Tuesday, 10 March 2020

FTS International (NYSE; FTSI)- Hydralic Fracking Solution Company with No Turnaround soon

This is my first foray into evaluating a company outside of Singapore. This company was brought to my attention in a forum and because the format it reports its financials are similar to how Singapore companies report here; likely because its institutional shareholders are Singaporean linked companies, I was able to analyse the company easily.

Background of FTS International (FTSI)

FTSI is in the USA Fracking Industry. Its main business is the leasing of fracking units to oil exploration and production companies in the US Shale Oil industry (also known as Fracking). Their model is similar to rig companies who own the rigs and leases these rigs to oil exploration companies who are extracting oil in the sea.

FTSI financials can be found in this link, under "Current report filing" dated 12 Feb 2020. The group has only two full years of financial results because it IPO'd in 2018 to raise funds for its operations.

Will it be Able to Repay its Debts?

As of writing, the company is trading at a range of US$0.40-US$0.50 per share. It made a loss of US$72.6 million or US$0.67 loss per share in 2019. It is now selling at a book value of 1.45 times. Quite an expensive valuation in my view.

What is interesting is its debt profile and cashflow generation ability. FTSI has two tranches of debt:

(A) Term Loan Due in April 2021 of US $90 million
(B) Senior Notes (Bonds) due in May 2022 of $369.9 million

Its cash profile is as follows:

(A) Cash Reserves of US$223 million, of which it needs only about US$100+ million to run its business (a Q&A asked during the presentation of financial results by FTSI management), indicating an excess of US$100million in excess cash.

Weakening Fundamentals of US Shale Oil 

One of the biggest news that happened this week was the disagreement between Saudi Arabia and Russia in maintaining oil prices. This resulted in oil prices falling to the US$30 per barrel range which was last seen in 2015-2016.

For the past 2 years, FTSI had been operating in an oil environment where WTI price was in the US$50-70 range. If one observes the free cash flow generated by FTSI in those 2 years, one can notice a pattern: In 2019 when WTI was at a US$50-60 range, FTSI produced $26 million from the leasing of its fracking units. In 2018, when WTI was in the range of US$60-70, FTSI produced about US$280 million in free cashflow. See Page 6 of the financial report in the Link

If WTI is to stay in its range of US$30+ to US$50 range over the next 2 years, we can perhaps say that FTSI will be producing very little free cash flow for its business. Furthermore, the current low prices means US frackers will definitely reduce their drilling activities in the USA. Furthermore, some fracking oil E&P US companies are poised for bankruptcy under current oil conditions. All these point to a fall in demand for FTSI fracking units.

As mentioned, FTSI is definitely able to repay its 2021 term loan due to its cash pile, however I doubt FTSI will be able to redeem fully its 2022 bonds, especially when capital markets are now less welcoming to the energy sector. In the market, FTSI bonds are currently selling below the 70 cents range which indicates distressed levels.

Furthermore, with US fracking industry poised to decline, there is going to be an oversupply of fracking units in the market.

Expected Value of FTSI

The weakening of US shale raises the question if FTSI will be able to roll over its debts in 2022. Until WTI moves to above US$50, it is prudent to value FTSI at a book value of between 0.25 to 0.50 times its book value, to indicate some form of distress. This points to a US$10-US$20 million market cap or US$0.10-US$0.20 range

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