2024 Q3 Earnings Update Part II: Transocean $RIG, Peabody Energy $BTU, Forward Air $FWRD, ProFrac Holdings $ACDC, +1 Paywalled Stock

Hello and Welcome to Part II of the Q3 Earnings Call updates.  With a decisive end to the presidential election, an enormous amount of uncertainty has left the market.  Most stocks have rallied hard, except for those that import goods from China.  I was so consumed by watching the election results, that I didn’t even publish a writeup yesterday.  I did explore some election consequences in a YouTube video:

Trade disclosure:  I have sold my positions in Peabody Energy (BTU) and Warrior Met Coal (HCC) into this Trump election rally.  While this may prove to be a mistake, I believe I can buy them back for a cheaper price at some point over the next three months. Feel free to heckle me if this instinct proves to be wrong.

Transocean (RIG)

Bit by bit, Transocean keeps getting better and better.  Old contracts roll off, and the newer, higher value contracts activate.  Quarterly revenue was up to $948 million, last quarter that was $861 million, and last year it was $713 million.  If you look past non-cash asset impairments, RIG was cash flow positive for the second sequential quarter, bringing in $136 million of cash, which goes automatically toward amortizing debt. 

Management has been focusing on fleet utilization, and their whitespace issues are mostly solved with 97% utilization for 2025, and 86% utilization for 2026, not including cold stacked rigs.   The contracted backlog is up to $9.3 billion.  All ears were listening for hints regarding the potential merger with Seadrill.  CEO Jeremy Thigpen made it clear that if prices were right, they could easily absorb 10-15 rigs with very little increase to their shore-based support network, and that the industry would benefit from further consolidation.   Of course Seadrill owns 13 active rigs, and manages 2 rigs for Sonangol, which is 15 rigs, exactly Thigpen’s high-end figure.  Merger enthusiasts are taking that as a hint, but of course imaginations can run wild.

The dilution from a stock based acquisition of Seadrill would benefit Seadrill’s shareholders more than Transocean’s.  But Transocean’s shareholders would reach leverage targets earlier, and could receive a return of capital earlier.  Without a merger, at current projections, RIG can start returning capital to shareholders toward the end of 2026. 

According to projections of supermajor capex by Rystad, 2026-2027 should have double the capex of 2024.  Since it will take a year to take a rig out of coldstack, we could hear about 1-3 out of 10 global cold stacked rigs starting to be reactivated in 2025 for 2026 contracts.  The naysayers and Valaris enthusiasts are adamant that no cold stacked rigs will ever be reactivated. We will find out next year who is correct.

Peabody Energy (BTU)

Just a steady quarter of reasonable returns.  Peabody completed $100 million of share buybacks at an average price of $22.55.  Net income was approximately $100 million, and another $100 million was released from the Powder River Basin collateral bonding requirements.  The coal industry is waiting for prices to recover, which has started with the new China stimulus.

Forward Air (FWRD)

This was the second full quarter of integrated financial results, but without the overhang of the goodwill write down last quarter.  FWRD had $656 million in revenue, $77 million in EBITDA, and $23 million in net income.  The initial market reaction was negative, and understandably so as at this current net income run rate, it would take 17 years to pay off the debt from the acquisition.  But it is important to note that there were $22 million of merger related costs still in the quarter, so the net income figure is not as thin as it initially appears.  Furthermore, the work for merger synergies has only just begun, and even in this current weak logistics market, revenue from the Omni segment grew 7% over the prior quarter.  This indicates that the merger is not causing Omni clients to change providers.  

The market seems to want FWRD to sell the Omni division, which I do not believe would be wise, as the division is performing well and growing, and the funds raised from such a sale would almost certainly be less than what FWRD paid for it, leaving FWRD with residual debt, and no Omni earnings with which to pay it off.  I am confident that with the cyclicality of logistics, organic growth, and sustained inflation driving up revenues, FWRD could pay down enough debt to achieve a much higher multiple within two years. But activists are pushing FWRD to go private much sooner than that.

ProFrac Holdings (ACDC)

Oilfield services continue to be weak, and are projected to be weaker still in Q4 2024.  Based on conversations with clients, activity is expected to pick up in 2025.  In Q3 of 2024, ProFrac had total revenues of $575 million, capex of $70 million, and free cash flow of $30 million.  The initial market reaction to earnings was negative, possibly due to the negative net income, and the guidance that Q4 will be worse.  But ACDC has a fleet that is 72% electric or dual fuel, and has a stable cash position while they wait for the cycle to turn.  ACDC stopped giving fleet counts a few quarters ago, but did say that active fleet count was up for Q3, but is expected to be down for Q4, and due to annual seasonality, Q1 of 2025 should be a sequential improvement.

Frac services is in the supply destruction phase of the cycle, with management claiming that over the last year, the market has gone from about 280 frac fleets down to about 210.  With ACDC having somewhere around 40 fleets, give or take, that makes them a considerable portion of the market, and with in-house engineering, ACDC is able to maintain their own equipment to control costs.