The ballad of $ACDC, why ProFrac Holdings is a green AI story that could easily triple in the near term.

Those Wilks boys are at it again, just rolling up everything in sight.

Edited 11/2/2024: Operating cash flow for 2Q 2024 was $113 million. They did indeed do that acquisition in Midland, Texas. I was early on this one, but I think it has a high probability of inflecting going in to 2025. There is still a good chance it will be the victim of tax loss harvesting for the last two months of 2024. With the Permian Basin based acquisition, fleet counts should rise somewhat even during the cyclical downturn as the Permian Basin’s drilling programs are more resilient.

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ProFrac Holdings, ACDC, is an oilfield services rollup operated by the Wilks cousins, Matt the chairman and Ladd the CEO who are the children of the Wilks brothers, Dan and Farris who co-founded and sold Frac Tech for $3.5 billion in 2011.  Dan and Farris own 45% and 37% of ACDC respectively, which means the Wilks family is solidly in control, and shareholders are passengers on their freight train, for good or ill.  

I look at management teams through the lens of James Burnham’s “The Managerial Revolution” 1941, and I always check to see if the management team is cut from a capitalist cloth or a managers cloth.  The Wilks are tried and true capitalists, not hired managers with their agency conflicts.  The risk of a company run by capitalists is that they might take it private if the stock price is too low, but the risk of a company run by managers is that they might invent totally new ways to screw over the shareholder at every turn just to keep their salary coming.  In this instance I am not terribly afraid of the Wilks taking the company private, because being public gives them better access to capital markets in order to facilitate the acquisitions for their rollup.   I do not believe they are finished their acquisition spree yet, I have even heard rumors of a current target headquartered in Midland, TX. 

Personally, I can really get behind this ownership structure, and I am happy to free ride on their story.  The family has extensive expertise and relationships in the sector, and the passing of the torch to the next generation means that expertise comes along with the vigor of youth rather than at its expense.  The risk of dilution is low, and the risk of stagnation is low.  This was the same setup as Carvana, CVNA, with Ernie Garcia II a large owner, and Ernie Garcia III as the CEO.  I was smart enough to do my due diligence on Carvana and buy a big stake at $3.92 a share, and I was stupid enough to sell calls at $5.50.  My research game is strong, but if I wasn’t such a shitty trader or strategist, this substack wouldn’t be Unemployed Small Cap Value Degen, it would be Independent Small Cap Value Degen.  

The stock price of ACDC, while having recently bounced a bit, is still suffering from a pretty major mistake, the management team zigged when they should have zagged.  Frac services is a cyclical business, and the Wilks overconfidently thought their market share was large enough to hold the line on price during a downturn.  They were wrong, and their number of deployed fleets dropped from about 40 to around 20.  They stopped giving precise fleet counts on conference calls.

Overconfident CEOs is not a new problem, there’s even academic research arguing that overconfident CEOs make better leaders.  The good news is that management had the maturity to admit their mistake and change course.  They dropped prices and are trying to spread their fixed costs across more frac fleets.  The price recovery these last three months is due to significant improvement last quarter.  The inflection is here, this is the time to jump on this train. 

ACDC has 45 frac fleets, and they believe that in the 12 months from Q3 2024 to Q2 2025 they will have an average of 40 fleets operational, each contributing about $20 million to EBITDA.  And that this will allow them to pay down approximately $500 million of debt.  That would be one hell of a year compared to the last 12 months.  If Enterprise Value / EBITDA held steady around 5x, that would be a 160% return in about 12-15 months.

The next time oilfield services are at the peak of their cycle, ACDC believes that with their vertical integration, each fleet could generate up to $50 million of EBITDA annually and have all 45 fleets or more running.  If Enterprise Value / EBITDA held steady around 5x, that would be a six bagger from here.  

This is not including two other business lines, not only is ACDC a frac fleet supplier, but they have also acquired seven sand mines which have been bundled under the name Alpine Silica and prepared for an IPO spinoff, as well as their manufacturing arm so that they can refit and build out new frac fleets.  The sand mines likely suffer from a classic goodco badco situation, as they are much less cyclical than the frac fleets, and should trade at a higher multiple after a spinoff.  There is also the possibility that competitors would be reluctant to be a client of either business while under the ACDC umbrella, everyone hates giving revenue to competitors.  

ACDC has a lot of strengths, their vertical integration should make them the low cost supplier, and as in any cyclical business, the low cost supplier survives the downturns to buy up their competitors.  The company is called ACDC because they are moving in the direction of electric pump trucks rather than diesel.  This is a cost reduction for clients, as well as gives the ability to use the associated gas to generate the electricity rather than selling it for peanuts, or worse, paying to get rid of it with Biden’s flaring ban.  They have market access to all shale basins, and service both oil and gas oriented clients.  

The sector should have significant tailwinds, while environmentalists hate all fossil fuels, the switch from coal to nat gas has reduced CO2 emissions more than all solar panels and windmills combined.  The electricity demand for the AI buildout, as well as the electrification of everything should be a huge tailwind, also the LNG export terminals coming online in 2025 should be a huge tailwind.  While I am ecstatic about the narrative shift surrounding nuclear, the buildout of US nuclear is years away, heck even the buildout of nat gas electricity is slow.  We probably have a few years of cancelling decommissioning of coal power plants, followed by a decade of ramping up of nat gas, and only then followed by a nuclear renaissance.  And even after a nuclear renaissance, we will still need fracking for fertilizer and plastics.  

Regarding potential multiple expansion, with size comes inclusion into ETFs and a passive flow.  I have just enjoyed this recently with Jackson Financial (JXN).  Beyond that, the narrative around nuclear has just shifted on a dime, and this might be a harbinger of the end of the environmental movement being dominated by a mother goddess cult.  The current environmental movement is not under the primary direction of level-headed people who want to preserve nature in order for our grandchildren to enjoy it, it is directed by a group of people who, in the decline of Christianity, have come to worship a mother goddess, nature.  Nuclear is bad because it is artificial, and human artifice is a sin to the mother goddess as it is unnatural.  Only the wind, the sun, and the rain are pure sources of energy as this energy comes from the mother goddess herself.  And any resource extraction, whether it be lithium to fuel the green economy, or natural gas, which has reduced CO2 emissions, is evil, because to extract resources from the mother goddess is to rape her.  As long as this cult maintains control of environmentalism particularly, and leftist politics generally, there is very little hope of a huge multiple rerating.  However, the narrative shift around nuclear fission might just be that watershed moment of the change for not only the political left, but environmentalism itself is about to eschew these anti-human religious nutballs from their ranks.  

If ACDC were perceived as a green Artificial Intelligence stock, and if investing policy was directed by institutions who, while still controlled by the political left, were not controlled by a mother goddess cult, it wouldn’t be unreasonable to see an Enterprise Value / EBITDA multiple of 8x instead of 5x.  And this would be after years of expanding vertically and horizontally while paying down debt and maybe an occasional dividend or two.  In this instance I would not be enthusiastic about buybacks as the Wilks brothers own plenty of the company already, and the biggest risk from this capital structure is a take private at the bottom of a cycle.  

The monetization of the Wilks brothers’ enormous ownership stake, however, could be a drag on the stock price for years and years if they were to divest.  I also saw this with JXN as Prudential was selling and suppressing the stock price for over a year after the initial spinoff.  I am not too worried about this share price suppression, however, because it would be taking place after such an enormous runup in valuation that I would have to be a really greedy little piggy to harbor any ill will after riding this freight train to its destination.  Choo choo fellow degens.