Mammoth Energy Services, Inc. (NASDAQ: TUSK), a small fracking and infrastructure gaming company, is our topic in this article. I have done several past articles on them and you can find them here, and return periodically to monitor progress as needed. The slope has been downward and to the right for the past year or so, with a modest recovery in the oilfield rally after March 2022.
A year ago I temporarily got excited about this pivot to infrastructure last year so at $3.86 per share I issued a bullish June 2021. By November it had become clear that this pivot wasn’t generating much in terms of returns, and at $2.86 per share, I revised my thesis for a strong sell. At $2.38 per share right now, it looks like I’ve finally made it.
So the question before us now seems to be are they going to tell us on May 9, when the results come out, who will make us wish we had bought at this level? The answer is probably no.
A quick visit to the company website is revealing. The company is still focused on collecting an old debt — some $344 million, including interest — from their adventure to turn the lights back on in Puerto Rico after Hurricane Maria in 2017. In this November 2021 article, I made a comment summarizing my thoughts on the fungibility of this debt.
Here are my comments from this section of the article.
The advanced legal process for PREPA is well covered in this related article, if you are interested. I’ll leave it to your imagination as to how likely TUSK will ever collect a penny from PREPA. In what seems to pass for a 10-Q, in Puerto Rico, they posted $1.7 billion in current assets, compared to ~$8.0 billion in current liabilities. The queue at the PREPA payment counter seems quite long. We will continue from here.
Little has changed since. We are maintaining a strong sell on this company and will explain why in the rest of this article.
TUSK is a minor player in all the markets it serves: hydraulic fracturing, sand supply and infrastructure. They also have other businesses, but these have largely disappeared with no associated revenue.
Most fracturing fleets are older Tier II equipment that does not meet customer interest in Tier IV, dual-gas-DGB, all-gas, or electric fleets that support ESG goals. In their annual report 2021, they note about 20 units converted to DGB status. This puts them at a disadvantage for the top-tier prices that competitors’ more modern equipment fetches. That said, in their Q-4 commentary, they noted that a third fleet was being reactivated at improved prices. On the company’s website, they note 6 fleets in total, of all types.
One problem they have had in the past is that their main client for hydraulic fracturing was Gulf Port Energy Services, with whom TUSK was in dispute. It seems like a lot of that has been resolved from February this year. That said, I don’t know if it improves the marketing of their services beyond Gulf Port, and they don’t disclose their customer base.
TUSK is also a supplier of frac sand, with several mines in Wisconsin. It could actually be a beacon of hope for the company. Volumes have doubled from the previous year, and as demand for this rare resource continues, they could see additional volumes. Prices are also up, from lows of less than $10/tonne at $16-17/tonne. They note that one million tons will come out in 2021. That’s about 111 sand pits, so nothing to do.
The next driver is their infrastructure business which focuses on laying fiber optic cables. CEO Arty Straelha commented on this company:
The opportunities we see in this area, particularly around fiber maintenance and installation contracts and MSAs, are encouraging as we approach next year. Funding for infrastructure projects remains strong. Mammoth will continue to seek opportunities in infrastructure services as we strategically structure our service offerings for growth in both geographic footprint and project depth.
It is remarkable to me that they are speaking in generalities here and not announcing any new contracts. As such, I don’t find the above comment particularly inspiring, and it’s worth noting that the company is operating at around half of its 2020 volume. lips, it suggests a gap between their service offerings and market demands.
Revenue fell to $228 million in 2021, at a time when most of the industry was seeing improved revenue and profits. During the fourth quarter of 2021, they pumped 891 floors, with around 1.6 fleets used on average. A 10,000 foot well uses 40 to 50 stages of fracturing, which equates to 16 to 17 to seventeen wells. This compares to an average usage of 0.6 fleets in the same quarter last year and 1.2 fleets in the third quarter of 2021. Quarterly revenue was flat QoQ and around 40% lower than revenue for 2020.
For the full year 2021, TUSK pumped 2544 floors, with about 1.1 floats used on average. The sand division sold approximately 270,000 tons of sand during the fourth quarter of 2021 and 1 million tons of sand during the fiscal year ended December 31, 2021. The average price of sand sold during the fourth quarter of 2021 was d around $17.84 per ton, while the average price for the whole year was $16.76 per ton.
Net loss for the fourth quarter of 2021 was $13.3 million, compared to a net loss of $11.9 million for the same quarter of 2020 and a net loss of $40.9 million for the third quarter of 2021. Adjusted EBITDA, as defined and reconciled in our earnings release, increased to $17.2 million for the fourth quarter of 2021 from $7.5 million for the same quarter last year and a negative $29.7 million for the third quarter of 2021.
Capital expenditures for the fourth quarter and full year 2021 were around 1.4 million and 5.8 million respectively. Investment expenditure over the whole year is slightly above the forecast of 5 million. This was mainly due to the pressure pumping activity. Capital spending for 2022 is expected to be around $6 million, with spending primarily focused on completing wells in the second half of the year. As of December 31, 2021, TUSK had cash of $9.9 million and debt of approximately $86.7 million, with an October 2023 maturity. As of the report date, the company notes that it could be in breach of certain covenants guaranteeing this debt. (page 122).
Possible catalyst – the PREPA regulation
It looks like there is a potential payment of $90 million for bills that weren’t submitted. Rather than parsing this comment to import it, I am including it here for your reference.
Allow me to provide you with the latest information regarding our contracts with PREPA. As you recall, FEMA issued a memorandum of determination on May 25, 2021 regarding the first contract. In that memorandum of determination, FEMA found that $46.7 million was not payable under that contract. On July 23, 2021, with the help of Cobra PREPA, filed an administrative appeal of the entire 46.7 million denials.
On January 5, 2022, PREPA received a request for information from FEMA in connection with this appeal. PREPA’s response was filed on February 4, 2022. Upon PREPA’s submission of its response, FEMA’s 90-day period for the appeal determination is renewed. If PREPA does not receive a decision from FEMA within 180 days of FEMA’s receipt of the appeal, PREPA may file for arbitration. The earliest opportunity to file a request for arbitration is March 21, 2022.
On July 15, 2021, FEMA informed PREPA that it had commenced review of the second contract and that FEMA’s intention was to complete work on this project and issue a memorandum of determination by December 31. 2021. As of January 19, 2022, PREPA has not received any updates from FEMA as to when it expects this project to be completed. Since August 2021, PREPA and Cobra have worked to reconcile approximately $159.5 million in invoices under the second contract that PREPA had not submitted to FEMA. Since then, PREPA has submitted approximately 90 million invoices to FEMA.
These invoices of approximately $90 million had not been submitted to FEMA by PREPA due to reported discrepancies in staffing levels on the invoices compared to reports prepared by PREPA’s inspection contractor. Although Cobra staff pointed out errors in the reports, prepared by PREPA’s inspection contract for over two years, we are grateful that PREPA finally submitted our invoices to FEMA.
Last Monday, PREPA filed a motion for an order approving a settlement agreement with Whitefish Energy Holdings. We believe this is a positive development as it will result in approximately $90 million for services to be paid to Whitefish in two instalments, and approximately $6 million in administrative claims relating to mobilization and demobilization, invoices and an administrative claim of approximately 34 million for interest on overdue invoices.
While this is an encouraging development, we still have work to do to get paid. And it’s always clear to us that the only way to change PREPA’s behavior is to hold them accountable. We urge our stakeholders to continue to push the Oversight Board commonly referred to as FOMB to hold itself accountable for meeting contractual obligations and paying its debt which continues to accrue interest at the rate of approximately $3.1 million per month.
This seems exaggerated to me. On the contrary, it seems to confuse the issue. It is important to remember that the counterparty, PREPA, is bankrupt, which may impact the chances of resolution in favor of TUSK.
Your takeaway meals
It is natural to fish the bottom of a market. I look for bargains every day. We’ve gotten used to paying single digits for quality businesses, but those days are over. There are reasons why TUSK continues to be challenged in a rising market:
- A minimal footprint in all the markets they serve;
- Debt due next year that, without the PREPA settlement, they have no way of repaying. It should be noted that PREPA, is itself bankrupt, so these procedures are quite tangled;
- A distracted focus for senior management as they desperately try to engage FEMA to help them collect on PREPA debt;
- Falling cash balances indicating they are burning QoQ money.
In short, I can’t find a single catalyst that would lead me to believe that even at these reduced levels, TUSK is a gamble worth taking.