in termination fees that will be deferred until
4Q2020 in $3m allotments. Although they recoup some of its cash from
the breached contract, it does hurt future cash and gives rise to uncertainty
about this logistics facility. Logistics accounts for roughly 5% of total revenue.
Despite this, SOI
increased its share of market to about 30%. They've been able to do this
by not only expanding their mobile management proppant systems but also by
rolling out 10 new mobile chemical management systems; this system eliminates
the middle man when inserting chemicals into the well. One controller can now
regulate the flow based on the data being received. It began its trial in
4Q2018 and had great success. In addition to this, they further integrated
their supply chain from mine to wellhead. With the incorporation of Solaris
Lens into Railtronix, it provides greater automation and real time tracking. SOI
continually cuts costs for their customers with these technological
advancements in an industry where it's all about margins now.
Non-production times were
.06% of total operating hours, proving the reliability of their products.
Pricing in the back half of the year went flat and is expected to stay flat
rolling into the first half of 2019. Many of its competitors experienced
similar problems, but management is trying to differentiate and add value with
its new products. If they were to see tangible results, expect them to come
sooner rather than later as completed wells will grow only moderately.
What
has the stock done lately?
In the beginning of December, SOI
issued its first cash dividend of $0.10/share. Management felt that it was an
appropriate time since they finally started turning a substantial enough profit
to do so. Shareholders are starting to value profitability rather than growth
for Solaris. Furthermore, the amended contract came shortly after the cash
dividend announcement, negating any positive outlook from the cash dividend.
Since then, shares have rebounded from near historic lows of $11.00 to $16.46,
appreciating 49.6%.
Past
Year Performance:
SOI
has experienced a tumultuous year with the stock making strides to get back to
its 52-week high. On the positive side, Solaris continually beats earnings,
marking its fifth straight beat in 4Q2018.Because of the earnings beats, more
analysts have upgraded their ratings with bullish sentiment. On the other hand,
SOI filed for a $500m shelf registration of mixed securities in the middle of
October sending the price tumbling. The price went from $19.20 to $13.50 in two
weeks, depreciating 31.0%.
Source:
FactSet
My
Takeaway:
I think AIM should
continue to hold SOI and stick to the thesis at hand. SOI has exceeded
expectations in terms of Sales, Net Income and EPS although the stock price
doesn’t reflect that. Solaris seems to be facing headwinds from an unfavorable
industry environment in the early half of 2019. Upstream budgets have been
reduced but completions should hold steady. To maintain market share or to even
expand it, it will come down to whether these technological advancements hold
enough value of increasingly frugal upstream drillers
Source:
FactSet
