Come on, admit it, you want just one more chance to lose $ in the Marcellus!

Ranger Energy Services (RNGR $10)

$250M mkt cap, $45M net debt.  Valuation 3.75X 2022E, sub 3X 2023E.

Well positioned Oil field services company benefiting from the Patriot and Perfx wireline acquisitions in early 2021 and hugely accretive acquisition of Basic’s rigs and other services lines and assets out of bankruptcy in Aug 2021.  True earnings power of the core and acquired assets just emerging now into sector upcycle.

Current asset base has revenue potential of $765M at 20% margins implying $150M EBITDA, versus 2022 estimates of $615M/$80M and H2-2022 revs of $330-$340.  Current 2023E EBITDA is in the $100-$110M range.  Rigs in reserve will only be utilized at higher ROICs.

Stellar pick off of the Basic assets in BK auction and definitive turn in cycle has positioned the company for meaningful margin expansion and FCF ramp. Bought Basic for net cost of $42M, currently running at EBITDA of $12M/quarter.  Acquired significant excess assets in the Basic purchase. Many older rigs were scrapped and other excess Real estate/assets are being sold and rapidly reducing debt.

Bought Patriot for $12M, currently running at $2-3M EBITDA / quarter.

Net debt already well under 1X EBITDA run rate.  Mgmt targets zero net debt before considering further consolidation.  Board also discussing shareholder returns given overall valuation less than 3X run rate EBITDA.

FCF should accelerate as capex is disciplined ($15-$20M) and rapid debt paydown works down interest expense. 2023 FCF should approach $50M or $2/share, a 20% yield on an essentially debt free balance sheet.  NOLs will cover cash taxes at least into 2024.  LT maintenance capex should run 4-6% of revenue, including costs to reactivate available capacity.

Can’t bring myself to actually say/type that an energy company management is TOO conservative but Stuart Bodden, CEO and Melissa Cougle, CFO are taking it slow with the balance sheet while making great strides with all of the acquired operations. They understand the acquisition versus buyback math but think they can do further consolidation at very attractive returns. In aggregate, the 2021 acquisitions provided valuable scale and operating leverage to an expected multi-year up cycle.

1x turn on 2023 = $4 or 40% upside.  Holding the 2022 EBITDA multiple on the higher 2023 EBITDA gets you to the same level.

On the Q3 call:

Mgmt Guiding to revs of $615 -$620M and EBITDA margin at the high end of the original 11-13% range. Implies $75 -$80M EBITDA.

Net debt down to $45M. Strong desire to get to zero net debt given prior experiences; probably overly conservative but certainly de-risking. 

FCF $8M, could have been higher but some WC build given strong business results. Still expect Capex of $15M vs. D&A of $40M (very disciplined)

Processing Solutions and Wireline both very strong.

High spec rigs up another 3% Q/Q and 11% Y/Y to $648/hr on 123K hours +3$ Q/Q and +140% Y/Y (acq & mkt recovery).

In Q3:

Overall EBITDA $30M up from $18M in Q2.

High Spec Rigs $80/$17 revs/ebitda

Wireline Services (completions, production) $61/$11

Processing Solutions (coiled tubing, rentals, fishing, plug/abandonment) $37/$11

Corporate -$9

Some seasonality in Q4, some noise around certain customers running out of budget, but equipment quickly spoken for.

Why the market is staying disciplined: (from WSJ)

Large asset managers are also pressuring oil giants to maintain “capital discipline”—i.e., spend less on production. Private U.S. oil companies added 47 drilling rigs in the third quarter while public firms added only one. Climate lobbyists want companies to return profits to shareholders or invest in green energy.

Continental Resources founder Harold Hamm said this month he is taking his company private to have the “freedom to explore.” “We have all felt the limits of being publicly held over the last few years, and in such a time as this, when the world desperately needs what we produce, I have never been more optimistic,” Mr. Hamm wrote to employees.

High Spec Rigs

RNGR has 168 active rigs in a 1000-1200 rig market. The top 6 control 50-60% of the market and this should continue to consolidate.  Management indicated multiple discussions in High Spec rigs and wireline and other services.  Currently price and structure (debt/equity) are obstacles but all are moving in the right direction.  Based on track record, we are giving management the benefit of the doubt that these potential acquisitions will create meaningful value.

RNGR has 198 rigs of comparable quality but will be very disciplined about putting the incremental 33 (20%) to work.

Wireline:

45 active trucks versus 68 available. Significant rev/margin upside with increased utilization.

Ancillary Businesses:

Fishing and Rentals and Plug & Abandonment all are growing nicely following the basic acquisition and have capacity well above current run rates.

Coil Tubing continues to grow and has a replacement value of $35M versus an allocated purchase price of $2M and EBITDA north of $5M.