Solaris Oilfield Infrastructure (SOI) Update - June 17

Post Reply
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Solaris Oilfield Infrastructure (SOI) Update - June 17

Post by dan_s »

I have updated my forecast/valuation model for SOI and posted it to the EPG Website. I am keeping my current valuation at $13.25, but there is a clear path to significant upside for SOI in 2022.

SOI is trading at $9.78 this morning. It pays a $0.105/quarter dividend for annual yield of 4.29%.

Solaris is an oilfield services company that provides frac sand management systems at the wellsite. It is the industry leader in this "niche" that has gained market share during the pandemic. It has a very strong balance sheet with over $50 million of cash and no long-term debt. It has generated free cash flow from operations for nine straight quarters and I am forecasting a steady rise in their FCF in 2H 2021 and a doubling of FCF next year; from ~$21 million in 2021 to ~$45 million in 2022. This Company's financial results are directly tied to upstream D&C activity, which needs to increase sharply next year since the global oil market will be under-supplied a year from now.

My updated profile on the Company will be posted to the EPG website this afternoon.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Solaris Oilfield Infrastructure (SOI) Update - June 17

Post by dan_s »

This is an extremely bullish outlook for SOI

B of A Equity Research: Three reasons we see above - consensus growth for US E&P capex next year

We expect 2022 US onshore D&C capex up 30% y/y
Our updated Oilfield Services (OFS) macro view calls for a 30% y/y increase in US onshore D&C capex in 2022, implying accelerated growth from this year’s forecast of +13% y/y. This is not the consensus view, however, as some investors currently believe E&P capital discipline points to lower spending growth next year, even though the 2022 WTI forward curve is now approaching $66/bbl. Our non-consensus view is supported by three things:

1) Private E&Ps are in growth mode, headed to 2019 levels
The Private E&P horizontal (hz) rig count is now up 56% (+75 rigs) since the start of 2021, suggesting Private E&Ps aren’t demonstrating capital discipline . Instead, this group could be incentivized to grow given M&A optionality and robust well head economics. At today’s oil price, we think this group could exit 2021 at its pre-Covid rig count, implying another 50 hz rig adds through YE. And in 2022, a move towards the 2019 avg rig count by YE22 seems realistic considering (a) oil prices are 35% higher, on avg, than they were in 2019 and (b) capital is by no means scarce. Thus, after increasing by about 33% this year, this would actually imply the Private E&P rig count could be up another 45% next year. And given Private E&Ps have not been living off DUCs, like Public E&Ps, this is a good proxy for 2022 Private E&P capex after accounting for OFS pricing inflation (more below).

2) 2022 E&P capex will not be helped by DUCs, like in 2021
The Public E&Ps, especially the Majors, have leaned heavily on DUCs this year, skewing capex lower than it would be if not for this DUC tailwind. Going forward, however, E&Ps will be burdened by fully-loaded well costs as the excess DUC inventory is now mostly depleted . Further, if oil prices remain at today’s robust levels, we simply do not think Public E&Ps will continue to run at maintenance levels of activity, instead choosing to add a rig or two to show some modest production growth in 2022. Accordingly, we think current consenses estimates for 2022 Public E&P to be +12% y/y is too conservative.

DUCs = drilled but uncompleted wells

3) OFS inflation provides addt’l upside to 2022 E&P capex
Between now and YE22, we forecast 160-170 hz rig adds and 30-35 frac spread additions, implying growth of 40% increase in active drilling rigs and 15% increase in frac activity. And while we are not calling for a return to pre-Covid pricing, this growth could drive 10%+ OFS cost inflation.
Dan Steffens
Energy Prospectus Group
Post Reply