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CHAMPIONX CORP CHX
February 02, 2024 - 5:25pm EST by
madler934
2024 2025
Price: 26.60 EPS 1.90 2.25
Shares Out. (in M): 198 P/E 14 11.8
Market Cap (in $M): 5,266 P/FCF 11.2 10.0
Net Debt (in $M): 316 EBIT 480 500
TEV (in $M): 5,582 TEV/EBIT 11.0 10.5

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Description

Description

We believe ChampionX (CHX) is an underappreciated business within the volatile oilfield services (OFS) sector. CHX trades at a 10% 2025 FCF yield with ability to grow FCFPS annually >10% tied to higher margin offshore projects coming online over the next few years, even in a low oil price environment (~$60/bbl).

Background

ChampionX is the product of an RMT of two industrial companies' O&G businesses in 2020: Dover’s Artificial Lift segment spun out as Apergy in 2018 (~35% of EBITDA) and Ecolab’s oilfield chemicals business (~65% of EBITDA). The combination created a higher quality, lower volatile oilfield services company with strong mgmt. The industrial heritage is evident in leading FCF conversion, ROIC and working capital mgmt. vs. OFS peers.

 
One of the few quality businesses in the oilfield services (OFS) sector

More of a specialty chemicals company than an OFS business
 

>75% of EBITDA tied to production - recurring, longer duration revenue

 

CHX generates mid-teens ROIC including adding back covid-era impairment
 

CHX has consistently out-performed peers on key metrics like ROIC, margins, FCF conversion, working capital intensity
 

FCF conversion above peers, despite smaller size, yet trades at discount to peers:
       
   

 

   

 

 

CHX's business is tied to production, not drilling - that gives it longer duration vs peer OFS companies where 80%+ of sales is tied to drilling and completions capex
 

This makes CHX unique: peers are tied to O&G capex vs. CHX which is tied to opex
   

This link to production has led to less significant positive earnings revisions than other OFS companies over the last two years, but will also be more defensive in a downturn
 

Terminal value is a big issue for OFS companies but less of an issue for CHX where reveues are tied to total liquids production globally (oil + water)
 

CHX organic growth exceeds oil demand growth by ~3x from mix shift to harder to produce bbls
       

CHX's most valuable asset is Nalco Energy Services - the leader in offshore oilfield chemicals
 

CHX’s Offshore division is the technology leader in offshore O&G chemicals – a legacy of when predecessor Nalco dominated the deepwater chemicals industry for decades.
 

Nalco’s Energy division was acquired by Ecolab for 10.9x NTM EBITDA (1.8x Sales) in 2011

 

Nalco's technical expertise is critical to offshore production, customers bring in Nalco years before production begins - this drives close relationship, high visibility for CHX
   

Visibility on customer production ramps drives CHX mgmt confidence in HSD organic growth for Chemicals (we estimate MSD)
 

Nalco was the technical advisor responsible for starting up over 2/3 of all Offshore fields producing today
 

Offshore is CHX's best business:
   
  • Duopoly with BKR (~40-50% share on Deepwater vs. 26% of global OFS chems market)
     
  • CHX technical abilities far above BKR- BKR often brought in for security of supply diversification
     
  • Rational competition - some gains/losses for each but no significant competition on price
     
  • CHX's superior service has led to them gaining share in key geographies from BKR
   
  • High growth: Deepwater production growing mid-teens CAGR
   
  • Highest margins: we estimate over 10% higher margins than Onshore (mid-20%s vs. low-to-mid-teens for onshore)
 
  • BKR formers: CHX's customers care more about technical expertise and service than price - different customers than BKR
       

CHX can grow sales organically mid-single digits in most oil price environments
 

Structural growth drivers:
   

1) Deepwater + Ultra Deepwater
     
  • 40% of PCT is Offshore growing double-digits… growing offshore % of mix will boost margins (+1000bps higher margins than Onshore)
   

2) MidEast onshore unconventionals
     
  • Jafurah: $100bn onshore gas project in Saudi
   

3) Growth of artificial lift from maturing shale fields
     
  • Increasing intensity of artificial lift per well as resevoirs becomes less productive - requiring more lift to make up for the loss
   

4) CHX sells to majors in US onshore whose production growth is expected to exceed the NAM average of ~flat to LSD %
 

MSD sales growth leads to mid-double digit FCF growth incl. capital return (%) - high-teens total return
 

With lower sales growth, working capital outflow should abate and FCF conversion should improve
       

Upside from leading emissions monitoring and Digital Oilfield products
 

Digital (Oilfield IoT) has seen very strong growth and now represents 25% of PAT sales
   

85% of segment sales are edge hardware for the monitoring of production assets
   

15% of sales is production optimization software
 

Management sees digital as a 20% growth opportunity as a segment and will likely separate it into its own segment
   

Formers framed the growth algorithm as MSD to HSD price and 5 to 15% volume growth from new customers and expansions
   

Resilient growth even in the face of weaker completions - digital expected to grow 17% in 2023 despite double digit decline in NAM rig counts
 

CHX owns a leading emissions monitoring service, which benefits from a growing focus on methane emissions in O&G production - a major GHG contributor
   
  • Market leader in emissions monitoring by installed base
   
  • Potential for regulations to significantly accelerate growth
   
  • Currently $20mm of revenues, upside case is $100mm in 5-years as management expects 30 to 40% growth
 

These businesses have been immaterial but are starting to become positive variance for margins next year
   

Digital as a whole is accretive to PAT, and the software business is even higher margin
   

We estimate Digital has 500-1000bps higher margins than current segment average (23% EBITDA margins)
       

CHX has attractive, predictable capital allocation, FCF conversion and shareholder return
 

CHX deserves premium multiple on clear capital allocation, no M&A risk, high shareholder return (~80% of FCF recently)
 

CHX FCF conversion very strong vs. peers - strong working capital mgmt vs. other OFS business
   

We estimate CHX can buyback 4-5% of shares per year growing sales MSD
 

We estimate top-line growth of MSD improves CHX FCF conversion to low-60% of EBITDA on lower WC investment requirements:


Risk / Reward

 



Key Risks

Sharp drop in oil prices to the $50s could cause US drilling activity to decline, longer-term would impact offshore growth                                               

  • This would cause operators to cut their spending /capex plans, which would further reduce NAM activity and drive a contraction in completions
  • PAT (Artificial Lift) and DT (Drilling Tech) sales could contract mid-teens in a de-stocking downturn
  • If price decreases are significant enough, could lead to customers requesting price concessions as seen in 2014 and in 2020, though majority of those price concessions were recovered by lower COGS

 

Biggest competitor BKR increasing supply                                                                                                                            

  • CHX has benefited from being the only major supplier with production sites outside of NA. When Gulf Coast has been disrupted, CHX has been able to provide better surety of supply than BKR (happened in 2021-22)
  • BKR built a plant in Singapore that was completed mid-2023 and increased their supply. They also have a plant in Saudi Arabia coming online end of the year
  • Our research indicates these new plants are not reducing market share for CHX
    • Could lower BKR's costs and ability to respond to supply disruptions, potentially reduce value of CHX's superior supply chain

                                                                                               

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Production of some of the fields where CHX has the highest revenue per bbl are growing significantly in the second half of 2024: Guyana, GoM, and oil sands. These long lead time projects coming online will accelerate organic growth in the PCT business in 2H24 while most other oilfield services companies see decelerating growth.

 

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