Expanding Into Mobile Energy Powers Future Growth And Diversifies Revenue Streams

Key Takeaways

• Solaris's acquisition of Mobile Energy Rentals expands its market reach and is likely to enhance future revenues with diversification into mobile power.
  
• The company's new product line and strategic investments, including share repurchases and dividends, aim to boost free cash flow and shareholder returns.
  
• Integration of Mobile Energy Rentals poses operational risks, demanding significant capital with uncertain market demand, and challenges from energy sector transitions.

Catalysts

Solaris Oilfield Infrastructure, Inc. designs and manufactures specialized equipment for oil and natural gas operators in the United States.

• The anticipated closing of the acquisition of Mobile Energy Rentals (MER) provides Solaris with an entry into the mobile distributed power market, expected to impact future revenue through exposure to multiple end markets both within and outside the oilfield.
  
• Solaris's investment in the build-out of a new complementary product line, which is complete, is showing a significant inflection in free cash flow generation, potentially impacting future earnings positively, as demonstrated by the highest quarterly cash flow in 4 years.
  
• The strategic acquisition of MER is planned to more than triple its fleet size, suggesting a substantial increase in capacity to meet the growing demand for mobile power generation, which could significantly boost future revenues and market share.
  
• Solaris's engineering and manufacturing capabilities, combined with its existing presence on one-third of the U.S. completion sites, provide operational synergies and commercial cross-selling opportunities with U.S. oil and gas operators and midstream companies. This is expected to enhance net margins through increased efficiency and diversified service offerings.
  
• The company has demonstrated a strong commitment to shareholder returns through dividends and share repurchases, backed by a solid growth capital program that drives earnings and free cash flow growth. The strategic investments and the MER acquisition underscore the company's potential to sustain and enhance shareholder value, indirectly contributing to an improved EPS through strategic reinvestments into the business.

Assumptions

• Analysts are assuming Solaris Energy Infrastructure's revenue will grow by 65.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.8% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $80.3 million (and earnings per share of $1.27) by about October 2027, up from $18.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, down from 22.4x today. This future PE is lower than the current PE for the US Energy Services industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 12.78% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Risks

• The reliance on the successful acquisition and integration of Mobile Energy Rentals (MER) to enter a new mobile distributed power product line poses financial and operational risks, potentially impacting revenue and net margins if integration challenges outweigh the anticipated benefits.
  
• The company's strategic expansion into new end markets and the planned tripling of MER's fleet size necessitates significant capital, which could strain Solaris' financial resources and impact its net debt position if market demand does not meet expectations.
  
• Solaris faces execution risk in managing the growth trajectory of MER, including capital investment efficiency and operational scalability, which could adversely affect earnings if the expansion does not yield the projected returns.
  
• Volatility in natural gas prices and the potential for fluctuating drilling and completion activity levels, particularly in natural gas-exposed basins, might negatively affect revenue stability and growth prospects in key markets.
  
• The broader energy sector's transition and regulatory environment could pose risks to demand for Solaris' traditional oilfield services, impacting long-term revenue streams and profitability as the industry evolves towards renewable energy sources.

Valuation

• The analysts have a consensus price target of $14.0 for Solaris Energy Infrastructure based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $80.3 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of $13.72, the analyst's price target of $14.0 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.