ProPetro Holding Corp. PUMP looks compelling at the moment. Given the company’s strong fundamentals and positive estimate revisions, it seems like this is the right time to add the stock to your portfolio.
Midland, TX-based ProPetro is an oilfield services provider, operating primarily in the prolific Permian Basin, spanning across West Texas and New Mexico. The company offers a wide spectrum of specialized and complementary services, and equipment for exploration and production of oil and natural gas. Notably, ProPetro currently has a Zacks Rank #2 (Buy), which means the company is poised to outperform the market.
Let’s delve deeper to analyse the factors that make this oilfield service provider an attractive investment option at the moment.
Deriving Profit From Permian Basin
ProPetro’s hydraulic fracturing horsepower is deployed in the Permian Basin, which is widely regarded as the dominant domestic growth area for onshore oil output. The surge in volumes from the ‘super’ basin should ensure continued expansion in exploration and production spending in the region. Notably, the basin is currently producing just above 4 million barrels daily (BPD), almost double than that of two years ago, and is expected to churn out another 1 million BPD by early 2020. ProPetro, through its healthy leverage to the Permian Basin, is likely to benefit from this multi-year upcycle by providing hydraulic fracturing and other well completion services to the producing firms.
Stable Revenue Generator
The company’s $400-million purchase of Pioneer Natural Resources’ Permian pressure pumping assets led to a 56% increase in ProPetro’s current base to 1,415,000 horsepower across 28 hydraulic fracturing fleets. The acquisition, which transformed ProPetro into a Permian-focused pressure pumping powerhouse, includes a 10-year strategic service agreement encompassing approximately 30% of its total fleet. With Pioneer Natural Resources being one of the largest Permian operators still expanding in the shale play, this long-term contract is expected to provide a stable revenue base for ProPetro.
The company’s strong relationships with high-quality customers provide revenue visibility and business certainty. Its clients — mostly well capitalized, blue-chip exploration and production companies with long-term production growth plans in the Permian Basin — are likely to be less susceptible to commodity price fluctuations. This should ensure multi-year revenue stability for ProPetro.
Decreasing Costs Lead to Higher Profits
ProPetro’s adjusted EBITDA grew more than 180% year over year to $388.5 million in 2018. Apart from strong utilization, the surge in profitability was driven by cost efficiencies from regional sand usage. In the fourth quarter, the company sourced around 71% of the sand locally compared with 57% in the third quarter and 35% in the second quarter. The shift to cheaper regional sand from the more costly Northern White variety boosted ProPetro’s supply chain economics by eliminating rail costs, lowering downtime and improving availability. With the usage of local sand likely to rise with more supplies coming online in Texas, the company should be able to sustain its robust EBITDA performance.
Balance Sheet Strength
ProPetro boasts a strong balance sheet with ample cash reserves and a relatively low debt load. As of year-end 2018, the company had cash and cash equivalents of $132.7 million and a long-term debt of $70 million, with a net cash position of around $63 million. Importantly, ProPetro's debt-to-capitalization ratio of just a little above 8% is lower than the industry average of 29.3%, thereby providing it with enough financial flexibility to tap strategic growth opportunities. The company also has $125 million available under the revolving credit facility, which further strengthens its liquidity position.
In terms of EV/EBITDA ratio — which is one of the best multiples for valuing oil and gas-related companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing company or industry – ProPetro seems undervalued. The company currently has a trailing 12-month EV/EBITDA ratio of 5.7, which is way below the broader industry’s 9.1, as shown in the figure below.
Over the past 60 days, 15 analysts have upwardly revised earnings estimates for first-quarter 2019, while only one has decreased the same for ProPetro. The Zacks Consensus Estimate for the current quarter has been revised upward from 48 cents per share to 58 cents, which is 38.1% higher than the year-ago figure of 42 cents. In full-year 2019, its bottom line is expected to increase 19.5% from a year ago to $2.39 per share.
A clear picture can be derived from the above-mentioned growth drivers, which differentiate ProPetro from peers. Its strong Permian presence, stable revenue generating abilities and cost-reduction efforts will enable it to achieve top and bottom-line improvements, while strong balance sheet will provide the company with financial flexibility to grow. The stock, which is currently undervalued, has a commendable growth potential in the near future.
Other Stocks to Consider
Investors interested in the energy sector can opt for other top-ranked stocks as given below:
Houston, TX-based Archrock, Inc. AROC is an oil & gas equipment and services providing company. Its bottom line in 2019 is expected to increase 39.6% year over year. The stock currently has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fort Lauderdale, FL-based Seacor Holdings Inc. CKH is an energy related transportation and logistics company. In the first quarter of 2019, its earnings are expected to grow 118.8% year over year. The company currently holds a Zacks Rank #2.
Subsea 7 S.A. SUBCY is a Luxembourg-based oil & gas equipment and services company. Its bottom line in first-quarter 2019 is expected to increase 133.3% year over year. It currently has a Zacks Rank #2.
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