Power. As AI begins to truly scale, so does its power requirements. The World Economic Forum estimates that the energy needed to run AI tasks is growing annually by 26-36%, and that by 2028, “AI could use more power than Iceland did in 2021.”
With the US Energy Grid already overwhelmed, there is not enough available power to scale AI. For the next 3-5 years, various stop-gap solutions will be needed to provide the necessary throughput needed to scale AI Inferencing.
Enter Solaris Oilfield, a stodgy oil sands play.
Solaris Oilfield, Inc. (SOI) provides mobile equipment that drives supply chain and execution efficiencies in the completion of Oil and Natural Gas Wells. Solaris’ patented equipment and systems are deployed across oil and natural gas basins in the United States.
SOI hit our Price/Volume Algo scan two days ago. When we began digging into the name late Thursday night, we discovered there is a LOT to like about Solaris. More on the story shortly.
We are always on the hunt for powerful, secular trends spurring huge organic revenue and earnings inflections in companies. The best ones are those where the Sell Side leaves forward numbers too low, creating dispersion between Consensus and eventual forward numbers.
SMCI, POWL, WGS, and ROOT were the four most powerful Inflection Points we highlighted this year. Each of these powerful inflections was spurred by an eye-opening beat over consensus, along with forward numbers moving up materially. Therefore, while the stocks went up 30-60% on their first day moves, each stock was actually cheaper after the big move due to explosion in forward numbers.
Quick SOWG Update: Our store checks have been on fire and we think SOWG will blow past numbers the next two quarters and the stock finishes the year at $40.
Back to Solaris. Typically, we are not fans of growth via acquisition. But, in the case of Solaris, we think we have a major growth inflection at hand due to a highly strategic and accretive acquisition, one that moves the company into the hot Distributed Power Solutions Vertical via its purchase of Mobile Energy Rentals. Mobile Energy is a provider of Natural Gas-Powered Mobile Turbines & Equipment, serving Customers in locations where Infrastructure is weak or unavailable.
While there will be a ton of debt added to the balance sheet for CapEx to scale Mobile Energy - $300M already secured - the future cash flows from 2025/2026 will quickly help the company de-lever and make this deal look brilliant in 18 months. EBITDA will rise by 130% between now and exiting next year.
So, 60% of its EBITDA will come from the Distributed Power Vertical starting in 2026, with half of these revenues coming from Data Centers.
Quick Math: SOI will have 60.5M shares outstanding and $315M in debt after this deal is done. At ~$12, we have a $1.05B Enterprise Value company. But one that only trades for 5x 2025 exit-EBITDA run-rate.
The closest public company in the Distributed Power Generation Market is Generac Holdings Inc (GNRC). GNRC gets an 11.6x EBITDA multiple:
Considering Mobile Energy is poised to grow its EBITDA 170% over three years, we think a higher multiple is warranted. To be conservative, let's employ GNRC's 11.6x EBITDA multiple.
On a standalone basis, in 2026, Solaris’ new Mobile Energy tuck-in business should be worth $1.4B (11.6x its $135M in EBITDA). Add in $360M of market cap we had in SOI before this deal was announced and we get to $1.76B of enterprise value target in 12 months.
This translates into $11 of upside in the stock from current levels.
The math is simple when you break it down. So, $23 is a very viable target for SOI over the next 4 quarters as this surge in EBITDA from this IPO-type deal tucked into their stock becomes appreciated by new public shareholders.
This is why Mobile Energy took 70% of their pay day in stock. They saw big upside for themselves by backing into SOI stock.
While Solaris has moved up strongly since this deal was announced, similar to the organic inflections highlighted earlier, SOI is still much cheaper at ~$12 than it was trading in the $8s, even when you add the $300M in debt required for CapEX, along with the 26% in new stock issued to Mobile Energy.
As for risks, private equity will surely move into the Distributed Energy space over the next few years. It is possible this market could be flooded with supply in 2-3 years.
Thankfully, with the near-term insatiable demand for power needs to scale AI, this is not a risk we will be worried about over the next 12 months. We expect to be long gone by the time any such risks come into play.
We are buyers at current levels and also plan to add on any/all dips to the low-$11s. We see minimal downside as the public float is tight, with only 28.5M freely traded shares available in the Class A float.
STOP LOSS: With our Conviction Level of 9 in our thesis over the next few quarters, we plan to give a 3-month timeframe to analyze where we are with this idea in the Fall.
With the deal expected to close quickly by the end of Q3, catalysts for a re-rating will abound, especially as new AI-oriented investors hunt for new Power Plays to buy into. So, SOI will benefit handsomely from a new set of aggressive shareholders poised to move into the name in the coming quarters.
We want to be there for that buying spree.
Please also refer to the SOI Investor Presentation detailing all of the finer points from the tuck-in.
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Disclosure: We are long SOI stock & calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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