Mammoth Energy Services: Putting More Pressure Pumping Fleets Into Operation

The results for Mammoth Energy Services (NASDAQ:TUSK) have improved significantly since the start of 2022 with high utilizations and solid rates for its pressure pumping fleets. It expects to put two more fleets into operation in 2023, which should result in a further increase to its EBITDA.

Mammoth is also spending a significant amount to upgrade some of its pressure pumping fleets, aiming to have four dual fuel fleets by the end of the year. Mammoth is budgeting $64 million for capex in 2023, compared to $13 million in actual capex in 2022. This means that it may only generate around $12 million in free cash flow in 2023 if it ends up with $85 million in adjusted EBITDA.

This projected free cash flow for 2023 is lower than I previously expected for Mammoth, largely due to its capex budget. As a result of the lower free cash flow expectations and a slightly more conservative outlook for well completions services, I am trimming my estimate of Mammoth's value to $6 to $7 per share. This is still well above Mammoth's current share price though.

Q4 2022 Results

Mammoth reported $24.1 million in adjusted EBITDA for Q4 2022. This included the impact of $3.5 million in bad debt expense related to a previously disclosed legal settlement.

Excluding that bad debt expense and also the $10.8 million in interest on PREPA accounts receivables for the quarter would have resulted in Mammoth reporting $16.8 million in adjusted EBITDA for Q4 2022. This would be a more accurate picture of how Mammoth performed during the quarter.

Mammoth's well completion services division continued to perform strongly, recording $12.6 million in adjusted EBITDA in Q4 2022. Their natural sand proppant services division generated $2.9 million in adjusted EBITDA in Q4 2022 after excluding the bad debt expense.

Meanwhile, Mammoth's other services division reported $1.3 million in adjusted EBITDA while its infrastructure services division only reported $0.1 million in adjusted EBITDA in Q4 2022 after excluding the interest on PREPA accounts receivables.

Well Completion Services Division

The well completion services division is currently contributing most of Mammoth's EBITDA. It noted that it had four of its six pressure pumping spreads operating at the end of 2022 and announced in mid-January 2023 that it put its fifth spread into operation. Mammoth intends to put its sixth spread into operation in 2H 2023 after upgrading it to Tier 4 dual fuel, while also upgrading two existing spreads to Tier 2 dual fuel. This would bring it up to four dual fuel fleets. However, the timing of upgrades may be hampered by supply chain issues.

Mammoth said that its annualized adjusted EBITDA per fleet was approximately $15 million at the end of 2022. Mammoth had an average of 3.4 fleets active during Q4 2022 and an average of 3.5 fleets active during Q3 2022.

Debt And Cash Flow

Mammoth ended 2022 with $66 million in net debt, down slightly from $71 million in net debt at the end of Q2 2022. I had expected Mammoth's debt paydown to be around zero in the second half of the year due to items such as its MasTec settlement payments (which it paid off in full by the start of December 2022) and backloading of capex. Mammoth's debt paydown in the second half of the year was slightly better than I expected, although that appears to be due to it only spending $13 million in capex in 2022 compared to its $20 million budget.

For 2023, Mammoth expects significantly higher capex and is budgeting $64 million. Much of this is going towards its well completions division as it upgrades its fleet.

Due to the increased capex budget, Mammoth may not be able to pay down its debt by a huge amount during 2023.

Mammoth's annualized adjusted EBITDA (excluding bad debt expense and interest on PREPA accounts receivables) from Q4 2022 was approximately $67 million. It may be able to generate around $85 million in adjusted EBITDA (excluding bad debt expense and interest on PREPA A/R) in 2023 with its added fleets.

After Mammoth's capex budget and interest costs, this would leave it with around $12 million in free cash flow in 2023, which would help it reduce its net debt to $54 million by the end of 2023. Mammoth's credit facility matures in October 2023, so it will likely need to get that extended or otherwise refinance its debt. Unless it gets a significant payment from its PREPA accounts receivables, it doesn't look capable of paying off that facility via cash flow.

Notes On Valuation

I am now estimating Mammoth's value at around $6 to $7 per share. This is an EV/EBITDA multiple of approximately 4.0x to 4.5x based on $85 million in adjusted EBITDA and its projected year-end 2023 net debt of $54 million.

This also does not include the money Mammoth is owed by PREPA. At the end of 2022, PREPA owed Mammoth $227 million for services plus $152 million in accrued interest. Mammoth ability to recover this money is highly uncertain, so I believe it is best not to include the debt PREPA owes to Mammoth in the calculations of Mammoth's estimated value.

Conclusion

Mammoth's well completion services division continues to perform well, with an average of 3.4 fleets active during Q4 2022. It expects to have six fleets in operation by the end of 2023.

The increased number of operating fleets plus the solid environment (despite weaker commodity prices) for well completions may allow Mammoth to reach around $85 million in adjusted EBITDA during 2023. This would give Mammoth a modest amount of free cash flow as its capex budget is fairly high in 2023 due to fleet upgrades.

I believe that Mammoth is worth around $6 to $7 per share in the current environment, not including any potential PREPA recoveries. Mammoth has a relatively modest amount of debt, so I'm assuming it can deal with its October 2023 credit facility maturity through refinancing or an extension of the maturity. However, that is something to watch since the maturity date is relatively near.

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