Canaccord Lowers Target Price To $14 Energy -- Oilfield Services
DOWNGRADING ON SIGNIFICANT
DROP IN UTILIZATION AND EPS
3Q12 first look: We are downgrading PSN to a HOLD rating following the
company's much lower-than-anticipated 3Q12 operating results and forward
outlook. The company reported a 33% sequential decline in revenue
(excluding third-party items) as its tank rental utilization dropped from
~70% to ~50% and pricing discounts were 15%-30% of historical norms.
This resulted in EBITDA of only $26.6M vs $46.0M in 2Q12 and our $51.2M
estimate. EPS was reported at 21c (after adjusting for ~11c of bad debt
expense) compared to CG/Street estimates of 42c/48c.
Although PSN tank rental price discounting of 15%-30% was somewhat
higher than expected, the discounting was less than the 75% realized by
traditional tank farm providers in some regions. We were more surprised at
how sharply utilization declined from 2Q12 levels. The company was mostly
impacted by lower activity levels in the US Bakken and Rockies as several of
its customers rapidly reduced budgets. Additionally, PSN renegotiated terms
on several long-term contracts, had some contracts lapse without renewal
and had others completely suspended due to the curtailment of projects. It is
likely that utilization remains low in 4Q12. PSN guided 2012 EBITDA in the
range of $140-$150M, which implies 4Q12 EBITDA of $24-$33M. Adding
insult to injury, PSN wrote off $9.5M in A/R and is still wrestling with very
high DSOs. PSN also reduced capex by 42% to $35M and we expect few new
storage tank builds prior to a significant improvement in utilization. PSN did
however announce the roll-out of two new products, a tank heating system
and a remote monitoring system, both to be used in conjunction with its
large-volume tanks. These products could generate as much as 7%-10% of
sales in the next quarter or two.
Taking into account lower utilization, limited new storage tank additions and
lower margins, our 2012/13 EPS estimates drop from $1.64/$2.05 to
$1.04/$1.05. Our target price drops to $14.00 (from $20.50) based on 13.3x
2013E P/E. We think PSN's valuation will be somewhat backstopped by what
we still believe is a sustainable monthly dividend of $0.09.