Takeaway: We added TUSK to Investing Ideas on the short side on 3/23.

Stock Report: Mammoth Energy Services (TUSK) - HE TUSK table 04 05 18

THE HEDGEYE EDGE

Mammoth Energy Services (TUSK) is a diversified oilfield and electrical infrastructure services company that is gouging U.S. taxpayers on its Puerto Rico contract.

Our TUSK thesis is centered on its $945MM contract for electrical T&D work in Puerto Rico. Mammoth’s subsidiary, Cobra Energy, is earning a ~40-45% operating profit margin for its work in Puerto Rico, while other more established companies in the T&D space are earning between 0%-10%. Most large utilities sent to the island under mutual aid agreements are working at cost, i.e. no profit. With just ~$30 million in electrical T&D assets, TUSK stands to make a +12x pre-tax return on investment on this contract alone. With PREPA in bankruptcy protection, FEMA (funded with U.S. taxpayer dollars) is paying TUSK hundreds of millions of dollars in exorbitant profits. Since the announcement of this contract TUSK shares have doubled.

At best, we believe TUSK will never see a contract like its current one in Puerto Rico again. The disaster recovery in Puerto Rico was plagued by a litany of factors that resulted in the award of two unprecedented and controversial, no-bid contracts by PREPA to Whitefish Energy and Cobra Energy. At worst, Cobra’s contract remains under scrutiny and could lead to cancellation or amendment.

We view the electrical T&D industry as highly competitive and fragmented; industry leaders, such as Quanta Services (PWR) and EMCOR Group (EME), typically earn a 5 – 10% operating profit margin. The amount of revenue and profit that TUSK is earning in Puerto Rico will never be repeated. This sets TUSK up to disappoint lofty revenue and margin expectations in 2H18 and 2019.

Other than TUSK’s PREPA contract, it owns a collection of second-tier OFS assets including pressure pumping fleets, northern white sand mines, and low-quality drilling rigs. Having been formed by Gulfport Energy (GPOR) and Wexford Capital, GPOR is TUSK’s largest E&P customer and is slowing activity in 2018.

We value TUSK at ~$20/share, ~40% downside from the current price of $33.

ONE-YEAR TRAILING CHART

Stock Report: Mammoth Energy Services (TUSK) - HE TUSK chart 04 05 18