C&J Energy Services is trading at a price earnings ratio of 5.8 based on 2011 earnings (three quarters actual and 4th qtr estimate), and 3.7 times projected 2012 earnings. C&J’s current enterprise value is $920 million.
C&J just become public last August at a price of $29 compared to its current price of $18.70. C&J is almost a pure play on hydraulic fracking, which accounts for 85% of its business. It now operates a fleet of six modern and high pressure rated hydraulic fracturing fleets. Three of the fleets have been in service less than a year, with the three being placed in service in April, August and October of 2011. It is not hard to see then that 2011 results understate the full current earnings potential of the company, based on current pricing.
C&J was founded in 1997 by Josh Comstock who continues to run the company. C&J started out providing pressure pumping and coiled tubing services to oil and gas industry. These services now account for about 15% of C&J’s business. C&J entered the hydraulic fracking business in 2006, focusing on complex, technically demanding jobs that require high pressure/horsepower. C&J’s fleets are rated to 15,000 psi and average 32,000 horsepower. High horsepower fleets are projected to be in tight supply until at least mid 2013.
C&J purchased Total Energy Systems last April for $27 million. Total is the longtime manufacturer of coiled tubing and pressure pumps for C&J and also has manufactured hydraulic fracking equipment for C&J since 2010. The purchase will lower C&J’s cost of equipment and supplies going forward. Total has growth opportunities of its own with outside customers. Total is currently building two additional fleets for C&J (7 and 8). The 7th is projected to be put in service in second quarter of 2012 and the 8th in the third quarter of 2012.
All six of C&J’s fleets are currently under contract. Here is a summary including customer/location and contract length.
Fleet 1 – Penn Virginia/Haynesville, Eagle Ford, Granite Wash. Contract July 2010 to July 2012.
Fleet 2 – EOG/Eagle Ford. Contract August 2010 to August 2012.
Fleet 3 – Anadarko/Eagle Ford. Contract February 2011 to February 2013.
Fleet 4 – EXCO/Haynesville. Contract April 2011 to April 2013.
Fleet 5 – PXP/Eagle Ford. Contract August 2011 to August 2013.
Fleet 6 – Apache/Permian basin. Contract December 2011 to December 2013.
The current structure that C&J is working under is generally one to three year contracts with monthly take or pay provisions. C&J is currently working on contracts for the 7th and 8th fleets to be put in service in 2012.
The tight supply of high rating fracking equipment has lead to higher pricing. Monthly revenue per unit of horsepower has increased from an average of $331 in 2010 to $387 in 2011 year to date through September.
With respect to the current low price of natural gas, you can see from the above that C&J’s fleets are working primarily in oil rich formations. In addition, the work being done in gas fields is focused on liquid rich gas (“wet gas”) that has higher pricing than “dry gas”.
Financial Summary
Below is a summary of historical numbers and my projection for 2012.
| C&J Energy Services |
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2010 |
2011 |
2012 |
| Profit/Loss |
|
Act./Proj. 4th Qtr. |
Projected |
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| Revenue |
$244,157 |
$788,000 |
$1,166,000 |
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| Cost of Sales |
$154,297 |
$463,000 |
$ 664,000 |
| SG&A |
$ 17,998 |
$ 53,200 |
$ 75,000 |
| Interest Expense |
$ 17,350 |
$ 4,000 |
$ - |
| Other (Net) |
$ 1,860 |
$ 7,700 |
$ 5,000 |
| Provision for Taxes |
$ 20,369 |
$ 93,000 |
$ 155,000 |
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| Net Income |
$32,283 |
$167,100 |
$ 267,000 |
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| Shares Outstanding |
46,300 |
51,000 |
53,000 |
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| Earnings per Share |
$ .70 |
$ 3.28 |
$ 5.04 |
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| Adjusted EBITDA |
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| Net Income |
$32,283 |
$167,100 |
$267,000 |
| Dep. & Amort. |
$10,744 |
$ 22,000 |
$ 35,000 |
| Interest Expense |
$17,341 |
$ 4,000 |
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| Provision for Income Tax |
$20,369 |
$ 93,000 |
$155,000 |
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| Adjusted EBITDA |
$80,737 |
$ 286,100 |
$ 457,000 |
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| CAPX |
$44,473 |
$125,000 |
$125,000 |
| Debt |
$27,000 |
$ - |
$ - |
| Ending Cash |
$ 3,000 |
$ 65,000 |
$225,000 |
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| Enterprise Value |
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| Market Value |
$920,000 |
$ 920,000 |
$ 920,000 |
| Debt |
$ 27,000 |
$ - |
$ - |
| Less Cash |
$ 3,000 |
$ 65,000 |
$ 225,000 |
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| Adjusted EV |
$944,000 |
$ 855,000 |
$695,000 |
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| EBITDA / EV |
11.7 |
3.0 |
1.5 |
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As mentioned, C&J is trading at 5.3 times 2011 earnings and 3.7 times projected 2012 earnings. On an EBITDA basis the company trades at 3.1 times 2011 and 1.6 times 2012 EBITDA.
In the short run, I think that the company will get recognized based in the very low earnings and EBITDA multiples. A re-rating at P/E multiple of 10 based on 2012 projected earnings would put the stock in area of $50. Longer term, as the supply of fracking fleets catches up with demand current pricing for fleets could decrease. By then, C&J could have 10 to 12 fleets or more, which even at lower rates could produce earnings that make the current share price look fair, creating some level of downside protection. C&J has built strong relationships with best in class energy producers. Fracking is not a commodity but a critical piece of the well development process. Trust and expertise matter.
Here is a link to C&J’s most recent company presentation:
http://www.cjenergy.com/phoenix.zhtml?c=242928&p=irol-presentations
Risks
Fracking is currently being scrutinized by states and the EPA. Changes to current procedures or laws relating to fracking could harm the company.
Many industry factors could decrease demand for fracking fleets and supply of fracking fleets is sure to grow into the future.