NCS Multistage (NASDAQ: NCSM) Research Update

Highlights:

• Arrowhead is updating its coverage on NCS Multistage Holdings, Inc (“NCS” or the “Company”) with a fair value bracket of USD 47.17 – USD 57.65 (Share Price on December 2, 2022: USD 26.61) based on Discounted Cash Flow Valuation and Company Comparable Valuation.
• NCS is an oilfield services and equipment company, which provides highly engineered products and associated services to support onshore and offshore oil and gas well completion and field development projects. The Company offers products and services in five categories: Fracturing Systems, Well Construction, Tracer Diagnostics, Repeat Precision, and Enhanced Oil Recovery (“EOR”) Products.
• NCS has established leadership positions across a focused product line portfolio. The Company claims to be the worldwide leader in pinpoint stimulation and North America’s top provider of tracer diagnostics services. The Company believes that its AirLock, which is the anchor product for its Well Construction product line, and which has achieved over 13,000 runs with a 99.99% success rate, was the first economical casing buoyancy system in the world.
• Since the beginning of 2022, the number of customers purchasing PurpleSeal composite plugs in Canada has been increasing, which has helped NCS generate prospects for composite plugs as well as NCS’s full wellbore offering. The Company launched a new product offering called the PurpleFire factory-assembled modular perforating gun system which is currently in field trials. During Q3’22, the Company reported successful initial trials of the Purple Fire Express system (which is an integrated downhole tool string for plug-and-perf completions) with several additional wireline customers.
• NCS aims to emerge as a top OFSE market player by developing and integrating innovative technologies into the market. Currently, NCS holds a total of 105 patents, up from 19 US and 23 international patents at the time of its IPO in April 2017.
• The Company maintains lean operations by outsourcing most of its supply chain activities to local and overseas partners, and only managing core business aspects like R&D, design, engineering, assembly / testing, and quality control internally. This allows the Company to operate on a “capital-light” business model with a smaller fixed asset base and limited investments in field equipment and customized vehicles. Due to its smaller capex requirements, NCS is able to generate higher free cash flows than many of its competitors.
• NCS was significantly affected by the Covid-19 outbreak because of its direct exposure to the Oil & Gas industry, which is among the worst affected by Covid. The Company’s revenue almost halved in 2020 compared to 2019 because customers had to reduce or suspend oilfield operations. But the demand for oil and gas has improved since the lows of mid-2020 and E&P customers have slowly begun to increase activity. After surpassing FY’19 level in Q3’21, Canadian rig counts have continued to increase, and US drilling and completion activity is also increasing
• Oil and Gas prices are increasing because of Russia’s invasion of Ukraine. Renewed government support, at least for the short term, and a focus on energy independence have encouraged many companies in the US to commit additional capital to drill more wells. Additionally, soaring energy demand and the European embargo on Russian oil have increased drilling activity in North America. These are expected to create a derived demand for oil drilling, and equipment manufacturers like NCS.