Morningstar | Slightly Lowering RPC FVE on Diminished Expectations for Pressure Pumping Business
We're lowering our fair value estimate for RPC to $14.50 per share from $15 owing to diminished expectations for the pressure pumping business, which constitutes about 60% of company revenue. Our no-moat rating remains in place.Our lowered expectations for RPC's pressure pumping business reflect this business' unremarkable financial performance compared with peers in recent quarters. In the third quarter of 2017, when we estimate RPC's pressure pumping operating margins hit 26% and operating income per fleet horsepower reached about $380 (on an annualized basis), the company probably had the most profitable pressure pumping business in the industry. The market's expectation for RPC soared following that quarter, but in retrospect, RPC merely had one lucky quarter with results being buoyed by its outsize spot market exposure. Since then, the company's performance has drastically fallen relative to peers. We estimate second-quarter operating income per fleet horsepower of about $160 for RPC versus around $230 for its peers. We are not surprised to see competitive pricing take its toll on RPC, but the speed of its onset has outpaced our original expectations, necessitating a slight downward revision in our fair value estimate.
The higher-profitability pressure pumpers currently are for the most part those like Liberty Oilfield Services (not covered) or Halliburton, which can offer a high-efficiency last-mile sand logistics system to clients. We expect even this advantage to prove ephemeral, owing to low barriers to entry in last-mile sand logistics. In any case, RPC has clearly missed the boat on the key driver of high pressure pumping profitability today, and it has little to differentiate itself from its other high-quality peers.
RPC now looks about fairly valued to us, a far cry from just seven months ago when the shares traded more than 70% above our fair value estimate. The fall in the share price has partly been due to a downward revision in the market's assessment of pressure pumpers overall--most pressure pumpers' share prices have fallen 20% or more since then. This reflects the partial fulfillment of our long-held bearish thesis on pressure pumpers, founded upon our no-moat assessment of the industry. The events of the past year have only bolstered our thesis, as pressure pumpers have voraciously added new active capacity, putting a cap on pricing and margins in the industry. Additionally, the market has moved from seeing RPC as a star of the pressure pumping industry to only a middling player, a revision that we also see as appropriate.
RPC is a holding company for several oilfield services companies. The company provides oilfield services and equipment to oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the U.S., including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services provided are: Technical Services, which include pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline services, and fishing; and Support Services, which include rental tools, oilfield pipe inspection services, well control school and energy personnel international.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.