Superior Well Services (SWSI) - GARP?

Thesis: The bullish thesis for SWSI is predicated upon increased demand for their services related to the ongoing recovery from a capacity bubble within the pressure pumping market. Increased demand for SWSI's hydro fracing is due to greater per-well intensity in the Marcellus Shale, where growth is expected to be sustained even despite a lousy gas price environment. The market does not fully appreciate the magnitude of this dynamic's impact on SWSI's top-line, and still has some concern over the firm's financial leverage (The bulk of principal payments are not due until 2013 ($207.1mm))

Company Profile: $570mm Market Cap, $785mm Enterprise Value. SWSI provides well-site solutions to oil and natural gas companies. The company offers technical pumping services and down-hole surveying services. Its technical pumping services include stimulation services, such as fracturing and acidizing, which are designed to improve the flow of oil and natural gas from producing zones; It serves regional, independent oil and natural gas companies in the Appalachian, Mid-Continent, Rocky Mountain, and southeast and southwest regions of the United States. The company operates service centers in Pennsylvania, West Virginia, Oklahoma, Mississippi, Alabama, Michigan, Arkansas, Utah, Texas, Virginia, New Mexico, Louisiana, Ohio, Kansas, North Dakota, Colorado, and Wyoming. As of December 31, 2008, Superior Well Services, Inc. owned a fleet of 1,628 commercial vehicles and 116 logging and perforating trucks and cranes. The company was founded in 1997 and is based in Indiana, Pennsylvania.

The Story: Once near the brink of bankruptcy, SWSI stock has surged ~170% over last the 6 months to become one of the top performing oilfield service stocks in the sector. The company has a strong presence in the Marcellus Shale, providing over 30% of the horsepower to operators in the region (SWSI also has good exposure to plays in the Haynesville, Barnett and Bakken as well).

The Marcellus in particular possesses good economics and is expected to grow, even despite the current tepid natural gas price environment. SWSI’s large exposure to the Marcellus relative to its size makes the company an excellent pure-play to capitalize on the growth of that region.

Valuation: A 6.3-6.5x EV/EBITDA multiple on 2011 is a reasonable target, given SWSI's size and the valuation history of its comps (RES, BJS and KEG), implying a $20-20.6 per share price target.

Disclosure: I have been Long SWSI since Jan 4th, 2010 at an average fill of $15.10.