Gas-Weighted Exposure And Underutilized Frac Fleets Will Pressure Earnings Ahead

Catalysts

About ProFrac Holding

ProFrac Holding provides hydraulic fracturing, proppant production and related oilfield services through a vertically integrated platform.

What are the underlying business or industry changes driving this perspective?

• As U.S. shale activity remains below the level needed to sustain flat production, any slower than expected rebound in drilling and completions could leave ProFrac with underutilized fleets and plants, pressuring revenue and limiting operating leverage driven margin recovery.
• Growing natural gas demand from LNG exports and power markets may not translate into commensurate Haynesville and South Texas activity if operators maintain strict capital discipline, which would delay anticipated volume driven earnings improvement from the company’s gas weighted exposure.
• Industry wide discipline on new frac equipment additions could be undermined by smaller or distressed competitors redeploying idle diesel fleets, prolonging pricing pressure and capping ProFrac’s ability to expand net margins despite its current focus on premium dual fuel and electric fleets.
• Heavy reliance on cost reduction, automation and asset management to offset volatile customer schedules risks diminishing returns if white space and program “head fakes” persist, constraining the sustainability of recent EBITDA margin gains and free cash flow improvement.
• Ongoing balance sheet actions to secure up to $200 million of additional capital highlight the need for external funding, and if market recovery is slower than assumed, higher interest burdens and potential dilution could weigh on future earnings and limit equity value accretion.

Assumptions

This narrative explores a more pessimistic perspective on ProFrac Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming ProFrac Holding's revenue will decrease by 4.2% annually over the next 3 years.
• The bearish analysts are not forecasting that ProFrac Holding will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ProFrac Holding's profit margin will increase from -17.2% to the average US Energy Services industry of 7.0% in 3 years.
• If ProFrac Holding's profit margin were to converge on the industry average, you could expect earnings to reach $119.8 million (and earnings per share of $0.54) by about December 2028, up from $-336.5 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.9x on those 2028 earnings, up from -2.4x today. This future PE is lower than the current PE for the US Energy Services industry at 18.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Maintenance drilling and completion activity in U.S. shale is currently below the level needed to sustain flat production. A cyclical catch up phase in 2026 and beyond, particularly in gas focused basins, could drive a durable rebound in fleet utilization and pump hours, supporting stronger long term revenue and operating leverage.
• Expanding LNG export capacity and rising power demand create a favorable multi year backdrop for natural gas. ProFrac’s strong foothold in Haynesville and South Texas positions it to capture a disproportionate share of any sustained gas led upcycle, which could materially improve segment margins and overall earnings.
• The company’s vertically integrated model, including in house manufacturing, Alpine Silica proppant assets and an advanced asset management program, structurally lowers operating and maintenance costs. Even a modest industry recovery could translate into outsized margin expansion and higher free cash flow than currently implied.
• Technology leadership through ProPilot 2.0 automation, continuous pumping capabilities and the Seismos closed loop fracturing partnership can deliver lasting efficiency gains, such as lower fuel use and labor intensity. Over time this may structurally lift net margins and help smooth earnings through volatile commodity cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for ProFrac Holding is $2.0, which represents up to two standard deviations below the consensus price target of $3.9. This valuation is based on what can be assumed as the expectations of ProFrac Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $119.8 million, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $4.48, the analyst price target of $2.0 is 124.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.