NexTier Oilfield Solutions (NYSE:NEX) is a mid-sized oil well services company, hydraulic fracking expert, well construction and completion cementer, wireline and pumping leader, with natural gas fueling, logistics, and storage businesses. Nearly all of 2022’s $3.2 billion in revenue originated inside the US with 65% from Texas operations. On the spike in oil/gas prices last year, total sales jumped +128% vs. 2021, and could remain elevated for some time.

The bullish argument is that the oil services sector of the market rose from the dead last year, and could have a string of 2-3 years of outstanding profitability. The need for new oilfield drilling and production may continue at rates higher than normal, as industry capacity is tight, and even small expected increases in demand globally will be difficult to meet without significant CapEx outlays by oil production companies (far above the expected spending between 2020-22).

World Oil Supplies Depleting Fast

OPEC’s Saudi Arabian energy leadership has been warning for several years that crude oil supply in the world is running close to capacity. A few weeks ago, Saudi Aramco CEO Amin Nasser said at a conference in London:

If China opens up, [the] economy starts improving or the aviation industry starts asking for more jet fuel, you will erode this spare capacity… the world should be worried. There will be no space for any hiccup, any interruption, any unforeseen events anywhere around the world.

The current IEA projection is crude oil production increases will roughly match demand resurgence, particularly as China reopens more fully from its COVID pandemic fight. The wildcards will be supplied from Iran and Russia, affected by embargoes and sanctions. Highlights of its February forecast:

Following a modest year-on-year contraction in 4Q22, global oil demand is set to rise by 2 mb/d in 2023 to 101.9 mb/d. The Asia-Pacific region (+1.6 mb/d), fueled by a resurgent China (+900 kb/d), dominates the growth outlook. The reopening of borders will boost air traffic. Jet/kerosene demand is expected to increase by 1.1 mb/d to 7.2 mb/d, 90% of 2019 levels. World oil supply held largely steady in January, at around 100.8 mb/d. The pause comes after a sharp 1.2 mb/d decline at the end of 2022 led by the US and Saudi Arabia. We expect global output to grow 1.2 mb/d in 2023, driven by non-OPEC+. Supply from OPEC+ is projected to contract with Russia pressured by sanctions.

Years of falling investment in new discoveries and production of oil/gas supplies around the world could cause a larger spike in prices than witnessed during the Russian invasion of Ukraine, assuming a new wrinkle in supply appears (like a war in the Middle East) or demand expands faster than anticipated. Embargoes of Russian energy supplies by the West were definitely hard for the global economy to withstand, but a longer-term problem not easy to fix continues staring the world squarely in the face.

Below are graphs of the slight uptick in rig counts in the US and around the world helped by the increase in energy prices last year. Notice, today’s rig count still sits below 50-year averages.

The bad news for oil/gas consumers (and the greater economy) is that oilfields around the world are depleted quickly, always have been. Oil production must be replenished with new well development, or total supply will decline. The 2021-22 effort by fossil fuel companies to focus on “free” cash flow generation means normalized levels of drilling and well completion have not jumped like previous energy price upswings. Yet, production at America’s leading energy names in particular will not grow without extensive capital reinvestment.

The good news for oil drilling-related companies like NexTier is that the big oil conglomerates in America have resigned in early 2023, announcing far greater CapEx budgets for the year. Without new exploration and well development, volumes will fall and sales will follow (absent a nice rise in energy prices beyond US$90 crude oil and $4 natural gas).

The opportunity for savvy retail investors is Wall Street appears to be pricing/valuing a “peak” in NexTier operations during 2023, before a potential multi-year upswing in demand has even played out.

Bargain Valuation?

Wall Street analysts are projecting another 30% increase in company sales into 2025, with EPS reaching the $2.50 area and staying there. My argument is even better growth could be on the horizon, providing a dirt-cheap valuation on 2024-25 results.

On total enterprise value (which includes the current stock market capitalization, plus debt, minus cash holdings), the ratio on EBITDA (earnings before interest, taxes, depreciation and amortization) of less than 3x forward results only makes sense if 2023 outlines peak results . On the graph below, you can review NexTier is positioned near its lowest valuation based on cash earnings since the company became publicly traded in 2017. Essentially, EV calculations on both EBITDA and sales are today the cheapest since the once-in-a-lifetime 2020 crude oil bust.

In addition, the NexTier EV to EBITDA and revenue setups are cheaper than most every other oil services company in existence. If you are searching for one of the biggest beneficiaries of a future uptick in oil well completion rates, this name should be near the top of your research list.

And, with spiking demand, robust pricing power for its services, mushrooming cash and little net debt, profit margins are racing higher. I am projecting final income margins on sales will be industry leading by the middle of 2023.

Strong Technical Momentum

Management reported a larger than expected jump in Q4 profits several weeks ago. Plus, it was announced days ago that the stock is being added to the S&P MidCap 400 index. Both have led to material new buying in the stock and something of a minor breakout on the charts. After consolidating the 2021 to early 2022 price advance, it appears NexTier is ready to run higher again.

On the 18-month chart below of daily price and volume changes, you can see that the price is now back above the important 50-day and 200-day moving averages.

Plus, a super-low 21-day Average Directional Index score was achieved last week, indicating something of a balance between buyers and sellers over the last month. Turning higher in price could mean a lack of overhead supply now exists. Any and all buying interest may require rising quotes to find enough supply to make trades each day.

Finally, the Accumulation/Distribution Line and On Balance Volume readings are in very healthy advances over the past year and a half, especially over the latest 6-month span. Considering the overall US equity market has been headed south since late January, NexTier’s momentum pattern appears to be quite bullish in comparison.

Final Thoughts

I have been watching NexTier for months, finally buying a position this week. If you want oil & gas industry exposure, and understand the services sector could be entering a prolonged recovery phase, the value and momentum proposition from NEX is worth your research time.

In 6-12 months, management will have cash overflowing its coffers. It can pay down debt dramatically, start a rich dividend for shareholders, and even buy back a large portion of its shares. I would recommend all of the above before any new bolt-on acquisitions are contemplated.

For sure, the company is now a takeover target. When you add in accounting depreciation and amortization of goodwill for any acquisition of NexTier, a bidder can put cash returns of 20% to 25% annually into his pocket (depending on the price premium offer and which side of $2.50 for EPS is hit). The lowest valuation and highest profit-margin company in oil services could be accretive to any of the major peer firms in oil & gas drilling and well completion.

What’s the downside risk? Business fortunes will always follow oil/gas prices. If a deep recession hits the global economy, no doubt NexTier’s stock quote will suffer with an oil industry downturn. I can model the downside back to $6 a share, if crude oil heads under $50 per barrel and natural gas under $2 per MMBtu. My fundamental assumption is that NEX will remain profitable on GAAP income for years, regardless of energy pricing.

The upside could be as high as $20 per share, if we get another spike in oil/gas prices over the next 12 months. Such would encourage even greater rates of new drilling and well completion, leading to NexTier EPS above $3 in 2024. AP/E closer to 7x, and EV to EBITDA of 5x (on little to no net debt held over the next year) seem entirely appropriate, discounting peaking conditions with the P/E and hitting its long-term average EBITDA multiple.

So, we have a 12-month theoretical worst-case downside of less than -50% vs. potential upside gains of +90% in a best-case scenario. I rate shares a Buy. If the US equity market swoons in March-April, taking NexTier back under $10 a share, the risk/reward story would likely improve long term. Oil/gas companies are flush with cash themselves, and stuck increasing new well construction just to meet production goals. NEX represents a solid buy on weakness candidate, in my opinion.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.