Big Risk Could Mean Big Profits – Or Slump – For Mammoth Energy Services

The Cobra division of Mammoth Energy Services (TUSK), a $1.3 billion market-cap company, has been awarded a $945 million contract by Puerto Rico Electric Power Authority (PREPA) to rebuild Puerto Rico’s electric utility infrastructure after the devastation of Hurricane Maria. Executing – and being paid for – a contract so large relative to the size of the company is a make-or-break proposition for Mammoth.

Company Description

Mammoth Energy Services, with its memorable stock symbol and logo, is headquartered in north Oklahoma City, Oklahoma. It has 1,850 employees. The company was formed in 2014 from assets contributed by Gulfport Energy (NASDAQ:GPOR), also headquartered in Oklahoma City and Wexford Capital. Currently, Wexford owns 56% of outstanding shares. Gulfport owns just over 25% of the company’s shares, per a February 14, 2018, Securities and Exchange Commission 13-D filing. This leaves a somewhat thin market, and less say, for other investors.

The company operates in five oilfield service segments and one new segment:

  • pressure pumping services
  • well services
  • natural sand proppant
  • contract land and directional drilling services, and
  • other energy services, which includes oilfield worker housing.

Recently, Mammoth also started a utility infrastructure service, which has been awarded a $1 billion Federal Emergency Management Agency (FEMA) contract to rebuild Puerto Rico’s electricity infrastructure after the island was devastated by Hurricane Maria in 2017.

Oil Prices and Production

The April 12 closing oil price was $67.07 per barrel for West Texas Intermediate (WTI) crude oil, a recent high.

The US is on pace to surpass even Russian crude oil production this year. Exports from the US, production problems in Libya and Venezuela, and OPEC/Russia (ROPEC) production restraint have kept oil prices higher than expected. Moreover, oil storage levels have declined from their historically high levels. Higher prices incentivize US producers, which in turn boosts business of oilfield service providers like Mammoth Energy Services. Potential investors should nonetheless be aware producers have changed strategy insofar as they are not allocating every available dollar to drilling.

Basins in which Mammoth Operates

Mammoth is running three of its pressure pumping fleets in Appalachia (Marcellus/Utica), two in Oklahoma’s SCOOP/Stack formations, and one fleet in the industry’s major basin, the Permian. Activity in Appalachia and Oklahoma derives from Mammoth’s founding from and close association with Gulfport Energy, which drills for oil and natural gas in these areas.

Competitors and Competitive Advantage

Mammoth Energy Services faces considerable competition in the “sand space” from fellow sand suppliers and from producers anxious to optimize their use of sand. Indeed, in the Midland sub-basin, an inflection point of 2,000 pounds/foot of sand has been reached: using more does not increase profitability.

More generally, the company has moved into the Permian (Midland and Delaware sub-basins). Much of the oil-producing action is in the Permian, as is considerable oilfield service competition.

The PREPA Contract

In the utility infrastructure business, Mammoth deployed crews to Texas and Florida after Hurricanes Harvey and Irma to help restore power. This experience factored into Mammoth’s winning the PREPA contract.

The initial PREPA contract was with Whitefish, a two-employee Montana company. Whitefish’s small size and lack of experience were questioned and the contract was unwound.

Mammoth, thus, also faced early skepticism about its ability to perform.

The contract amount was subsequently increased to $445 million, and in March of this year, to $945 million. As part of winning the contract, Mammoth’s Cobra division has agreed to periodic US government audits. Investors should note that while the contract is between fiscally-challenged PREPA and Mammoth, it is expected PREPA will request reimbursement from the US Federal Emergency Management Agency. Moreover, Mammoth’s Cobra division will be working on the island side-by-side with FEMA, the US Army Corps of Engineers, Fluor, and others.

Governance

The Institutional Shareholder Services ranks Mammoth Energy Services overall a “10,” indicating higher governance risk. Its subscores are Audit: 2, Board: 10, Shareholder Rights: 5, and Compensation: 8. Repeating, Mammoth has two large shareholders: Wexford Capital with 56% and Gulfport Energy with 25%.

Gulfport Energy recently added a director, Deborah Adams, who has engineering and project management experience with ConocoPhillips (NYSE:COP).

Operations, Strategy, and Growth Prospects

Mammoth’s sand division produces sand from three Wisconsin mines of various sizes (20/40, 30/50, 40/70, and 100-mesh). It expects to reach sand processing capacity of 4.4 million tons by mid-2018.

Much of its sand is used by the company’s pressure pumping division, and Mammoth has contracts with several railway companies to haul the sand to where required. Note that regional (brown Texas) sand with a smaller transport cost competes with Northern (Wisconsin) white sand; however, some producers consider Northern white to perform better, at least in certain wells.

In the fourth quarter of 2017, the company sold 600,000 tons of sand, with 31% in Oklahoma’s SCOOP/STACK, 22% in the Pennsylvania-Ohio’s Marcellus/Utica, 19% in Colorado’s DJ, 16% in Texas’ Permian, and small amounts elsewhere.

The company’s logistics network includes 1,800 railcars, two transload facilities in Ohio and Oklahoma, and 62 trucks to deliver sand to the well site.

Mammoth’s high-pressure pumping fleet is new, about two years old and was expanded in 2017 to nearly 300,000 horsepower. It consists of six high-pressure fleets and a third of capacity is dedicated to Gulfport Energy through 2018. Its 4Q17 pressure pumping margin was 19%, lower than the margins for the six prior quarters and down from 27% in 3Q17 and as much as 39% in 3Q16.

Unquestionably, the Puerto Rico electric utility contract is the order-of-magnitude growth determinant.

For 2018, Mammoth expects capital expenditures of $125 million, with about half ($56 million) in infrastructure, a sixth ($21 million) in completion and production, another sixth ($24 million) in proppant and logistics, and the remainder in drilling and other.

Mammoth’s Financial and Stock Highlights

In mid-day April 13, 2018 trading, the company’s stock price was $33.79 per share.

Financial highlights include 4Q17 revenues of $369 million, net income of $64 million, and adjusted EBITDA of $110 million. The 4Q17 revenue is a scorching 500% larger than the 4Q16 revenue, due to the Puerto Rico electric utility infrastructure repair contract.

For all of 2017, Mammoth Energy Services’ revenue was $691 million, up 200% from $230 million in 2016. Net income was $59 million for the year, a $151.4 million improvement from a net loss of $92.5 million in 2016.

Mammoth Energy’s revenue by segment in 2017 was:

  • Infrastructure: 53%
  • Pressure pumping: 28%
  • Sand: 11%
  • Contract drilling: 4%
  • Other: 4%

The company completed 1,375 high-pressure stages during the quarter and sold 600,000 tons of sand at an average sand sales price of $43/ton. Its blended costs per ton were $19.50 in the fourth quarter of 2017.

Mammoth Energy Services’ trailing twelve months earnings per share is a solid $1.42 giving it a price-to-earnings ratio of 24. Its estimated earnings per share for the next twelve months are $2.32, an upside of 63%. Indeed, the company’s expected earnings per share for the first quarter of 2018 is $1.60, almost double its actual fourth-quarter 2017 earnings per share of $0.82, which in turn was more than 50% above analysts’ average estimate of $0.53 per share for the quarter.

Mammoth Energy Services’ $33.79/share stock price is 255% of its October 2016 initial public offering price of $13.26/share. The company’s EBITDA generation is up by a factor of four from $41 million to $165 million.

TUSK data by YChartsMammoth’s market capitalization is $1.31 billion at a mid-day April 13, 2018 stock price of $33.79 per share. At the end of the fourth quarter of 2017, the company had $359 million in liabilities and $867 million in assets resulting in a liability-to-asset ratio of 41%. Mammoth’s ratio of current assets divided by current liabilities is 1.4, above the desirable minimum of 1.0.

The company’s reported cash and equivalents were only $6 million at the end of the fourth quarter of 2017.

Mammoth’s one-year target price was recently increased from $29.14 to $31.99 per share, yet its mid-day April 13th price of $33.79 per share is already above that level.

Like other companies in the oil and gas space, Mammoth Energy pays no dividend.

Overall, the company’s mean analyst rating is a 1.9 or “buy,” from the ten analysts who follow it, with favorable recent directional trends. Seven rate Mammoth Energy Services “buy,” two rate it “hold,” and one rates it “strong buy.”

Both Barclays and Johnson Rice recently upgraded the company: Barclays from “equal-weight” to “overweight” and Johnson Rice from “buy” to “accumulate.” In addition, Stephens & Company initiated coverage at the beginning of 2018 with an “overweight” rating.

As of December 30, 2017, the two largest institutional holders of Mammoth Energy Services are Wexford Capital with 56% and Janus Henderson Group with 5%. Shorts as a percentage of float are 6%.

Positive and Negative Risks

By far, the Puerto Rican infrastructure project is Mammoth’s biggest positive and negative risk. The company must perform a contract equal almost in size to its entire market capitalization with a new division. A recent news article outlined the very substantial post-Hurricane-Maria risks and issues of rebuilding Puerto Rico’s electric infrastructure. Even before the hurricane hit, Puerto Rico has entered the biggest-ever government bankruptcy of $120 billion for its bond and pension debt. Mammoth must be paid by PREPA, and PREPA expects to be reimbursed by FEMA.

Moreover, Mammoth cannot allow the project to sap time and talent away from its other divisions.

The company’s governance score is not strong: This is reflected by the fact that Wexford Capital controls the majority of the company’s equity. Thus, other investors have comparatively little say. The counterweight is strong financial backing from Wexford, and an operational relationship given the company’s origins with Gulfport.

Overall, with an upside of 60% in earnings per share and the company’s big Puerto Rico rebuilding project, there is substantial potential in the stock.

Potential investors should consider their oil price and general stock market expectations as the factors most likely to affect Mammoth Energy. Many producers can set the marginal price: the largest of these – Saudi Arabia and Russia – could decide not to adhere to their current production cut agreement, thus driving oil price down, along with the prices of US oil producers and their oilfield service providers. However, after a drought in oilfield service results, analysts like Tudor Pickering Holt expect stronger upcoming results in this sector.

As well, the company’s proppant division faces considerable competition from other public and private sand providers, both independent like US Silica (public) and Black Mountain Sand (private) and integrated like Halliburton. Although over 20,000 wells are expected to be drilled this year, sand use could also inflect depending on technological innovation and process fine-tuning. Not every well produces better economic results with an ever-increasing intensity of sand, as has been experienced in the Midland sub-basin.

Recommendations for Mammoth

Given the size of the Puerto Rico project, the company has considerable upside from that segment, including a prospective 63% increase in earnings per share. This kind of opportunity is rare for a company of Mammoth’s (small-despite its name) size.

Investors should base their decisions on Mammoth’s ability to execute the PREPA contract, understanding that Mammoth’s stock is over 80% owned by Wexford Capital and Gulfport Energy. They should evaluate the company’s ability to compete (and not lose focus due to its PREPA contract) with other oilfield service providers, and decide whether or not the PREPA contract benefit is already priced into the stock.

Obviously, Mammoth has significant backing, and thus, financial stability from both parent and large investor Gulfport and majority investor Wexford Capital.

Mammoth Energy Services, Inc.

Disclosure: I am/we are long TUSK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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