ProPetro Holding: Hold The Pumps (NYSE:PUMP)

Shares of ProPetro Holding Corp. (NYSE:PUMP) have done quite all right coming out of the Covid-19 pandemic. After oil prices, and thus capital spending, collapsed in 2020, they quickly recovered in 2021, and certainly in 2022 as the world (or at least large parts of it) are facing an energy crisis.

My last take on the business dates back to April 2020, when I concluded that the company was entering a period of turmoil with relative strength.

A Quick Reap

In April 2020, shares of ProPetro were facing very tough price action, as an anticipated OPEC production cut in response to the outbreak of the pandemic was not seen. The world would even see negative oil prices soon thereafter. While this was a dismal position to be in as a supplier to the E&P sector, yet ProPetro Holding Corp. held a resilient balance sheet, a key distinguishing factor.

The combination of very low expectations and balance sheet integrity provided potential, yet the risk-reward was hard to gauge given the fluid conditions at the time.

ProPetro was founded in 2005 by providing hydraulic fracturing and related services. The company went public in 2017 in an offering which attracted relatively little information with little demand seen for its shares at the time. Shares went public at $14 per share, giving the company a $1.2 billion equity valuation on the back of a business which posted a 23% decline in 2016 sales to $437 million, with operating losses posted at $38 million, results which left me a bit puzzled.

The company has seen a strong recovery as utilization rates and capacity grew to 690,000 horsepower. This made that revenues for the year 2017 rose 125% to $982 million on which EBITDA of $137 million was reported, with net earnings posted at $13 million. This still translates into sky-high earnings multiples as the nature of the business requires a lot of capital spending.

2018 revenues grew another 74% to $1.7 billion on which earnings of $174 million were reported, equal to $2 per share, causing shares to rise to the mid-twenties. 2019 revenues rose further to $2.1 billion as earnings fell to $163 million, for earnings of $1.57 per share. Earnings fell as activity levels dropped off during 2019, as shares were down to just $10 ahead of the pandemic already.

With oil trading at $23 in April 2020, shares traded at just $4 per share, translating into a market value of around $400 million, far below the book value of the company at around a billion, with a small net cash position held by the firm and the company trading at just 2 times earnings reported in 2019. Factoring in the observation that the company would likely outlive many peers given its strong balance sheet, a speculative position seemed warranted, as excessive volatility might cause trading opportunities as well.

Recovering

Since a tough 2020, ProPetro Holding Corp. shares rallied to the teens in the spring of 2021, fell to the mid-single digits later that year, hit a high around $15 early in 2022, and now trade at $10 again.

2020 results were dismal by all means, as revenues fell from $2.1 billion in 2019 to just $789 million, on which a $107 million loss was reported. The results were even aided by a relative strong first quarter, as fourth quarter revenues trended at just $600 million, with losses being very substantial. It was promising that net cash was reported at $69 million.

The company grew 2021 revenues to $875 million, with revenues trending around a billion by the end of the year. The company posted an operating loss of $68 million for the year, almost entirely the result of losses on disposal of assets.

First quarter sales for 2022 rose to $283 million as the company returned to profitability, having posted an operating profit of $5 million and change. Second quarter sales rose further to $315 million, now accompanied by a $40 million operating loss on the back of a $57 million impairment charge.

In November, the company posted third quarter sales of $333 million, marking further sequential sales growth, with operating profits posted at $14 million even after accounting for a $36 million loss on disposal of assets, an expense which has been incurring quite frequently in recent quarters, almost to be considered a structural cost (certainly as this is a cash item).

The 105 million shares now support a roughly $1.05 billion equity valuation here, which still includes approximately $52 million in net cash. Cash flow is under pressure on the back of capital expenditures, this year pegged at $350 million. At the same time, it has been write-downs which hurt depreciation charges, now trending at just around $125 million, indicating huge negative free cash flows as activity levels recover and assets are replaced. The company itself posted EBITDA at a rate of $360 million, valuing its operating assets below 3 time EBITDA.

Alongside the third quarter results, ProPetro announced a $150 million deal to acquire Silvertip, a completion service company operating in the Permian in a deal valued almost equal to 15% of its own valuation here. Roughly two-thirds of the deal was paid for in stock, the remainder with cash and assumption of debt. The deal is set to add $70 million in EBITDA in 2023, being forward looking metric, at just over 2 times EBITDA. In either case, the deal looks quite accretive to cash flows, but seems quite fair in relation to the own valuation here.

And Now?

ProPetro Holding Corp. remains a very cyclical play, and as we might hit a new period of turmoil, or at least lower oil prices, the company might see renewed pressure on the business as well. The company has done well coming out of the 2020 risks on the back of the balance sheet integrity, something which it maintains, although the net cash position has likely been eliminated entirely following the Silvertip deal.

The issue is that the underlying ProPetro Holding Corp. business is very cyclical, as the huge write-downs in poor times exceed the profits in the good times. This inherent cyclicality means that I see no need to market-time ProPetro Holding Corp. stock here, with cyclicality being too dangerous for long-term investors.