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Seventy Seven Energy Has Strong Upside Potential

August 26, 2014 | About:
Faisal Humayun

Faisal Humayun

2 followers

Seventy Seven Energy (SSE) is a spin-off of Chesapeake Energy’s (CHK) oil field services division. This article discusses the long-term prospects for Seventy Seven Energy and why the company can give significant returns.

Company overview

Seventy Seven Energy provides oilfield services in the United States. The company operates in the Drilling, Hydraulic Fracturing, Oilfield Rentals, Oilfield Trucking and Other Operations segments.

The Drilling segment offers land drilling and drilling-related services, including directional drilling, geosteering and mudlogging for the oil and natural gas exploration and development activities.

The Hydraulic Fracturing segment provides hydraulic fracturing and other well stimulation services.

The Oilfield Rentals segment offers rental tools for land-based oil and natural gas drilling, completion and work over activities.

As of December 31, 2013, the company owned or leased a fleet of 115 drilling rigs; owned 9 hydraulic fracturing fleets with an aggregate of 360,000 horsepower; and owned a fleet of 260 rig relocation trucks, 67 cranes and forklifts, and 246 fluid hauling trucks.

Key investment positives

Robust Order Backlog

As of July 2014, Seventy Seven Energy had an order backlog of $2.8 billion that gives the company nearly three years of revenue visibility. Of the company’s total backlog, only 4% was related to third parties other than Chesapeake Energy.

The company’s total backlog includes new services contracts entered into with Chesapeake in connection with the spinoff under which Chesapeake Energy is committed to use the services of Seventy Seven Energy.

This contract makes the revenue visibility firm for Seventy Seven Energy and ensures that the rig utilization rate remains high in the foreseeable future.

Strong Industry Trend

Seventy Seven Energy is not among the big players in the North American services companies with 2013 revenue of $2.2 billion. The company is therefore well positioned to take advantage of the strong industry dynamics.

The full-scale development plans of large shale resources (existing and emerging) will ensure that the company’s rigs are utilized well. Further, the industry is also moving towards more advanced rigs, which employ modern techniques and equipment.

Seventy Seven Energy is working towards making its fleet more advanced and robust to keep pace with the industry dynamics. The company is expected to have a modern and efficient land fleet of 91 rigs by the end of 2014.

Better Fleet And Higher Margin

As of 2013, Seventy Seven Energy had a fleet of 85 rigs, which included eight tier three rigs and only twenty tier one rigs. As a part of the company’s fleet modernization effort, Seventy Seven Energy plans to have a fleet of 98 rigs by 2015.

Further, the number of tier three rigs is expected to be reduced to nil from the current eight rigs. The number of tier one rigs will increase to 41 from current levels of 20 rigs. The number of tier two rigs will remain constant at 57 during this period.

The modernization of the fleet will help Seventy Seven Energy to improve its EBITDA margin and also improve the fleet utilization. As of July 2014, the land rigs in the U.S. consist of 37% tier one and 25% tier two rigs. Therefore, by the end of 2014, Seventy Seven Energy will have rigs that are well above the industry average in terms of the level of modern fleet.

Strong Outlook

Seventy Seven Energy has a strong growth outlook for 2014 and 2015. This should help take the stock price higher. In terms of revenue per operating day for rig services, the revenue is likely to increase from $23,900 in 2013 to nearly $25,000 in 2015.

Further, the company also expects the rental utilization at Great Plains to inch higher to 55%-60% in 2015 from 44% in 2013.

Overall, as the new rigs come into operation, the company’s revenue efficiency and EBITDA margin will get a boost. This will impact the company’s EPS and value creation.

Seventy Seven Energy also has $1.3 billion of debt outstanding as of July 2013. However, this is not a matter of concern as the debt maturity only comes after 2019. There is no immediate refinancing or repayment pressure on the company. The company has an annual interest outflow of $90 million, but this is not a matter of concern with 20114 annualized EBITDA at $412 million and the EBITDA interest coverage comfortable at 4.

Conclusion

Seventy Seven Energy is an interesting long-term bet to consider for investors who are bullish on the US shale revolution for the long-term. I believe that the demand for land rigs will sustain in the United States over the next few years and Seventy Seven Energy is well positioned to benefit from this.

Investors can consider Seventy Seven Energy with a 3-5 year investment horizon. As the company improves its fleet mix in 2014 and 2015, the stock should see substantial upside.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 0.0/5 (0 votes)

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