Description

Newpark Resources is an oilfield services provider trading at 5x EV / EBITDA with 4x turns of leverage. The equity of the business is down 90%+ since 2018.

The Company is an SCF Partners (old Houston PE firm) roll-up and currently has 2 product lines: Mats and Drilling Fluids.

1.       Mats –

a.       Historically workers (oilfield, agricultural, construction) have walked on wooden mats in muddy unwalkable terrain. NewPark has a strong patent on a composite mat that has taken huge share over the last 10 years (we estimate 10% - 30%). This is because the mats tend to be safer and the cost of ownership can be less as they tend to last longer. The revenue here is levered 50/50 between energy and construction.

b.       This business involves manufacturing the mats and then just throwing them in the field. It has grown nicely at high incremental EBITDA margins as it is a fairly easy and a non-labor-intensive services. There is some capital intensity but even with that it produces strong ROICs.

2.       Drilling Fluids –

a.       Historically a terrible business for Newpark and any other player who has operated in the space. This involves setting up waste water treatment facilities mostly to treat Frac Water. There is a benefit to scale but the largest % of cost is the transportation of the twater. As a result, everyone is constantly trying to build closer and closer to the Frac sites leaving the existing infrastructure more and more useless.

The mats business has all the profits and very little of the revenue. The fluids business has all the revenue and has been highly unprofitable since 2015. It is commoditized, competitive and undifferentiated. Today the company is losing tons of cash even though the Mats business is still profitable.

It is pretty clear to see that the Mats business + the liquidation value of the Drilling Fluids business is in excess of the current Enterprise Value. This business is capital intensive but at today’s level of activity they won’t need to invest in Mats for a very long time…so we think EBITDA is the right metric to look at.

At the beginning of the year, the Mats business did $60M of RR EBITDA. As of last quarter (one of the worst quarter in the energy industry) the Mats business did $20M in RR EBITDA. Wide range on what this company is worth but $150 - $400M is pretty conservative.

If you match the ROIC of other drilling fluids companies with NewPark it suggests that their net asset value is about 50% of the balance sheet. At extremely conservative assumptions of PPE you could easily see their NAV at $150M of the total $350M on the balance sheet.

The business is over levered, in violation of their covenants and the debt is due at the end of next year. So either the management will have to make the right decisions or the banks will force their hand through a BK. Right now the If you assume a value of $450M on EV that suggests that there is $250M of equity value or 60%+ the current stock price.

Catalyst

Liquidity Issues with Debt Maturities