Seeking Alpha • Sep 03
Mammoth Energy Services: Improved Oilfield Services Outlook Is Driving Recovery
Summary
Mammoth delivered improved results in Q2 2022, mainly due to its oilfield services divisions.
It believes that its well completion services division may be able to generate $100+ million in adjusted EBITDA on its own in the future.
Using more conservative numbers (based largely on 2018 results) results in a scenario where Mammoth could generate $40 million in positive cash flow once it pays off its debt.
Getting anything from PREPA would be a bonus.
Mammoth Energy Services (TUSK) has begun to show improved business results, largely due to the favorable environment for oilfield services. It generated $13 million in adjusted EBITDA in Q2 2022 (excluding interest on its Puerto Rico Electric Power Authority [PREPA] accounts receivables). Mammoth's well completion services and natural sand proppant services divisions combined to generate $13 million in adjusted EBITDA during the quarter, so without those divisions Mammoth's adjusted EBITDA would be roughly zero.
The strength in those areas should allow Mammoth to generate positive cash flow and start paying down its high interest credit facility debt. Mammoth's ability to collect its PREPA accounts receivables remains highly uncertain though. The strong commodity pricing environment that helps Mammoth's oilfield services business also adds more challenges for PREPA as nearly all of Puerto Rico's power generation comes from fossil fuels, including 80% from natural gas and oil.
In the 2020 environment, Mammoth's value was mainly from its potential to collect on its accounts receivables. The current environment for oilfield services should allow Mammoth to do well on its own though, and anything that it can get from PREPA would be a bonus.
Q2 2022 Results
Mammoth reported strong results in Q2 2022. It generated $23 million in adjusted EBITDA in Q2 2022, up from $9 million in adjusted EBITDA for Q1 2022. These numbers are inflated by the interest (approximately $10 million per quarter now) that it is charging on its Puerto Rico Electric Power Authority [PREPA] accounts receivables.
Excluding the interest-related income results in a better picture of Mammoth's actual business performance. The exclusion of that income would lead to Mammoth generating $13 million in adjusted EBITDA in Q2 2022 and negative $1 million in adjusted EBITDA in Q1 2022.
The improvement in results is primarily being driven by Mammoth's well completion services and natural sand proppant services divisions. These divisions reported $8.5 million and $4.9 million respectively in adjusted EBITDA for Q2 2022.
Mammoth now has four frac spreads working, up from two at the end of 2021. It is aiming to activate a fifth fleet in Q4 2022 and a sixth fleet in Q1 2023.
It estimates that it could generate $15 million to $18 million adjusted EBITDA per year per frac spread at current prices. With six operating fleets, this could result in $90 million to $108 million adjusted EBITDA per year.
Mammoth's Completion Services (mammothenergy.com)
Cash Flow
While Mammoth believes that it could generate $100+ million in adjusted EBITDA from its well completion services division, I believe it would be prudent to model things more conservatively. In 2018, Mammoth generated approximately $65 million in adjusted EBITDA from that division with six fleets. Adding $25 million in adjusted EBITDA from the natural sand proppant division and no net contribution from the rest of the company results in a total of $90 million in adjusted EBITDA.
If we allow for $50 million in capital expenditures, that results in $33 million in positive cash flow. Mammoth's cash flow could increase as it pays down its credit facility debt, which had an 8.75% interest rate at the end of Q2 2022.
PREPA Accounts Receivables
Mammoth is now owed approximately $358 million from PREPA, including $131 million in accrued interest. It seems doubtful that it will be able to collect anywhere near the full amount though.
PREPA is currently attempting to restructure its debt and the mediation deal deadline keeps getting pushed back. PREPA has approximately $9 billion in debt and over $4 billion in pension liabilities that it is trying to deal with. It also had been reporting a string of operating losses (before interest expense). PREPA's challenges are now compounded by high fuel costs, with 43% of Puerto Rico's power generation coming from natural gas and 37% from oil.
Notes On Valuation
I can see Mammoth Energy being worth around $6 to $7 per share now in a scenario where the performance of its oilfield services business is similar to 2018. In that scenario it could generate around $0.70 per share in free cash flow (with its current interest costs), rising to around $0.85 per share in free cash flow once it pays off its credit facility debt.