Atlas Power Options, Inc. (NYSE:AESI) is an organization whose identify refers back to the e-book, Atlas Shrugged, by Ayn Rand. Nonetheless, it might require greater than an Atlas, or Hercules, to beat the challenges inherent within the boom-and-bust frac sand enterprise.
The corporate provides sand for hydraulic fracturing from a number of Texas areas. Certainly, pre-IPO, the corporate was referred to as Atlas Sand. Along with its sand mines, Atlas is constructing a one-of-kind prolonged proppant conveyor, designed to take sand vehicles off west Texas roads. Fracing requires actually tons of sand, which should be delivered by hundreds of vehicles on a really restricted variety of highways. This has led not simply to congestion and time prices however, extra considerably, to harmful and lethal accidents.
Atlas was based in 2017 by skilled exploration and manufacturing professionals and led by oilfield entrepreneur Bud Brigham. A portion of its fairness was offered to the general public in an IPO just a few months in the past. Nonetheless, insiders nonetheless personal practically 70% of the corporate.
Possession at this time is split into Class A (public) shares and Atlas Sand Working LLC items.
Whereas the corporate has good backing and skilled leaders, frac sand provide is a extremely unstable enterprise that has bankrupted many prior firms. Lengthy-term buyers could need to wait for added quarterly outcomes, the profitable operation of Dune Specific, and a shopping for alternative later, when fairness possession isn’t majority-controlled by insiders and a bigger proportion of revenue may be attributed to Class A stockholders.
First Quarter 2023 Outcomes and IPO
Atlas Power Options, Inc. went public with an preliminary public providing within the first quarter of 2023. Whereas initially concentrating on $20-$23/share, the IPO priced at $18.00/share (elevating $324 million) and started buying and selling Thursday, March 9, 2023, at barely beneath that stage.
On Might 8, 2023, it reported first quarter 2023 gross sales of $153.4 million on 2.8 million tons of sand (or $55/ton, the next value for sand than just a few years in the past when sand was oversupplied.) Earnings was $62.9 million (41% margin) and web money stream from operations was $54.2 million.
Nonetheless, despite the fact that Class A and Atlas Sand Working unitholders acquired the identical 1Q23 dividend, potential buyers must be conscious that solely a fraction of Atlas’ web revenue in 1Q23 is attributable to the Class A shareholders for the reason that firm was public for just some weeks of 1Q23. To wit, whereas web revenue was $62.9 million, $54.6 million of that was pre-IPO web revenue attributable to Atlas Sand Firm, LLC.
Additionally notice that one other $6.6 million was attributable to a redeemable noncontrolling curiosity, leaving $1.7 million, or $0.03/share, for Atlas Power Options shareholders. (And most of these 57.4 million shares are held by insiders.)
Atlas additionally reported that it had begun building of Dune Specific, on account of be operable in 2024. Dune Specific is a 42-mile-long proppant (or sand) supply system-the world’s first long-haul conveyor– that originates at Atlas’ Kermit (Texas) sand facility. Dune Specific has 75,000 tons of storage and is designed to take hundreds of sand vehicles off the few roads within the Delaware Basin, thereby making these roads safer. Atlas already has a contract with BPX Power, a subsidiary of BP (BP).
On the map beneath, most of the Permian sand mines are in a tough line from Monahans (the Monahans Sand Hills are illustrated on the high of this text) northwest via Kermit to the border with New Mexico.
West Texas Intermediate (WTI) Crude Oil, $/bbl
Oil Costs and Manufacturing
The WTI closing value on the NYMEX futures marketplace for supply at Cushing, Oklahoma in July 2023 on Thursday, June 1, 2023, was $70.07/barrel. The Brent futures market, which now elements within the value of (successfully) WTI at Midland, Texas, was $74.24/barrel for August 2023 supply.
The 5-95 confidence interval via the top of 2024 reveals a variety of about $30/barrel to $155/barrel.
The Power Data Administration (EIA) estimates US oil manufacturing will common 12.5 million barrels per day (BPD) in 2023 and 12.7 million BPD in 2024.
For June 2023, the EIA predicts Permian basin oil manufacturing might be 5.7 million BPD, or a bit lower than half of the whole. Key onshore basins (excluding Alaska and offshore US) are proven within the map beneath. The Haynesville and Appalachia are principally pure gasoline; the Anadarko and Eagle Ford are gasoline and liquids, and the Bakken, Niobrara, and Permian are extra liquids, together with oil, with some gasoline.
Sand and Proppant Market Elements
Regardless of the larger footprint within the U.S. shale enterprise from worldwide producers similar to Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP), diminished drilling budgets to upkeep ranges imply markets for and costs of companies like frac sand may be depressed, though they did see post-Covid and inflationary bounces. Inside horizontal drilling practices, lateral lengths have elevated (optimistic for sand use), depth or kilos of sand per foot seems to be reaching an inflection level (impartial) though firms are all the time aiming applied sciences towards greater preliminary manufacturing charges (optimistic). Nonetheless, producers now steer away from tight downspacing due to well-to-well interference (damaging for sand use).
The frac sand trade experiences volatility from three instructions: a) massive oil and pure gasoline value adjustments, b) strain on completion prices (like sand) with diminished numbers of wells drilled within the down-cycles, and c) the commodity nature of sand itself, separate from the commodity conduct of oil and gasoline. This final is the “siren” nature of sand: it may well seem deceptively simple to learn the frac sand enterprise from a mining and actual property perspective.
Texas sand is the low-cost alternative for the Permian and Eagle Ford basins, and the west Texas Permian basin is the place probably the most US drilling is going on.
Atlas Power Options is headquartered in Austin, Texas; the first Texas drilling basins are within the west and south.
A drive via Monahans, Texas in west Texas-with sand whipping up from piles on each side of the interstate-illustrates simply one of many operational challenges of mining and supplying sand: protecting it from blowing away.
And maybe it’s this above-ground visibility, considerably like actual property, that appears to make sand mining an even bigger boom-bust enterprise than oil itself.
Just a few public firms – Good Sand (SND) and U.S. Silica (SLCA) – have survived the forays into frac sand provide. Different public firms, like Covia and Hello-Crush, haven’t. Equally, Black Mountain Sand is a big non-public sand provider; many non-public firms have additionally come and gone.
It’s also the case that sand suppliers each compete with and cooperate with a lot bigger multi-line oilfield service firms and proppant managers. Some producers even have their very own sand provides.
Insiders personal about 70% of the corporate’s Class A shares. Thus, out of 57.15 million shares excellent, solely 17.71 million are floated, or out there on the market and commerce by public buyers.
Shorts have been 8.8% of floated shares at Might 15, 2023.
Furthermore, possession of the corporate is shared with Atlas Sand Firm, LLC, which seems to be represented on the March 31, 2023, steadiness sheet as a $778 million redeemable noncontrolling curiosity.
At March 30, 2023, the highest 4 institutional holders have been Janus Henderson (3.5%), Adage Capital Companions (3.2%), ClearBridge Investments (3.0%), and Vanguard (2.4%). Some institutional fund holdings signify index fund investments that match the general market.
The founder, CEO, and government chair of Atlas Power, Bud Brigham, is a identified amount: he has efficiently began and offered different oilfield firms.
Monetary and Inventory Highlights
Atlas Power Options’ June 1, 2023, closing inventory value was $16.20/share, in comparison with the (slender) three-month post-IPO vary of $15.06-$18.95/share. This provides a market capitalization of $926 million from the excellent shares (together with the 70% insiders’ shares). Taken along with the $778 million redeemable noncontrolling curiosity provides an general market capitalization of $1.7 billion.
This value was 85% of the excessive and 67% of its one-year goal value of $24.20/share. (Or, the upside to the one-year goal value is 49%.)
Earnings per share (EPS) for the prior twelve months was $1.37, leading to a trailing value/earnings ratio of 12. Analysts’ common estimates of 2023 and 2024 EPS are earnings per share are $2.56 and $3.50, respectively, for a ahead value/earnings ratio vary of 4.6 to six.3.
Trailing twelve months’ (TTM) return on property is 21% and return on fairness is 43%.
TTM working money stream was $237 million and levered money stream was $28 million.
At March 31, 2023, Atlas Power Options had $269 million in liabilities, together with $114 million of long-term debt, and $1.1 billion of property for a very good liability-to-asset ratio of 24%.
Nonetheless, separate from the liabilities and the $57 million of stockholders’ fairness on the steadiness sheet, the corporate additionally has in its possession obligations the $778 million redeemable noncontrolling curiosity famous above.
A ahead annual dividend on the Class A shares of $0.60/share yields 3.7%.
As famous above, Atlas possession is split into Class A (public) shares and Atlas Sand Working LLC items. For 1Q23 Class A shareholders acquired $0.15/share dividend and unitholders acquired the identical $0.15/unit distribution.
Imply analyst score is 1.6, or roughly proper between “sturdy purchase” and “purchase,” from ten analysts. At the very least one analyst considers it considerably undervalued.
Atlas’ subsequent earnings convention name is August 1, 2023.
Notes on Valuation
Atlas’ e-book worth per share is $0.99, beneath its market value, indicating optimistic investor sentiment.
Enterprise worth is $751 million and the corporate’s ratio of enterprise worth to EBITDA is 2.4, suggesting an excessive cut price.
Optimistic and Unfavourable Dangers
Though firms have diminished their drilling budgets to nearer to upkeep ranges, they’re doing all potential to enhance efficiency-which can embrace extra sand per foot-and drill longer laterals-which means extra sand general.
Mining and promoting frac sand is hard enterprise as a result of it’s simple to enter. It attracts real-estate professionals (one can see above-ground sand mines) in addition to commodity consultants. Frac sand demand operates as a second-order spinoff commodity: the supply-demand steadiness for sand relies upon (however not solely) on the supply-demand steadiness for crude oil.
Potential buyers ought to take into account their oil value expectations because the issue almost definitely to have an effect on Atlas Power Options’ enterprise.
Suggestions for Atlas Power Options
Whereas Atlas Power Options pays a dividend and has upside to its one-year goal, long-term buyers will need to wait till insiders not maintain the vast majority of shares and the corporate has a cleaner steadiness sheet: it’s doubtless insiders’ pursuits and that of the $778 million redeemable noncontrolling curiosity that may not totally align with these of particular person outdoors, public shareholders.
Atlas could enchantment to speculative buyers who assume it might turn into an acquisition goal for a bigger firm.
Editor’s Word: This text covers a number of microcap shares. Please pay attention to the dangers related to these shares.