Goldman Sachs Highlights Nine Energy's 'Significant' Margin Expansion Potential

Nine Energy Service Inc NINE launched its initial public offering in early 2018. Despite the stock losing nearly 10 percent since its IPO, one Wall Street analyst sees the potential for 70-percent upside.

The Analyst

Goldman Sachs' Waqar Syed initiated coverage of Nine Energy Service's stock with a Buy rating and $39.50 price target.

The Thesis

Nine Energy offers investors exposure to the "rising complexity" of domestic shale wells, but with a less capital-intensive business model, Syed said in the initiation note. (See the analyst's track record here.)

The company's cementing and coiled tubing businesses are key advantages and benefit from longer lateral wells, Syed said. Nine's wireline and completion tools units benefit from higher frac storage count, a figure Goldman Sachs expects to increase by 33 percent in 2018 and 13 percent next year.

The company is "under-earning" and boasts the potential for "significant" margin improvements over time, Syed said. Nine's EBIT margins are still 2,000 basis points below its peak 2015 levels, but should expand 1,330 basis points through 2019, he said. By comparison, the average expansion rate projected across the pressure pumping sector is just 260 basis points.

Nine Energy is expected to generate an average return on assets of 10 percent through 2020, which is attractive versus its diversified small- and mid-cap  service peers, which are on average expected to break even, the analyst said. 

The stock is trading at 5x 2018 EV/EBITDA, which is a discount to SMID peers at 6.1x to 6.4x and even more of a discount to large-cap peers that trade in the 9.2x to 12.5x range. Goldman's $39.50 price target implies 70-percent upside and is based on a 5.5x multiple applied to its normalized EBITDA.

Price Action

Shares of Nine Energy Service were trading up more than 3 percent midday Tuesday. 

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