Atlas Energy Solutions Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Atlas Energy Solutions Inc. is an oilfield services company providing logistics, transportation, and related services to oil and natural gas companies, particularly within the Permian Basin, focusing on efficiency, safety and sustainability.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

AESI operates in a cyclical and highly competitive industry. While the company has a strong presence in the Permian Basin, it does not possess a wide and durable moat that can repel competition long term.

Moat Assessment: 2/5

  • Limited Competitive Advantage: AESI’s business is largely centered around providing logistics and transportation services to oil and gas companies. While this requires expertise and reliable operations, it is not a particularly differentiated service, meaning competitors can easily replicate its core offerings.
  • Economies of Scale: AESI seeks to establish a cost advantage through its high-throughput facilities. The reliance on economies of scale for competitive advantage is a major source of weakness, given new technologies and innovations can upend previous scale advantages.
  • Regional Specialization: While the Permian basin region is strategically important, it is also prone to geographic-related risks, like transportation costs and environmental hazards.
  • Lack of Intangible Assets: AESI lacks significant brand recognition, unique technology patents, or other strong intangible assets which create lasting customer loyalty and pricing power.

Justification for Moat Rating

The company does have some advantages, like its vertically integrated operations and its geographical location which help lower its costs. The company also has a strong focus on sustainable practices. But the advantages are easily replicable and thus won’t be able to generate a moat. A moat is something unique, defensible, and hard to copy for competitors, not just a positive operational aspect. As such, it does not give a durable competitive advantage for AESI.

Legitimate Risks that Could Harm the Moat and Business Resilience

  • Fluctuating Commodity Prices: The oil and gas industry is highly volatile. A drop in commodity prices would directly affect the production, and therefore, the demand for AESI’s services, causing lower revenues and potentially impairing profitability. While commodity markets go through various cycles, a long downturn can be detrimental.
  • Competition: The oilfield services sector is highly competitive, with numerous players offering similar services. New entrants with innovative technologies can quickly disrupt the existing players and upend any advantages, including economies of scale.
  • Technological Disruption: The industry is subject to rapid technological advancements that can reduce the need for traditional logistics or make it easier for new competitors to enter the industry. Automation is a major part of the industry.
  • Dependence on Major Customers: A loss of a major customer could significantly impact AESI’s financials.
  • Regulatory Changes: Changes in environmental or safety regulations may increase operating costs and hinder the company’s ability to scale effectively. The ever-evolving regulatory environment will continue to demand heavy investment.
  • Macroeconomic Conditions: Economic downturns can slow down business activity, which can severely affect the volume of operations of the oil and gas industries.
  • Political Risk: Political instability and conflicts, both domestic and international, can affect the demand for and production of oil and gas, thus affecting AESI’s business. The risk is amplified when the location of extraction is concentrated in few unstable areas.
  • Financial Risk: Given the highly-leveraged status of the company, there is an inherent risk of a significant downturn. The dependence on banks will hurt the company if the costs of debt are elevated and credit availability is limited.

Business Explanation

Atlas Energy Solutions Inc. is a leading provider of proppant logistics and related services in the Permian Basin, with 80% of its revenue in 2023 coming from this region. It is primarily a service company, its services include the sourcing, transportation, and delivery of frac sand, which is key to shale drilling operations.

  • Revenue Distribution:
    • Logistics and Transportation: This segment accounts for the majority of revenue. The company’s operations involve the transportation of frac sand from mines to well sites, typically in the Permian Basin. This includes long-haul trucking, in-field delivery, and onsite sand management services.
    • Proppant Sales: AESI sells frac sand, which is used in hydraulic fracturing operations. This represents a smaller portion of the overall revenue but is tightly correlated to their logistics. They only resell sand and don’t extract it.
    • Other Services: These services make a small part of their revenue and are ancillary services like storage and delivery, consulting, etc.
  • Industry Trends:
    • High Demand for Proppant: The boom in shale oil and gas extraction has led to a significant increase in the demand for frac sand, a vital component in hydraulic fracturing. This is a major tailwind for the company.
    • Focus on Efficiency and Cost Reduction: Oil and gas producers are continuously seeking to optimize their operations and lower their production costs, driving the need for efficient logistics providers.
    • Sustainability: There is increasing emphasis on sustainable operations by oil and gas companies, therefore companies are looking for partners that operate with an understanding of environmental concerns.
    • Technology: The utilization of technology to increase efficiency in operations has given companies a way to be more profitable.
  • Competitive Landscape:
    • The oilfield service industry is highly fragmented and competitive. There are many companies operating in the Permian basin, ranging from small players to larger multinationals.
    • Companies compete fiercely on pricing, service quality, and logistical capabilities. Those without a strong local presence may also be at disadvantage because of higher transport costs.
    • A major way to create a competitive advantage has been by building up scale.
  • What Makes AESI Different?
    • Vertical Integration: AESI is involved in every stage of sand supply, from sourcing the raw material, to transporting to the well site, and managing on-site logistics. This has allowed them to lower their costs by having more visibility into the entire supply chain.
    • Geographic Focus: The company has chosen to focus on the Permian basin, allowing them to have a large network that will bring down their operating costs. They also develop close relationships with their customers.
    • Proprietary Technology: AESI utilizes technology such as enhanced tracking, automation, AI and machine learning to better manage their operations.

Financials

  • Revenues:
    • AESI’s revenues are very dependent on the state of the oil and gas industry. During the time of high drilling activity in the Permian basin, revenues will be high, as they deliver more volume of sand.
    • Revenues tend to rise quickly along with increases in oil and gas prices. A decrease in prices is followed by decline in demand.
    • Revenues are largely driven by volume, as pricing is very competitive and not often a differentiator.
  • Margins:
    • Operating margins are very dependent on pricing of sand and the costs for logistics. There can be periods where these increase significantly, giving a strong tailwind to revenues. Other times they might be under pressure due to oversupply in market, thereby reducing margins.
    • Margins are often higher with a higher volume of activity. As more volumes of sand is shipped, the company can spread its costs and realize economies of scale.
    • Profit margins can be impacted by the cost of natural gas and diesel.
  • Debt:
    • AESI has a relatively high debt, with Total Debt almost equal to 65% of the Total Capitalization at September 30, 2024. This ratio has been consistently elevated from previous periods.
    • A large amount of debt will lead to problems with profitability during downturns as the interest payments will eat into the profits and reduces the company’s leverage to react to downturns.
    • The company has several term loans to fund its growth and expansions. This increases the company’s leverage and makes it vulnerable to changing interest rates.
  • Cash Flow:
    • The operating cash flow has been very positive in recent times, mainly driven by increase in net income.
    • Free Cash Flow has been more volatile and is heavily influenced by expansion strategies, that involve high capital expenditures. During times of expansion FCF will be less than what might be expected, and vice-versa.
  • Recent News:

    • During their Q3 2024 earnings call, management noted that the volumes of sales are continuing to be resilient. This shows that the operations in the Permian Basin are still strong. They are looking towards using data driven metrics and customer data to focus on value, and are expecting higher demand for their services in the coming years. They did acknowledge that prices are becoming competitive.

    • The company has a history of major growth through acquisitions and expansion, as was shown again by an acquisition in the latest quarter. This highlights the company’s need to keep up with its expansion plans.

    • Management also talked about how the transition to electric trucks might improve their profitability. But also noted that in the near future, it might not be economical.

Understandability Rating: 3/5

While the core business of AESI is relatively straightforward (providing logistics for the oil and gas industry), some of the nuances require a good understanding of several business and financial metrics. While the general concept of the company’s activities is easy to grasp, understanding the financial aspects of the business can be complicated for many. Moreover, one needs a good understanding of the overall oil and gas sector to understand the growth opportunities for this company.

Balance Sheet Health: 3/5

  • Moderate Debt Burden: AESI’s high debt levels are concerning. The company is highly susceptible to a downturn in the oil market because of it.
  • Leverage: The company uses leverage to expand its operations. Though this can create better growth during expansionary times, it becomes dangerous during downturns, when profits decline significantly.
  • Asset Structure: A good portion of the company’s assets come in property and equipment, which are illiquid assets. In times of crisis, these may not be as easily leveraged, as well as can decline in price fast.
  • Positive Cash Flows: the company has been showing strong and growing operations cash flows, which help in debt servicing and further investments.

In summation, AESI is not a wide-moat company, though, it has advantages that lead to strong operations. However, investors must also consider the company’s leverage, and the cyclical nature of the business it operates in, among others, to see if it is a good long-term investment.