Permian Expansion And High Specification Rigs Will Drive Strong Long Term Upside

Catalysts

About Ranger Energy Services

Ranger Energy Services is a well servicing company in the Lower 48, focused on high specification workover rigs and complementary production oriented services.

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

• Scaled entry into the Permian Basin through the American Well Services acquisition increases rig count, customer reach and cross selling of new service lines.
• Adoption of ECHO hybrid electric rigs, which offer lower emissions, improved safety and higher efficiency than some conventional rigs, may help win premium contracts and displace competitors, potentially lifting average day rates and segment margins.
• Industry emphasis on production optimization and well maintenance, rather than pure drilling growth, is aligned with Ranger's core high specification rig business and may support utilization and pricing power across cycles.
• Integration synergies from AWS, including identified operational and administrative efficiencies, may reduce unit costs and enhance operating leverage.
• Demand for specialized plug and abandonment and safety sensitive services, supported by regulatory backed contracts, may allow Ranger to capture higher value work and improve the quality and predictability of cash flow.

Assumptions

This narrative explores a more optimistic perspective on Ranger Energy Services compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Ranger Energy Services's revenue will grow by 11.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.7% today to 9.8% in 3 years time.
• The bullish analysts expect earnings to reach $75.2 million (and earnings per share of $3.25) by about December 2028, up from $14.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Energy Services industry at 18.3x.
• The bullish analysts expect the number of shares outstanding to decline by 2.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in completion focused activity and prolonged budget exhaustion at key customers in basins like the Bakken and Powder River could indicate a structurally lower level of demand for certain well services, constraining long term revenue growth and limiting operating leverage on earnings.
• If depressed commodity prices and regulatory or operator delays cause a slower than expected rebound in plug and abandonment and coiled tubing work, the Ancillary and Processing Solutions segment may remain underutilized, which could pressure segment margins and hold back consolidated net margins.
• Integration of American Well Services may prove more complex or slower than planned, delaying or reducing the anticipated 4 million dollars of annual synergies. This would dilute the expected accretion from the deal and weigh on both EBITDA margins and net income.
• The ECHO hybrid rig program may face slower customer adoption than management anticipates or may displace more of Ranger's own conventional rigs than competitors over time. This could limit net incremental demand and mute the contribution of this technology to long term revenue growth and margin expansion.
• Ongoing weakness and structural competitiveness issues in the Wireline segment, which is already operating at thin EBITDA levels and has recently required noncash inventory adjustments, could signal a business line that struggles to earn its cost of capital. This may drag on consolidated profitability and earnings growth even if other segments perform well.

Valuation

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

• The assumed bullish price target for Ranger Energy Services is $21.0, which represents up to two standard deviations above the consensus price target of $16.83. This valuation is based on what can be assumed as the expectations of Ranger Energy Services's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $14.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $766.9 million, earnings will come to $75.2 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $13.77, the analyst price target of $21.0 is 34.4% higher.
  
• 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.