2 Ways To Play The 2017 Fracking Recovery

Iberia’s Robert MacKenzie expects the US Fracturing Market to recover by 4Q17, and believes that RPC, Inc. RES and Basic Energy Services, Inc BAS are poised to benefit from this.

“Our analysis indicates that a combination of a modest recovery in drilling and completions activity back to 4Q15 levels, combined with cold stacking and attrition of equipment should re-balance the market by 4Q17,” analyst Robert MacKenzie wrote.

MacKenzie believes that demand for pressure pumping services would not improve enough to absorb the complete excess capacity in 2016 or even in 2017. He added, however, that the effective utilization, or marketed fleets, is expected to approach 89 percent by late 2017, “the point at which we have seen pricing power in the past.”

Favorite Stock To Play The Recovery

MacKenzie named RPC [Rated: Outperform, PT: $15] as the “favorite stock to play an expected recovery in the U.S. frac market,” despite its high valuation. RPC appears poised to gain significant market share as activity recovers.

While its weaker competitors have had to stack 50-75 percent of their frac equipment, RPC has stacked merely 30 percent so far. The analyst noted that the company’s operating capacity is only about 40-50 percent utilized, which allows for “a fairly quick doubling of revenue once activity starts to recover, versus others who may need to invest to reactivate idled equipment.”

Moreover, RPC's calculated revenue per US land rig rose to $1.48 million in 4Q15, from $1.38 million in 4Q14. This was achieved despite significant price concessions, with the help of market share gains and increased service intensity.

Another Top Pick

Another favored name is Basic Energy Services [Rated: Outperform, PT: $3], MacKenzie commented. The company has stacked only 27 percent of equipment.

“As we saw last cycle, BAS successfully reactivated all its equipment far faster than peers given careful attempts to protect and smartly stack it to prevent degradation,” the Iberia report noted. The company’s shares have been under pressure due to concerns around liquidity and potential of a covenant breach. MacKenzie mentioned, however, that its recent debt deal would “diminish those concerns, leaving BAS greatly undervalued in an improving market.”