Description

C&J Energy is an oilfield services company that provides well completion and production related services to E&P companies. The company was founded in 1997 and went public in 2011. In March 2015, or less than two quarters into the oil price downturn, the company levered up to merge with the well completion and production services business of Nabors (NBR). In July 2016, following a sustained reduction in US oil & gas drilling activity, C&J filed for Chapter 11 with $1.4bn of bank debt ultimately receiving nearly 100% of the reorganized equity.

C&J emerged in January 2017 with (1) a clean, unlevered balance sheet, (2) oilfield services activity poised to ramp with E&P budgets up 30+% yr/yr in 2017, (3) an asset base exposed to the parts of the industry rebounding first and hardest, and (4) at a sharp valuation discount to peers.

At the current share price of $37, C&J market cap is $2.2bn and net debt is -$220mm (ie. net cash) on a fully diluted basis. C&J current enterprise value of under $2bn compares to a $4.5bn enterprise value for RPC Corp (RES), which is the most direct comp as a well completion and production services company with no debt and similarly sized asset bases and product offerings. As described below, C&J is worth $45-$62 per share (22-68% upside) or $2.4-$3.4bn enterprise value.

 Industry backdrop:

• The oilfield services industry is fragmented and oversupply exists but industry capacity is rationalizing with lack of investment, cannibalization, and players exiting the market. Also, completions activity is increasing with E&Ps focused on extracting more resource per well, and as the number of drilling rigs continues to rise in the US.

• E&P capex is projected to be up 30+% yr/yr in 2017 and rig activity is up 70% off the bottom and projected to grow further (total US rig count is now 665 and some management teams expect it to reach over 800 by year end 2017).

• Overall, C&J is well positioned to participate in an industry upcycle as supply comes out (given the lead-lag time in the system) and is exposed to the parts of the oil services industry that is rebounding first and hardest.

 Company overview:

• C&J provides well completion and production services (ie. preparing already drilled wells to begin production and/or continue to produce) and reports in three segments: Completions Services (57% of 3Q16 revenue), Well Support Services (38%) and Other Services (5%). The major driver of the business is US onshore E&P capital spending, particularly spending on completion activity.

• In the Completions Services segment, the company has a pressure pumping business consisting of 25 frac fleets (ie. trucks and equipment that frack already drills welled by pumping fluid downhole at high pressure) which equates to approximately 1mm hydraulic horsepower (HHP). C&J is the sixth largest pressure pumper in the US by HHP. Also in the Completions segment is 130 wireline trucks (used to lower devices into wells for reservoir evaluation) and 45 coiled tubing trucks (used to set or retrieve equipment in wells).

• In the Well Support Services segment C&J has around 500 workover rigs (used to repair or perform maintenance on wells that have already been drilled) along with fluid and frac tanks.

• Completion services has favorable fundamentals and will likely to grow at a faster rate than overall oilfield service spending as intensity continues to grow and the supply of completion equipment is reduced.

• Pressure pumping pricing has been unsustainably low for the past 12 months (negative EBTIDA margins) but pricing is increasing as demand picks up. Anecdotally, the industry expects 10-20%+ price inflation in 2017.

• C&J founder and former CEO Josh Comstock sadly passed away in 2016. New CEO Don Gawick is highly regarded and has been with C&J since 2012 after previously holding senior management positions at Schlumberger from 1979-2010.

 Valuation:

• C&J enterprise value is $2bn based on current share price of $37 (market cap is $2.2bn and net debt is -$220mm (ie. net cash) on a fully diluted basis). C&J is worth $45-$62 per share (22-68% upside) or $2.4-$3.4bn enterprise value.

   

• EV/EBITDA: Forward EBITDA expectations for C&J are too low.

  • Company EBITDA projections for the purposes of restructuring were $137mm in 2018 increasing to $271mm by 2020. These projections are conservative, stale, and not reflective of recent industry pricing trends.

  • For comparison, RPC Corp (most comparable peer as discussed below) consensus EBITDA estimates are $400mm in 2018 increasing to $750mm by 2020. The chart below shows Bloomberg consensus estimates for C&J and RPC Corp historically and sell-side analysts have historically believed each would generate roughly the same EBITDA.

  • Also for context, EBITDA for C&J (pro-forma for NBR completions business) ranged from $550-$850mm in 2011-2014.

    

     

• Comparison to RPC Corp (RES):

  • The best public comp for C&J is RPC Corp which is a well completion and production services company with no debt and with a similarly sized asset base and product offerings.

  • RPC Corp current enterprise value is $4.5bn compared to under $2bn for C&J.

  • Asset base comparison:

    • Pressure pumping: RPC has 930k HHP (~57% of revenue) and C&J has 1,000k HHP (50+% of revenue)

    • Coiled tubing: RPC has 53 units (~10% of revenue) and of C&J has 45 units (<10% of revenue)

    • Downhole tools/wireline: ~15-20% of RPC revenue and <10% of C&J revenue

    • Workovers/snubbing: <5% of RPC revenue and ~30% of C&J revenue

• Replacement value:

  • The below replacement value summary is based on historical newbuild costs. Thus, current newbuild costs are likely lower (no newbuilds are being built) but could also pick up meaningfully if rapid newbuild were to occur industry wide.

• Sellside valuations:

  • C&J is underfollowed in its newly reorganized form but sellside analysts are familiar with the company given it was previously covered by most oilfield service analysts.

  • Initial valuation analysis from sellside analyst pegs C&J enterprise valuation at $2.2bn to $5.2bn.

• Takeout optionality:

  • As demonstrated by the Patterson-UTI (PTEN) acquisition of Seventy Seven Energy (SVNT) for $1.8bn, there is demand for pressure pumping assets and thus some takeout potential.

  • Seventy Seven Energy asset base consists of 500k HHP of pressure pumping (ie. half the capacity of C&J) and 35 higher spec rigs, and it was acquired shortly after emerging from bankruptcy with a clean balance sheet.

• Summary valuation:

  • C&J enterprise value is $2bn based on current share price of $37 (market cap is $2.2bn and net debt is -$220mm (ie. net cash) on a fully diluted basis). As US onshore oil & gas drilling activity ramps, services pricing increases, and C&J equity gains trading liquidity and market attention, EBITDA and asset value estimates should increase and drive share price performance.

  • Using a low end upside valuation of $2.4bn based on replacement value (as described above) and high end upside valuation of $3.4bn based on a 25% haircut to RPC Corp enterprise value of $4.5bn, C&J is worth $45-$62 per share (22-68% upside).

Risks and mitigants:

• C&J trades OTC and liquidity will be relatively low in the near term.

  • C&J intends to go through the listing process and trade on an exchange in the coming months.

• The frac market is oversupplied and substantial excess capacity exists.

  • Industry capacity is rationalizing with lack of investment, cannibalization, and players exiting the market. Further, to reactivate the non-working equipment would require 20-30% price increases based on commentary from various management teams.

• Oil & gas commodity price exposure.

  • If oil prices return to the $40s or below, oil & gas drilling activity levels will remain low and oilfield service companies would face headwinds. In the meantime, in the current oil price environment, US drilling activity is ramping and demand for oilfield services is increasing.

Catalyst

As US onshore oil & gas drilling activity ramps, services pricing increases, and C&J equity gains trading liquidity and market attention, EBITDA and asset value estimates should increase and drive share price performance.

C&J enterprise value is $2bn based on current share price of $37 (market cap is $2.2bn and net debt is -$220mm (ie. net cash) on a fully diluted basis). Using a low end upside valuation of $2.4bn based on replacement value and high end upside valuation of $3.4bn based on a 25% haircut to RPC Corp enterprise value of $4.5bn, C&J could be worth $45-$62 per share (22-68% upside).