Atlas Energy Solutions Inc. (AESI): Transforming the Permian Basin Through Innovative Logistics

Published on November 30, 2024 | Ticker: AESI

Business Overview

Atlas Energy Solutions Inc. (AESI) is a leading provider of high-quality proppant and logistics solutions in the Permian Basin. With a strong focus on operational excellence and technological innovation, the company is revolutionizing the way sand is delivered to oil and gas customers, driving increased efficiency and sustainability in the region.

Company History

Atlas Energy Solutions Inc. was formed on June 28, 2023 as a holding company and the ultimate parent company of Atlas Sand Company, LLC (Atlas LLC), which was founded on April 20, 2017. Atlas LLC is a producer of high-quality, locally sourced 100 mesh and 40/70 sand used as a proppant during the well completion process. Proppant is necessary to facilitate the recovery of hydrocarbons from oil and natural gas wells. One hundred percent of Atlas LLC's sand reserves are located in Texas within the Permian Basin, and its operations consist of proppant production and processing facilities, including four facilities near Kermit, Texas and a fifth facility near Monahans, Texas.

Initial Public Offering and Reorganization

In March 2023, Atlas Inc. completed its initial public offering of 18.0 million shares of Class A common stock at a price of $18.00 per share, generating $324.0 million in gross proceeds. In connection with the IPO, Atlas Inc. underwent a reorganization to become the holding company for Atlas LLC's operations. As part of the reorganization, certain legacy owners who previously held membership interests in Atlas LLC were issued shares of Atlas Inc.'s Class A and Class B common stock.

On October 2, 2023, Atlas Inc. completed the Up-C Simplification, which involved reorganizing under a new public holding company, New Atlas. The Up-C Simplification eliminated Atlas Inc.'s dual class structure, with each share of the prior Class A common stock exchanged for one share of New Atlas' common stock and all shares of the prior Class B common stock surrendered and cancelled.

Key Innovations

One of the key pillars of Atlas' success has been its investments in developing the Dune Express, an advanced overland conveyor system that is poised to transform the way sand is transported in the Permian. By reducing the reliance on traditional truck-based delivery, the Dune Express will enhance the safety, efficiency, and environmental friendliness of the company's logistics operations. As the project nears completion, Atlas is seeing strong customer demand and enthusiasm for this innovative solution.

Financials

Financially, Atlas has demonstrated impressive performance in recent years. In 2023, the company reported annual revenue of $613.96 million and net income of $159.99 million, reflecting the strength of its business model and operational execution. The company's balance sheet remains robust, with a current ratio of 3.44 and a debt-to-equity ratio of 0.20 as of the latest reporting period.

For the most recent fiscal year (FY 2023), AESI reported operating cash flow (OCF) of $299.03 million and free cash flow (FCF) of -$66.46 million. In the most recent quarter (Q3 2024), the company reported revenue of $304.43 million, net income of $3.92 million, OCF of $85.19 million, and FCF of -$1.09 million. Revenue increased 6% sequentially from Q2 2024, driven by higher sales volumes, partially offset by lower proppant prices. Service revenue increased 116% year-over-year due to higher logistics volumes and the contribution from the Hi-Crush acquisition.

AESI operates in two main product segments: Product Sales and Service Sales. For the nine months ended September 30, 2024, AESI reported total sales of $784.62 million, consisting of $386.99 million in product sales and $397.63 million in service sales. Gross profit for the period was $182.12 million, with net income of $45.54 million.

The company utilizes non-GAAP financial metrics to assess its performance, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow, and Contribution Margin. For the nine months ended September 30, 2024, AESI reported Adjusted EBITDA of $225.67 million and Adjusted Free Cash Flow of $203.41 million.

Liquidity

The company's strong financial performance and robust balance sheet contribute to its solid liquidity position. As of the latest reporting period, AESI had a debt-to-equity ratio of 0.45, cash of $78.64 million, and an available credit line of $74.80 million under the 2023 ABL Credit Facility. The company's current ratio stood at 1.23, with a quick ratio of 1.08, indicating ample financial flexibility to fund its operations and pursue growth opportunities.

Strategic Acquisitions

The acquisition of Hi-Crush in 2024 further bolstered Atlas' position in the Permian, adding complementary proppant production and logistics capabilities to the platform. The integration of these assets has been seamless, and the company is already realizing significant synergies from the transaction.

Operational Challenges

However, Atlas has not been without its challenges. In the second quarter of 2024, a mechanical fire at one of the company's Kermit facilities caused disruptions to production, resulting in higher-than-anticipated operational expenses. The company responded swiftly, implementing operational improvements and process enhancements to address these issues. As a result, the Kermit plant has since returned to normalized levels of efficiency and profitability. Additionally, Atlas faced another operational challenge in the third quarter of 2024 when a dredge mining asset was damaged during commissioning at another Kermit facility. In response, the company has made changes to its mining equipment strategy to mitigate such risks in the future.

These operational challenges impacted profitability in Q3 2024, with elevated operating costs at the Kermit facility related to the fire in April 2024 and the damaged dredge asset.

Geographic Performance

AESI's revenue was generated primarily in Texas, New Mexico, Ohio, Oklahoma, and West Virginia in Q3 2024. The company does not have significant operations or sales outside the US.

Industry Trends

The proppant industry has seen volatile pricing in 2024 amid a challenging oilfield services market. AESI expects pricing to remain under pressure in the near-term but anticipates a recovery as high-cost competitors are forced to reduce capacity or exit the market.

Future Outlook

Looking ahead, Atlas is well-positioned to capitalize on the continued growth and development of the Permian Basin. The company's guidance for 2025 points to strong volume growth, driven by increased customer demand and the successful ramp-up of the Dune Express. Additionally, the company's commitment to operational excellence and technological innovation is expected to further strengthen its competitive advantages in the market.

For Q4 2024, AESI expects operator capital budget exhaustion to result in a longer holiday slowdown, negatively impacting both sales volumes and last mile crew counts. They expect their last mile crew count to remain in the 26-28 range for November, before seeing a few crew drops during December. AESI anticipates Q4 2024 EBITDA levels to be flat to down relative to Q3 levels, due to the impacts of the holiday slowdown, partially offset by improvements in average OpEx per ton.

Despite these near-term headwinds, AESI remains optimistic about its longer-term growth prospects. The company is increasing its quarterly dividend by 5% to $0.24 per share, representing an annualized yield of around 4.8%. Furthermore, AESI's Board has authorized a $200 million share repurchase program over the next 24 months, demonstrating confidence in the company's future performance.

Conclusion

In conclusion, Atlas Energy Solutions is a unique and innovative player in the Permian proppant industry. With its focus on operational efficiency, logistics optimization, and customer service, the company is transforming the way sand is delivered to oil and gas operators in the region. As the Dune Express comes online and the company continues to execute on its strategic initiatives, Atlas is poised to solidify its position as a leading provider of proppant and logistics solutions in the Permian Basin, despite facing near-term challenges in a volatile market environment.

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