Summary
Newpark Resources, Inc. is in the final stages of restructuring throes and is emerging as a capital-light OFS company and a strong player in Industrial Mats.
Mats is the future of the company, as it brings higher margins, but OFS revenues still carry Newpark Resources.
We rate Newpark Resources, Inc. stock a hold due to the current decline in the OFS sector.
Protective foam floor tiles / mats inside a play room, nursery school or gym
Introduction
Long-time readers of my articles on Newpark Resources, Inc. (NYSE:NR) will note a change in the theme from drilling rigs to interlocking mats. That is because the company is in the later phases of a "core business" pivot from drilling and completion fluids, to industrial hygiene applications using mats to access as well as reduce dirt and dust in remote field work sites. The former is in secular decline as oil prices have cratered, and the other is a growth story. One that comes with high margins and an expanding market base that the market has not properly appreciated to this point.
In our last article, we raised Newpark Resources, Inc. from a Sell to a Buy on the strength of the cash infusion from the sale of their Fourchon, La. deep water offshore base to Tetra Technologies, Inc. (TTI), and the growth of the Newpark Mats & Integrated Services business. That money gives them some breathing room to pay down debt, support the Mats business, and intriguingly reduce their float.
In this article, we will check in and see how this transition is coming along. The stock is down ~30% since we last checked in along with other players in the OFS sector. As we have discussed, the pain may not be over.
The thesis for Newpark
Last time around, I floated the idea that Newpark might exit the drilling fluids business with a sale of the business. Now it appears they are streamlining their footprint-closing down the stimulation chemicals business and going down a Capital-light road instead. Withdrawal from non-performing areas like Chile-of whom almost no one thinks of in relation to the oilfield, is an example. Additionally they've made corporate adjustments-layoffs and restructuring in Fluids that will result in ~$6 mm in cost savings over the next few quarters. In the current climate this is probably the soundest approach. CEO Mathew Lanigan commented on the progress toward capital-light:
We also continue to see progress in the transformation of our Fluids business into a more agile, capital-light and simplified business. We believe that by continuing to take meaningful steps to strengthen the financial performance of our Fluids segment and reshape our balance sheet, we will be able to generate consistent free cash flow while improving our returns in that division.
The company has a couple of strong areas - EMEA, and North America-U.S. and Canada - that should respond to this strategy, once this slow down ends. The Middle-East is one area that every company has cited for growth in the coming year. It is driven primarily by National Oil Companies - NOCs - that have motivations other than-price for growing production. As NR focuses on those areas-particularly EMEA, things should improve.
Moving on to the Mats business. I think NR makes a good case in the slide below, that there is a growth market shaping up for matting in remote sites. The oilfield application of matting access roads and rig sites is probably the most familiar of these applications. Power, utility, and Renewable-oriented companies are under pressure to make, and have received funding for, a huge increase in capital outlay to modernize electrical infrastructure and buildout renewables-wind and solar, facilities.
MATs opportunity
CEO Mathew Lanigan summarized the opportunity they see in Mats going forward-
Industrial Solutions is our primary profit driver today, and we expect that within the next few quarters, this business will also represent the majority of our invested capital where we believe the strong market fundamentals in the utility and critical infrastructure markets will support a double-digit annual growth rate for our industrial business for years to come.
We remain committed to prioritizing capital into our expansion in this division, further positioning Newpark as a scaled specialty rental and infrastructure services company.
Q1 2023 and guidance
Total revenues for the first quarter of 2023 were $200.0 million compared to $225.2 million for the fourth quarter of 2022 and $176.4 million for the first quarter of 2022. Adjusted EBITDA was $21.0 million, as compared to Adjusted Net Income of $0.07 per diluted share and Adjusted EBITDA of $21.5 million in the fourth quarter of 2022, and Adjusted Net Loss of $0.00 per share.
Fluids delivered revenues of $144 million, operating income of $3.5 million and Adjusted EBITDA of $8.7 million in the first quarter. The first quarter included $69 million of revenues from U.S. land markets, $19 million from Canada, and $56 million from international operations, which included a quarterly record of $53 million from the EMEA region.
Industrial Solutions revenues included a $36 million contribution from rental and services and $19 million of product sales, resulting in segment operating income of $14.5 million and Adjusted EBITDA of $19.7 million for the quarter. Benefitting from 58% year-over-year revenue growth, the segment has delivered $213 million of revenues, $52 million of operating income and $74 million of Adjusted EBITDA over the trailing 12-month period.
Newpark reduced debt by $15 mm in the quarter and repurchased $15 mm in shares. NR's float is now 85.5 mm shares down ~4.0 mm from the prior quarter. Debt stands at $78 mm, down $10 mm from Q-4, 2022 and ~$55 mm from Q-3, 2022. They have $23 mm in cash on the books and $197 mm in receivables, much which is working capital for future projects.
Guidance
Newpark is encouraged by the strong fundamentals for utility infrastructure spending, and expects it will provide a multiyear tailwind for the Industrial Solutions segment growth.
For the second quarter for Industrial Solutions, rental and service revenues are expected to improve sequentially, benefiting from the recent start-up of several utility infrastructure projects. They also continue to see strength in the direct sales opportunity pipeline.
For Fluids, they are seeing the effects of the lower natural gas prices impacting certain basins in the U.S. in the near term that will impact revenues in coming quarters. NR expects revenues to pull back roughly 15% sequentially, reflecting the typical seasonal effect of spring breakup in Canada and a lower contribution from the U.S., which is impacted both by market softness and their ongoing focus on price discipline. International revenues are expected to remain relatively stable, benefiting from the continuing strength in customer activity.
With respect to operating margins, while they expect EMEA to see margins improve sequentially, and begin to see additional benefits from our ongoing cost reduction efforts, the impact of the lower revenues will more than offset these benefits resulting in an operating margin likely in the low single digits prior to any restructuring charges.
Risks
The oil and gas prices which underpin 75% of Newpark Resources, Inc.'s revenue are struggling right now, with no end in sight until momentum in the market shifts. As we are at the halfway point in the year, a recovery is probably a 2024 story.
The industrial market is highly fractured with private companies providing similar services. Competition may hold growth to modest levels.
Your takeaway
The pieces of the puzzle are in place for NR. The company is generating positive cash flow, and the shift to Industrial Solutions is driving higher margins, as the graph below illustrates. From what the company has told us, the growth in revenues and margins for EMEA geo-market will be offset by declines in the U.S. and Canadian markets.
EBITDA Margin chart for NR
On an EV/EBITDA basis, Newpark Resources, Inc. trades at 6X, too high for a company in flat to declining markets. While they are growing Industrial Solutions, those sales are not yet enough to carry the company, so we may see weakness in the shares.
While we like the story that has evolved for Newpark Resources, Inc. in capital-light OFS and the emerging renewables applications for Mats, we will wait to deploy further capital in this company until some of the market turmoil is past us.
Accordingly, we drop Newpark Resources, Inc. one rating level to Hold, as we think better pricing will emerge during the second half of the year.
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