In an April 12 research note, Raymond James analyst J. Marshall Adkins purported that Nine Energy Service Inc. (NINE:NYSE) is a "misunderstood stock within the oilfield sector," and that given its current valuation, it is "a name investors need to own."
Adkins highlighted three factors that he believes make the story attractive.
First, dissolvables will drive growth and free cash flow for Nine Energy. Management said it is confident the company can release a standardized, low-temperature, polymer dissolvable this year, which would likely create a market shift from the use of metallic-based to polymer-based ones. Entry of such a tool onto the market "would start Magnum's next growth phase," Adkins wrote—Magnum being the company Nine Energy acquired in late 2018 "based on the adoption of dissolvable technology."
Nine Energy forecasts gaining a 35–50% share of the dissolvables market in three to five years, which "would imply meaningful growth," Adkins indicated. But he acknowledge that may be a conservative estimate. "If the product is successful, the savings and safety should drive large operators to adopt en masse for full wellbore application."
Whereas dissolvables may subsume the company's coil operations, it eventually should generate even more significant free cash flow and return on invested capital, the analyst highlighted. Nine Energy should receive near full payout from the earn-out provision tied to the Magnum acquisition.
Second, the company has low capital needs and high cash flow generation, and as such, it should be able to deleverage over time. According to management, it intends to do just this in 2019. Raymond James projects Nine Energy will generate about $105 million in free cash flow, a 16% yield, this year, and $120 million, an 18% yield, in 2020. "This should mean that the company is able to reach its 1x target within the next 18–24 months," the analyst added. "The setup into 2020 looks extremely favorable."
Finally, Nine Energy's "premier offering and superior service quality" differentiate it from its competitors and should facilitate its outperformance in a strained market," Adkins highlighted. For instance, the company's rate for cementing on time is 89%, while the market average is 65–70%. "Not only should the company be able to win incremental work (reinvestment opportunity), but it should also be able to increase price and margins at a greater rate than its peer group."
Raymond James has a Strong Buy and a target price of $32 per share on Nine Energy, whose current share price is around $20.87.
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Disclosures from Raymond James, Nine Energy Service Inc., Apr. 12, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analysts Praveen Narra and J. Marshall Adkins, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months..
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