Introduction
Newpark, (NR) is an oddity in the oilfield service space. It is an independent-meaning it's not part of a big conglomerate service company, mud and completion fluids company that has an approved mud formulation for deepwater applications by a Super Major Oil Company-Shell, (RDS.B). They recently announced the award of a 3rd rig from this company, and are poised to pick up work from other major operators in the near future.
Deepwater muds are very special concoctions that take years to be developed and approved. Newpark beat incredible odds by getting Shell to run this Kronos, but all it takes is one. They did it, in part by hiring the best Shell customer relations and technical team in the business. Folks who've worked in Shell offices and know their requirements intimately. Now companies are calling them to talk about it.
I see multiple drivers for this company to grow over the next year and recognize improvement in their stock as a result.
Management: Newpark's New President of Fluids Systems
In July of this year Newpark hired David Paterson to run their fluids business globally. In my opinion this was the single most important thing they did all year to prepare for the immediate future. Paterson, is one of the preeminent oilfield service company execs today. He's a mud engineer by training, with a Bachelors and Masters in Offshore Engineering from Robert Gordon University in Aberdeen. Coming from BW Mud, in a 2001 acquisition, he rose quickly through the ranks in M-I SWACO. His rise continued into the Schlumberger, (SLB) hierarchy after the 2010 merger between Smith International, (SII) and Schlumberger. In 2015 Paterson was named President of a major division of SLB that he ran until recently.
I am honestly surprised Newpark was able to get him. With his connections and experience, why go to tiny Newpark when he could have a run a much bigger division of any of the major service companies?
Opportunity among other reasons. Paterson is a natural successor to the current CEO, Paul Howes who is in his middle sixties and is going to be looking beyond the work place for fulfillment soon. In a couple of years, my expectation is that we will see David sliding into the President's job, and shortly after the CEO's seat. Newpark is a company Paterson is uniquely qualified to run!
Here are some comments from Paterson on the Q-3 call.
“I've spent most of my career working in and around the fluids space, and although the competitive landscape has changed a lot in recent years, I feel Newpark is ideally placed to capitalize on the evolving market conditions.
To date, Newpark is the only truly global independent fluids company, and we're extremely focused on what we do. This is what attracted me to Newpark. And as I talk to more of our customers, they really appreciate our focus on fluids and the caliber of professionals we have in the Newpark team.”
Technology and Infrastructure
Delivery of fluids to drilling rigs, particularly deepwater rigs, is an enormously labor-intensive and complicated process. You can have great technology, and many companies do, Newpark isn't alone here. But, tech without the infrastructure to deploy it in a timely fashion is the same as not having it at all. The pic below may not look like much to you, but it represents an investment of about $50 mm over the last few years by Newpark. An investment that is finally ready to pay some dividends as deepwater activity picks up in the GoM.
In the background you can see some deepwater service boats that ferry mud to the drilling rigs offshore. Some of them can load 25-30,000 barrels of fluid at one time. Modern drillships can take on volumes like that as they drill 25-35K feet below the mudline, often in 6-8K feet of water. They need thousands of barrels of mud just to begin the drilling process.
How fast the mud company can mix and load these volumes is a key differentiator between competitors. A plant like the one you see here, can probably load up to ~100 BPM, making the time at the dock minimal. Time at the dock is considered "flat time" (flat time is when the days to total depth curve moves horizontally on the graph.) and is carefully managed by the oil company.
Patterson comments on Newpark facilities-
“Our fluids operating business are also establishing an enviable reputation as the industry flagship facilities in key markets. I visited a number of our sites, including Port Fourchon, Louisiana as well as the Burgan field in Kuwait, and both of these facilities surpass anything I've seen throughout my career in terms of fluid blending and loading capabilities and in finding that our customers are really starting to appreciate this differentiation.”
Related: Why The Saudis Suddenly Agreed To This Mega Oil Deal
Again, Best in Class Facilities are a key differentiator.
Move into stimulation fluids
This one caught me off-guard when it was rolled out a year or so ago. This is a very non-traditional area for a mud company. Stimulation historically is a province of the big pumping companies. You know, the Big Colors. There isn't any particular reason for that except some of the materials involved are hazardous to work with and require specialized equipment to handle. Pumps, blenders, and the like. It was just easier to leave that work to the Big Colors.
The time for business as usual is past in the oil service business and Newpark quietly began to move into this area.
Paterson comments on the stim business-
“We also continue to develop our stimulation chemical capabilities and regenerate a lot of customer interest in both our technologies and our unique approach. Although we are primarily focused on the large U.S. stim market, we have recently secured repeat stim chemicals sales in the Middle East, so we definitely see an opportunity to build a global stimulation chemical business over time.”
The term "stimulation" as it's being applied here involves pumping of strong acids, mutual solvents, scale inhibitors, demulsifiers, surface tension reducers, and a host of other commonly available materials. The graphic below gives you an idea how broad this category is.
Sales of stimulation fluids are a high technology, value-added sale and can drive enormous profits and margins. The key to stimulation sales is the people behind the design of whatever treatment is being applied. This stuff is going to be injected into the reservoir to fix or prevent some problem that is perceived be inhibiting maximum production from the reservoir. You had better know what you are doing, or you will make things worse! Oil companies rely heavily on service providers for recommendations for well stimulation. And, Newpark to its credit has hired some of best of the people away from competitors like Schlumberger, and Halliburton.
Not only have they hired good people, the "best" as I have said, the company has built a first class, reservoir materials testing lab.
David Paterson comments here-
“Our Technology Center in Katy, Texas sets the global standard in laboratory support and analytical capabilities for drilling, completion and stimulation fluids, and we continue taking steps to bring this capability closer to our customers, recently opening a new laboratory in Abu Dhabi.”
The Cleansorb acquisition
The importance of this acquisition cannot be over-estimated. Let me explain. I am going to get a little nerdy here, but will try and keep it at "layman's" level as best I can and still convey the thought.
Most wells drilled offshore require some form of sand management. Sand management is the practice of preventing or minimizing movement of reservoir material toward the well bore, essentially stabilizing the well bore for maximum, intervention free production. There are a variety of ways to go about this, but they fall into two broad classes.
Hydraulic Fracturing-HF, which is a form of reservoir stimulation. HF involves a lens or multiple lenses of highly permeable sand, or proppant are injected into the reservoir at pressures exceeding the fracture gradient of the rock. A lot of damaging fluids and chemicals are injected as well during this process, and must be cleaned up “in-situ” or through a flowback process.
Author's personal files
Open Hole Gravel Pack-OHGP (Note-this can also be done without the gravel pack, but I am trying to keep this simple.) Gravel packing is the exact opposite of the HF form of sand management. An element of design for an OHGP is that nothing, or as little as possible in the way of mud filtrate or solids is lost to the reservoir as the productive interval is drilled. It's called Formation Damage Prevention.
Author's personal files
Now, if you were in one of the classes I teach on the topic of "Reservoir Drill-in Fluids"-RDF, design, I would ask you what the key difference is between the two cartoons shown. Most of you aren't at a level where the key difference is going to be obvious to you, so I will do the big reveal. Related: China Grants Export License To Teapot Refiners
If you notice in the second cartoon, in the reservoir interval there is a line drawn between the reservoir, (the Yellow area), and the annular sand pack, (the space between the reservoir and the screen). This is the RDF filter cake which must be removed with production. Filter cake breakers, or "removers" are often applied shortly after the gravel pack to ensure an even "break" of this filter cake, so that the screen isn't plugged as a result.
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And, that's where Cleansorb technology comes into play. They have proven, client accepted technology for breaking down RDF filter cakes, and this acquisition saves Newpark years of basic qualification trials to get oil companies to run their breakers.
The key takeaway for you here is that the OHGP form of sand management is increasingly being applied for a variety of reasons, over the HF form in the offshore deepwater arena.
David Paterson addresses this acquisition-
“The recent Cleansorb acquisition is a great example of this as we build out our reservoir drilling and completion fluids offering. Like Newpark, Cleansorb is a recognized technical leader in their space with a strong reputation in stable markets. And we've already received a lot of positive customers' feedback on this strategic acquisition.”
Having this filter cake breaker technology in-house immediately vaults Newpark into the “Major” mud company category, alongside the Big Color companies- Halliburton- (Baroid), Schlumberger- (M-I SWACO), and Baker Hughes-Fluids.
Q-3 Financials
Third quarter 2019 revenues were $203 million, representing a 6% decline from the prior quarter and a 14% decline year-over-year. SG&A costs were $27 million in the third quarter compared to $28 million in the second quarter and $30 million in the third quarter of last year.
Corporate office expenses were $9.7 million in the third quarter compared to $10.5 million in the second quarter and $11.2 million in the third quarter of last year.
Interest expense was $3.6 million for the third quarter, relatively in line with the previous quarter and down modestly from $3.7 million in the third quarter of last year. The third quarter expense includes $2 million of cash interest, along with $1.6 million of non-cash interest expense, which primarily relates to their convertible bonds.
The third quarter provision for income taxes was $3.3 million, including a $2 million charge, primarily reflecting the impact of an increase in projected full year 2019 tax rate, which increased significantly as a result of the decline in anticipated earnings in the U.S. relative to their total projected pre-tax income.
Consequently, the third quarter tax rate is significantly elevated from the effective tax rate of 33% in the prior quarter and 44% in the third quarter of 2018. With the impact of the higher taxes, net loss for the third quarter was $0.02 per share, which compares to net income of $0.05 per diluted share in the second quarter and $0.04 per diluted share in the third quarter of last year.
Third quarter results reflect a continued generation of positive free cash flow, which came in at $8 million for the quarter. Third quarter cash provided by operating activities was $19 million, which includes $15 million of cash from operations, along with $4 million net decrease in working capital. Cash used in investing activities was $11 million in the quarter, the majority of which was deployed into the Mats business, while cash used in financing activities totaled $6 million.
Leverage remains modest and with a total debt balance of $162 million and a cash balance of $54 million as of the end of the third quarter, resulting in a total debt-to-capital ratio of 22% and a net debt-to-capital ratio of 16%.
Newpark is currently trading at a TTM- EV/EBITDA valuation of 7.72.
Your takeaway
I think Newpark's stock will rip higher in the New Year from current depressed levels. The macro environment is improving as we have discussed in the last few articles. With the things we've discussed in this article-strong management, technology and infrastructure, and value-added differentiator technologies in reservoir stimulation and filter cake breakers, I think they stand out as a top pick to improve their earnings and market penetration in key markets in 2020. If these factors play out as I suspect they will Newpark has the potential to double over the next year.
Note-Newpark is a micro-cap OSV though, and any investing decision should reflect the inherent risk associated with companies of their size. Little fluctuations in the market can make a big difference to them.
By David Messler for Oilprice.com
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