Citi Downgrades C&J Energy, Waiting For Better Risk/Reward In The Stock

Citi’s Scott Gruber downgraded the rating for C&J Energy Services, Ltd. CJES from Buy to Neutral, while reducing the price target from $5 to $2. The downturn in shares and the resulting decline in market cap makes it tough for the market to absorb a potential equity offering by the company.

C&J Energy is estimated to require around $100 mn in new equity to meet its liquidity needs through the downcycle, analyst Scott Gruber mentioned. He added, however, that the market cap of approximately $200 mn makes the potential new equity offering more difficult for the market to absorb.

The company may need another $400 million in 2017 to fix the capital structure. This makes the total added equity 2.5x the market cap. “The further the shares fall, the more dilutive the needs and the more difficult it becomes to maintain our Buy,” Gruber wrote.

C&J Energy reported EBITDA of $8 million, handsomely beating expectations. “The results created an easier path to compliance until 3q…Management denied covenant violation sentiment for 2016, a period in which C&J would need to post EBITDA of $95 million (assuming $20 million in stock comp),” the analyst said.

He added that there could be a violation in 3Q, with the company requiring $40 million of unadjusted LTM EBITDA, while the estimate is for -$12 million.

The EPS estimates for FY16, FY17 and FY18 have been raised from -$2.37 to -$2.03, from -$0.89 to -$0.48E and from $0.06 to $0.16, respectively.