Description

Buy FTSI - M&A Target at Unwarranted Discount to Comps

Another short and sweet one from me.  Pressure pumping is historically a terrible business.  It’s extremely capital intensive and cyclical, but at least there are no barriers to entry.  That said, I’ve found a security which I think is priced cheaply enough where it might actually be worth taking a swing.  FTSI has upside to the low $30s, which is up 40% from here.  

FTS International (AMEX: FTSI) is a provider of hydraulic fracturing services (“pressure pumping”) to the US oil and gas shale industry.  They currently are running 13 fleets, mostly in West and South Texas.  They have 28 fleets in total, but I wouldn’t expect most of the idle horsepower to ever go back to work (maybe a couple).  There is a long and interesting history behind FTSI (aka FracTech) that led to them going bankrupt in 2020, but they emerged last November and they have a clean balance sheet with $99mm of net cash.  

What makes FTSI attractive from an operating perspective is their internal manufacturing capabilities which enables them to maintain and refurbish their equipment cheaper than their peers, as evidenced by the chart below.

So at today’s price you have an EV of $218mm.  I think they can do $110-$120mm of EBITDA in 2022, which probably represents a mid-cycle-ish type of EBITDA number (ie not heroic assumptions and in-line with the same assumptions embedded in consensus assumptions for peers).  So you can buy this thing for around 2x EBITDA .  This compares very favorably to the comps which trade closer to 3.5-5.0x EBITDA

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I believe that you’ll continue to see consolidation in the US pressure pumping space and that FTSI is by far the most attractive rollup target right now given their clean balance sheet and fat cash balance.  These comps can trade their equity for a $100mm cash balance buy working equipment accretively.  See the comp table below.  

I think the knock on FTSI is that all of their equipment is older Tier 2 engines that are most certainly not the future of the industry but their comps all have the same issue with the vast majority of their fleets as well. FTSI’s fleet, while maybe the least advantaged at the moment, isn’t deserving of the discount to peers that is currently being priced in.  

Frankly, I don’t think this company will be around in 6 months.  The industry is still in consolidation mode.  The post-restructuring shareholders are going to want an exit.  FTSI was for sale before COVID and I believe that Keane chose to merge with C&J instead of FTSI because FTSI’s balance sheet was terrible.  I think that NEX will probably buy FTSI for like $32 / share which would be fine with the FTSI holders (who want out) and it would be accretive for NEX.  

Catalyst

Someone buys them, maybe sooner rather than later.  I also think that 3Q guidance is conservative and that they should beat.