NexTier: A Multiple Adjustment Is Coming
After a few tough years, over which oil prices turned negative, NexTier Oilfield Solutions Inc. (NYSE:NEX) is on the verge of massive profitability.
The company is a leading provider of integrated completions focused on U.S. land drilling services. The company delivers solutions and technologies for the oil and gas industry to maximize the production of wells. It was formed when Keane Group and C&J Energy Services merged in 2019, bringing together complementary assets and technology. The combined company has expanded its presence in most major U.S. onshore oil and gas basins.
NexTiers business
NexTier has a large fleet of hydraulic fracturing pumps, cementing pumps and other ancillary equipment, which it uses to help oil and gas companies complete their wells and begin production. It operates through multiple segments, including Completion Services and Well Construction and Intervention Services
The company generates revenue primarily by offering a range of services to oil and gas exploration and production companies. The main revenue streams come from several sources, including:
Hydraulic fracturing services: These services are typically used to stimulate production in new wells. They involve pumping fluids into a wellbore at high pressure, which fractures the surrounding rocks and allows oil or gas to flow more freely.
Wireline services: Wireline is a cabling technology used to lower equipment or measurement devices into the well for the purpose of well intervention, reservoir evaluation and pipe recovery activities. Companies pay for these services to obtain data on conditions within their wells or to conduct maintenance.
Cementing Services: This is a crucial part of the drilling and completion process, where cement is used to permanently place the casing, or steel pipe, in the wellbore and isolate fluids and gases from different formations. It ensures well integrity and prevents contamination of water aquifers.
Coiled tubing services: Coiled tubing is used in oil and gas well intervention and sometimes in drilling. It is a cost-effective solution for numerous operations, including pumping, sand control, drilling, logging and fracturing.
Other services include pumpdown services, pressure testing, pipe recovery and acidizing services, among others.
Competitive advantages
NexTier has a few key competitive advantages. To begin, it offers a wide range of oilfield services that are integrated, giving the company an edge because it can provide comprehensive solutions to its clients, covering different aspects of well completion and production. This convenience can be a significant deciding factor for clients when choosing service providers.
It also has geographical dominance with operations in most of the significant onshore oil and gas basins in the U.S. This broad presence allows the company to serve a larger customer base and gives it a competitive edge over regional players. The company also has technological advantages and strong focus on leveraging technology to deliver its services more effectively and efficiently, delivering through an experienced and skilled workforce to significantly contribute further to a company's value.
The world is definitely trying to shift to more renewable energy as the resource is running out and total oil rig counts are on the decline, going from more than 2,000 in the early 1980s to under 700 mow in the United States, according to Baker Hughes. This means oil production companies must drill for new wells or risk volumes and revenue falling. This essentially means spending money. What that really means is that NexTier is in the right business to help oil conglomerates allocate capital expenditures and profit greatly for the foreseeable future.
Financials
Nearly all of NexTiers 2022 revenue, which was $3.2 billion, originated inside the U.S., including 65% from the Texas operations. On the spike in oil and gas prices last year, total sales jumped 128% compared to 2021 and could remain elevated for some time going forward. In fact, the companys revenue expectations have already increased for the current year with $3.8 billion within reach. More importantly, after years of losing money, the company has started to squeeze out profit, amounting to around $130,000 per employee. The number that seems even more important is $5.07. Thats what analysts estimate the company will produce in net income per share over the next three years. The stock price is under $9 right now and NexTiers earnings could be even higher than expected.
In a year or two, NexTiers management could have more than $1 billion in cash to do any number of strategic desires. The company could pay out 50% of its earnings as a dividend with 15% yield. It could buy back stock or pay down debt to add value to shareholders. It could do all of them, but if the thesis of oil well development is sound, then NexTier will remain profitable for this decade, at least. Is it a cigar butt? Maybe. But at some point, the market will realize this valuation is wrong and push the price higher.
This article first appeared on GuruFocus.
