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Atlas Energy Prices

Atlas Energy $AESI is a better-than-average player in fracking sand in the Permian Basin. Before you yawn, the margins are huge, so worth a look.

Good sand, efficient process, great location! 

Atlas Energy $AESI priced their deal below the range at $18 (was proposed at $20-$23). This is another provider of sand for fracking used in the Permian Basin of the US.

This is not exactly an exciting topic for your next cocktail party. One almost intriguing aspect of this deal is they are using the money to build a conveyor system that will reduce the need to use trucks to move the sand "proppant" to the operators.

Management here is also better than average, and they are using some technology to create a more sustainable business. It's not expensive at less than 8x trailing operating earnings.

The production backdrop in this area is positive. Many operators are drilling " infill " to increase production as production declines from existing wells.

Atlas has a very large, high-quality, low-cost source of sand in the heart of the Permian, putting them in a very good position.

Some technical aspects of the story are aimed at the efficiency that gives them sustainable advantages in cost and emissions.

The money raised will be used to build the "Dune Express" conveyor system. The initiative is supported by multi-year contracts with major oil companies (no counter-party risk.)

There's money in the sand business. Atlas has achieved adjusted EBITDA and FCF margins of 55% and 47%, respectively.

The conveyor project adds some risk to the story, but investors will be "paid to wait" given these margins and returns. Shareholders will benefit from cash distributions out of the growing FCF. It's also worth noting that similar conveyor systems have been successfully developed and delivered for many years and are not that risky.

Two classes of stock (Class A and B) add up to ~103M shares for a $1.8B market cap. That's 7.8x 2022 trailing operating income.

This sector has been trading at low multiples as investors worry that fossil fuel prices will continue under pressure and don't "represent the future" of energy like renewable energy sources.

These worries may be overblown, and if Atlas can deliver high distributions to shareholders, the stock will get some support. With risk-free rates over 4% and trending higher, there will be more competition for dividend stocks.

The stock conclusion is to put this one on our watch list under "potentially undervalued energy" plays. It's not a big area for us, but a couple of names exist. Our research agenda is mostly on renewables like solar and nuclear.

We'll see how it opens and trades into stock coverage. Quite a few banks are on the cover, which might provide an opportunity on the long side going into that.

Enough banks to make some noise on coverage day.