Ranger Energy Services Stock: A Compelling Buy With Insider Buying And Robust Financials

Editor’s note: Seeking Alpha is proud to welcome Deep Value Investing as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Thank you for your assistant/iStock via Getty Images Despite a challenging Q1 2024, Ranger Energy Services Inc. (NYSE:RNGR) has a solid financial position, and remains debt-free with over $85 million in liquidity. After a recent 20% drop in Ranger’s share price, both the CEO and CFO bought shares in the company, signaling strong confidence in the future share price. The recent strategic pivot in the wireline segment from low-margin completions to production and pump-down services, combined with cost reductions of $4 million annually, demonstrates proactive management focused on profitability. In addition, management initiated a quarterly dividend payment in 2023, that has been consistent ever since, and they have a robust share buyback program, returning significant value to shareholders. These, and more factors that I will discuss in this article, make Ranger Energy Services a compelling buy. Company overview Ranger Energy Services Inc. is a supplier of well completion and production services operating in the largest basins across the United States, including the Permian Basin, Denver-Julesburg Basin, Bakken Shale, Eagle Ford Shale, Haynesville Shale, Gulf Coast, and SCOOP/STACK. Ranger operates in the oil and gas equipment and services industry, a cyclical industry tied to the oil and gas prices, with a considerable number of competitors, some of them emerging in the past decade due to lower entry barriers. Given the highly competitive landscape, which as we are about to see impacted the bottom line of Ranger in Q1 2024, I decided to include below a table with all the relevant competitors. Company Market Cap (in millions) Ranger Energy Services, Inc. 250.34 RPC, Inc. 1,225.3 ProPetro Holding Corp. 1,150.6 Select Water Solutions, Inc. 940.2 Oil States International, Inc. 384.5 KLX Energy Services Holdings, Inc. 57.6 Dril-Quip, Inc. 980.7 Mammoth Energy Services, Inc. 290.1 Solaris Oilfield Infrastructure, Inc. 210.4 NINE Energy Service, Inc. 32.5 Click to enlarge Table 1. Competitors of Ranger Energy Solutions Inc. (source: latest 10-K) Add to this stringent regulatory and environmental compliance, geopolitical risks, operational hazards, and weather-related disruptions, and you get a volatile industry, which minimal chances of predicting anything with high certainty in any timeframe. Nevertheless, this hasn’t stopped me from buying and holding shares in Ranger at the time of writing this article. Let me walk you through the reasons why I think Ranger is a compelling buy. Sell-off + Insiders Buying Captivated My Interest I noticed a drop in the share price prior to the Q1 earnings release of more than 20%, from the 12th of April 2024 until the 7th of May 2024, the earnings release date. Of course, price action by itself doesn’t really play a strong factor in my conviction to buy a stock, however, I found this decline to be a trigger for monitoring insider purchases at the new lower share price. Fair enough, on June 4, 2024, the price was attractive enough for two insiders, the CEO and CFO, to purchase shares in the company for the first time in 2024. Cougle Melissa, CFO: +12% position, worth $71,982 Bodden Stuart, CEO: +2% position, worth $74,970 When I see contrarian buying by insiders, I search their professional background to understand more about their experience and performance. Stuart Bodden has over 20 years of experience in the oil and gas industry. He joined Ranger as a CEO in 2021. In less than 2 years under his leadership, the company had record annual earnings in 2023. Melissa Cougle brings nearly two decades of finance leadership in the oilfield services industry. She joined Ranger in June 2022, and played a key role in achieving zero net debt and executing a share buyback program. Now, let’s explore the contributing factors behind this contrarian move by the CEO and CFO. Q1 2024 Was Rough, However… In Q1 2024, Ranger Energy Services saw a 13% QoQ revenue decline, and adjusted EBITDA fell by 41% QoQ. Let’s understand why. Ranger has 3 revenue segments. I included a table below to display the adjusted EBITDA over the past 5 quarters: High Specification Rigs Wireline Services Processing Solutions and Ancillary Services Q1 2023 17.4 4.2 5.0 Q2 2023 15.6 5.7 5.6 Q3 2023 15.7 7.4 6.5 Q4 2023 15.4 2.8 5.3 Q1 2024 13.6 0.2 2.5 Click to enlarge Adjusted EBITDA by Revenue Segment (Q1 2023 – Q1 2024) Understanding the decline during the past two quarters Contributing factors (source: Q1 2024 earnings call transcript & press release): Wireline Services: the largest drop in adjusted EBITDA, a decline of 93% QoQ, was due to competitive pricing pressures in the North US region. During last winter new competitors entered the market, lowering the price of completion wireline services. During the Q1 2024 earnings call, management mentioned a pivot towards more profitable (higher margins) services within this segment, focusing on production and pump-down services. In addition, a reduction of 32% in stage counts QoQ (47% YoY) contributed to the decline in revenue. Processing Solutions and Ancillary Services: -53% QoQ drop in adj EBITDA, attributed to a lower demand in the winter months for services like coil tubing, and yet another increase in competitive pricing pressures due to an influx of new competitors in the North region. High Specification Rigs: a relatively small -12% QoQ decline in adj EBITDA, impacted by downtime due to weather, and a safety-related incident on a non-Ranger rig. This led to 75 rig days with zero rig revenue, while still having to cover associated expenses. Across all segments, adj. EBITDA was $10.9 million, down from $20.1 million in Q1 2023 and $18.4 million in Q4 2023. Ranger Energy Services is in a healthy financial position Despite the headwinds in Q1 2024, I believe Ranger has the potential to turn things around. Contributing factors include: Strong balance sheet: debt-free status, having paid off nearly $80 million in debt since Q1 2022. At the end of Q1 2024, they held over $85 million in liquidity, which positions the company in a good position to navigate in the current headwinds, and to make potential new acquisitions and expand their services. Strong free cash flow: the company generated $54.3 million in free cash flow in 2023, representing 64% of adjusted EBITDA. Share buyback program: the company has been repurchasing shares, with 1,805,500 shares repurchased during 2023 and an additional 736,800 shares in early 2024, representing over 10% of the company’s outstanding shares. In 2023, they returned $21.7 million to shareholders, representing 40% of their free cash flow​. Dividend payments: Ranger Energy Services initiated its first dividend in 2023. The initial dividend declared was $0.05 per share, which they have consistently paid on a quarterly basis ever since. Their dividend yield (TTM) is 1.83%, which is close to 50% below the sector median. I view this positively, as the company has more room to allocate a greater portion of their free cash flow to expanding services and securing more contracts with E&P companies. Strategic acquisitions: their latest acquisition was in Q3 2023. It was a relatively small pump down assets and support equipment company worth $7.25 million. As mentioned above, their free cash flow and high liquidity position puts them in a favourable position for further, and larger, acquisitions. Customer relationships: during 2023 Ranger signed a significant agreement with a major integrated onshore operator and with a key blue-chip customer (undisclosed customer names). These agreements show management commitment to increase their customer base. I expect more new contracts to be signed during this year, especially after their pivot towards production and pump down services. Next, let’s see what management is planning to do to get back on track. Pivot from low-margin to higher-yield services As I mentioned above, the significant drop in wireline services was due to new competitors entering the market in the pump down services. Management’s decision to pivot away from a low margin and highly competitive service seems very reasonable to me. Many of the quoted bid prices we’ve encountered are unprofitable and ultimately unsustainable. And we have chosen to only bid at levels that will generate an acceptable level of return for our business. (source: Stuart Bodden, Q1 24′ earnings call) The fact that they stopped bidding for these low-margin services increases my confidence that management knows what they are doing and can react quickly to adverse situations. Cost cuts Management conducted an examination of its cost framework and identified around $4 million in annual cost reductions. These include: Personnel reductions: $3 million annual savings. Another $1 million annual savings in support and service-related costs​. Focus on Proven Success: High Specification Rigs This was the only segment that did not have a drop in revenue in Q1 2024, despite major disruptions due to weather (harsh winter conditions leading to reduced rig hours), seasonal slowdown and a major safety incident on a non-Ranger rig leading to 75 rig days with zero rig revenue. Demand for this service has been proven to be consistent for the past 2 years. Additionally, in their Q1 2024 call transcript they mentioned margins of 19% – 21% going forward, which I find very attractive. 1 year since RNGR joined the Russell 3000 Index Even though the announcement was done on the 26th of June 2023 (source press release), and the share price increased 50% in the next three months, the current price level is down from the peak, sitting at about 24% below the 52wk maximum. The news that RNGR entered the Russell 3000 Index does not excessively contribute to my conviction in this stock; however, being part of the Russell 3000 Index has increased the visibility of Ranger Energy Services among institutional investors. Valuation A quick back-of-the-envelope calculation shows that Ranger Energy has an EV/EBITDA (TTM) of 4, which is approximately 37% below the sector average. When compared to the EV/EBITDA of direct competitors (see Table 1 at the top of the article), Ranger’s valuation is 35% below the average. When analyzing the Price/Cash Flow (TTM) ratio for Ranger, we obtain a value close to 3, which is about 25% below the average of its direct competitors. The same happens when we compare the Price/Book ratio. Ranger is 33% below the average of its direct competitors. In essence, Ranger seems to be undervalued when compared against the sector, and most importantly, against its direct competitors. I often don’t spend time calculating a “fair value” of the stock, as I am never comfortable with the assumptions built into such calculations. There is simply too much uncertainty in the energy sector to assume x% of annual revenue growth rate. Any valuation that relies on such assumptions should be taken with a pinch of salt, or two… Instead, I use price action to determine when to exit my position. I often analyze weekly charts for support and resistance levels over the past 5-10 years that appear to have a certain level of validation. Ranger has been trading on the NYSE since August 2017, so in my view, there is enough data to draw multicolor lines on a chart for support and resistance levels. With this said, I would not be surprised to see Ranger trading in the mid-14s within the next 12-18 months. Risks Some risks that, in my view, could impact my long position in Ranger: Increased competitive pressures in North US sites, leading to lower operational margins. While I view positively their decision to shift away from low-margin, highly-competitive services, there is a caveat, which I will discuss in my next point. Execution risk in their strategic pivot towards production and pump-down services: the success of this pivot is based on the ability of the company to close new contracts for the high-margin services segment. Failure to do so could severely impact their wireline services revenue. The overall cyclical nature of the industry, which is highly dependent on oil and gas prices. A decrease in these prices could lead E&P companies to reduce their CapEx, subsequently reducing the number of contracts for companies in the oil and gas equipment and services industry. Operational hazards and weather disruptions: Q1 2024 performance was impacted by weather-related disruptions and safety incidents, indicating that the company is highly vulnerable to these factors. I don’t expect weather disruptions until Q4 this year, and these happen mostly in the winter season. Conclusion Insiders buying after a 20% sell-off, a recent bad quarter characterized by non-recurring disruptions, a healthy balance sheet with zero net debt and $85 million in liquidity, a strong share buyback program, consistent quarterly dividends over the past year, and a valuation below the sector and industry average all build my confidence in Ranger. This conviction led me to buy and hold shares in Ranger at the time of writing this article.

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