Agree. Key strength here is that a majority of the outstanding shares are held by institutions. Also, very positive statements in updated report out from Credit Suisse today (Maintains Outperform rating and $4 price target for ESES):
Busy Q1 Lays Path For Argentina/OK Growth
* Pivot. YTD has been the most eventful time period for ESES since we've been following the company. ESES (1) secured a contract for pressure pumping work in Oklahoma, (2) set the stage for a recapitalization of its balance sheet (pending shareholder approval in June) via the conversion of debt into equity, and (3) secured a two-year contract for tight gas work in Argentina. With an established path toward a debt-free balance sheet and contracts in hand to work in Argentina and Oklahoma, ESES continues to trade at a meaningful discount to a comp group of pressure pumpers ($530/HHP vs ~$1,800/HHP, assuming conversion). If ESES shareholders vote to convert its debt to equity in mid-June, financial concerns should be alleviated. The only remaining explanation for this valuation discrepancy is execution risk. If the company is able to successfully execute on these contracts in Argentina and Oklahoma, we'd expect its valuation to reflect something closer to that of its peers. Just trading at replacement value ($900/HHP) implies a $2.2 share price or 63% upside. Full closure of the valuation gap vs peers implies $4.2/shr or >200% upside.
* Busy in Argentina. ESES began working under the Argentina contract on April 1, 2017, and earned $2M in revenue in April. The contract required the bundling of services that ESES currently does not provide (wireline, flowback). So the company subcontracted those services out and used rental equipment to execute on the work. This drove up COGS in 1Q17. The company will look to purchase the equipment that was rented in 1Q, which will help to improve the company's margin in Argentina.
* Numbers. We adjust our 2017/18 EBITDA estimates to ($3.8M)/$10.4M from ($3.2M)/$10.1M. We reiterate our $4 DCF-based price target (assumes no equipment adds beyond the current footprint). Our price target implies $1,750/HHP (in line with pure-play US peers) vs the current valuation of $530/HHP (assumes debt to equity conversion). Risks to our estimates include the NAM recovery, oil price, and Argentine political environment.
