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NexTier Oilfield Solutions Inc. (NYSE:NEX) has been picking up momentum heading into 2023, even though in its latest quarter revenue missed by just under $30 million, it was still up 127.90 percent year-over-year, and about one third of the miss was from selling off assets and a disruption at one of its fleets.
Net income, adjusted EBITDA and free cash flow were all jumping in the quarter, yet the market hasn’t rewarded the company for its performance, as it has been trading flat since its earnings call, moving in a range of about $9.50 per share to $10.50 per share.
One reason for that could be the jump it made starting on September 26, 2020, where it climbed from approximately $6.65 per share to about $11.35 per share on October 25, 2022, before pulling back to the range mentioned above. The point there is the market may have already been pricing in its performance, and with the small miss on revenue, may have pulled back in response to it.
While that’s definitely a possibility, the other reason could be the market still doesn’t see how tight the frac market in particular really is, and why 2023 could provide favorable conditions for the sector, even if the recession gets worse for longer.
In this article we’ll look at the company’s performance in the last quarter, how its segments performed, and why 2023 could surprise to the upside.
Some recent numbers
Revenue in the third quarter was $896 million, up 128 percent year-over-year, and six percent sequentially. While revenue missed by almost $30 million, about a third of that came from a sale of its assets and temporary disruption of a downed fleet.
Net income in the reporting period was $104.7 million, or $0.42 per share, soaring from the $44 million net loss in the third quarter of 2021, and significantly above the $68.5 million, or $0.27 per share in the previous quarter.
Adjusted net income in the third quarter was $129.8 million, or $0.52 per share, compared to adjusted net income of $24.3 million in the third quarter of 2021.
Adjusted EBITDA was $194.8 million, including the $10.5 million gain the company received from a sale of assets, up from the $27.8 million in third quarter of 2021.
Free cash flow in the third quarter was $132.6 million, which included $21.6 million from the sale of its coiled tubing asset.
At the end of the reporting period the company had $250.2 million in cash and cash equivalents and $371.5 million available from its credit facility, bringing overall liquidity to $621.7 million. Total debt at the end of the quarter was $364.8 million.
NEX guides for fourth quarter revenue to be down a modest 2 percent to 4 percent sequentially, with continuing momentum in profitability and free cash flow.
Company segments
Completion Services
The completion services segment of the company is by far the largest, and accounted for $857.8 million revenue in the third quarter, up over $56 million from the third quarter of 2021.
Adjusted gross profit in the segment was $205.7 million, up $21 million sequentially.
Looking ahead, the company could outperform here in 2023 as fracking demand comes in higher than the market anticipates, which is how management believes it’ll play out.
To that end the company is looking at CapEx in the segment of 8 percent to 9 percent of revenue in 2023, which should be more than enough to fund it existing fleet, as well as its transition to electric and gas-powered equipment over a period of time. The CapEx budget for 2023 is set at about $350 million.
Well Construction and Intervention Services
Well Construction and Intervention Services contributed $38.3 million in revenue in the third quarter, down from the $41.9 million in the prior quarter. That was attributed to the sale of its coiled tubing assets during the reporting period.
Adjusted gross profit in the quarter was $7.6 million, down from the adjusted gross profit of $8.3 million sequentially.
Its cement business showed improvement in the quarter.
How the company views frac fleets
Management stated in its earnings call that well completion activity in the United States continues to be bullish. For a while the company has been saying frac fleet availability is one of the “primary bottlenecks restricting U.S. land production growth,” adding that they strongly believe that will stay that way for the next 18 months or so.
For that reason, NEX believes that has created an environment that provides it pricing power through 2022 and 2023. The company said it has already secured higher prices for 2023, with pricing still 10 percent to 15 percent down from pre-COVID levels. That suggests there is more room to increase prices as the company continues negotiations for 2023. Management believes that supply will not be able to meet demand, and that provides a pricing environment favorable to the company.
While demand for liquids is projected to grow by about 1.5 million barrels per day in 2023, the general consensus is U.S. shale oil production will probably increase by less than 1 million barrels per day. NEX believes even that could be too optimistic, and expectations are likely to be more to the downside than the market thinks at this time. NEX believes the total active fleet count isn’t going to increase much over the next year or so, based upon fleet attrition and supply chain issues, which will leave the fleet count close to the 270 operating now.
Management’s thesis is attrition is going to be worse than thought because maintaining older equipment in a constrained supply chain environment is going to put pressure on increasing the fleet count to levels they need to be at. If that scenario plays out, it will favor NEX’s model of focusing on “capital discipline and cash returns to shareholders over production growth.”
For that reason, revenue is probably going to be modest for the company in 2023, but profits are likely to increase while it returns capital to shareholders.
Conclusion
I like the disciplined approach NEX is taking in navigating the fracking environment it currently faces. It is operating under the assumption that fleet attrition is going to be worse than expected, and the fleet size in 2023 to be not a lot higher than it is now.
That plays into the strategy book of the company, and while the result will probably be a modest growth trajectory in revenue, it should continue to throw off a lot of earnings that can continue to provide the company with operational flexibility going forward and return a significant amount of cash to its shareholders.
Overall, 2023 looks like it should be a solid one for NEX, and with its share price lingering in the $9.50 to $10.50 range, there is a lot of room for growth if the company is right in its thesis and executes on its strategy.
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