Target Hospitality Stock – Set To Thrive Despite The Current Environment (NASDAQ.TH)

Investment Thesis. A rising production demand across the Permian basin is likely to result in a higher demand for lodging services. Revenue from Government Services is stable. These are the reasons I see upside potential in this stock.

In an August article, I argued that Target Hospitality Corp. (NASDAQ:TH)Potential upsides could be seen going forward. I argued this argument because of the strong rebound in revenue after COVID, and the extension to 2026 of a legacy contract in the Government Services segment.

This article examines whether Target Hospitality could have significant upside from its recent performance.

Recent Performance

Target Hospitality has seen a strong rise to the upside over the past week – this is due in large part to the United States’ ban on Russian oil imports.

This move is expected to significantly increase domestic supply and activity. Target Hospitality is a long-standing supplier of lodging services to oil and gas workers.

The company has changed from a strong focus in energy to a greater emphasis on government services over the years.

The company has strong exposure to energy through its HFS segment (Hospitality & Facilities Services – South) segment. Please describeThis was the former “Permian Basin”, and “Bakken Basin”.

Hospitality & Facilities Services

We can see that revenue rose by 41% between 2020 and 2021, with utilization increasing by a whopping 50% over the same time period.

This is why oil prices have been rising since the recovery of the global economy post-COVID. However, Russia’s oil supply has ceased and this has led to a need to increase the supply from the Permian basin. However, Supply chainThere are many issues that make it difficult to quickly increase output to fill the gap. This is why there is significant potential to see a strong uptake in demand for lodging services in this basin that can accommodate workers – at the very least, in the short and medium term.

The Permian Basin is the largest basin in the United States, so production within the basin will be prioritized moving forward.

Balance Sheet

We can see that the ratio of cash to total current liabilities (and cash to long-term obligations) has significantly increased in 2021 from a balance sheet perspective.

Source: Figures taken from 2019-2021 Target Hospitality Annual Reports. Cash to total current liabilities, cash to long-term loans ratios and cash to cash to total current liabilities were calculated by the author.

This is why I consider the company to be in a great position to expand utilization capacity to meet increased demand.

Looking forward

I believe that the stock could see further upside in the near term because of the fact that there is an increase in demand for workers in the Permian Basin. Target Hospitality is a key facilitator for lodging services for workers within the basin.

Government Services will continue to see minimum growth. RevenueUp to $527 million in commitments through 2026. This includes a legacy contract worth $265 million and many projects that support U.S. humanitarian efforts.

This perspective shows that there is little to no downside risk in this segment.

Conclusion

Target Hospitality could reap the benefits of increased demand in the Permian Basin for workers, while revenue from Government Services will remain stable.

Additional disclosure:This article is provided “as-is” and without warranty. This content is my opinion only. It does not constitute investment advice. It is the responsibility and obligation of the reader to do their due diligence before making any investment decision. Any actions taken on the basis of the information contained herein are beyond the control of the author.