Stifle First Energy CES recommendation Released today
CES Energy Solutions Corp.6
CEU-TSX January 20, 2020
Find me a “doubler” they said
• In this publication we highlight CEU’s compelling investment premise. CEU trades at 4.4x 2021e EV/EBITDAS and 9.6x 2021e P/E despite operating a production-focused business with high barriers to entry and significant capacity to execute shareholder-friendly initiatives.
• We are forecasting CEU to generate $178 mm of free cash flow after dividends in 2020e and 2021e. In Figure 3 we include a range of scenarios where CEU could repurchase between 15-77 mm shares (6- 29% o/s) with 2021e net debt/EBITDAS remaining between 1.6x and 2.4x depending on how FCF is allocated.
• As such, we believe the significant valuation discount and capacity to return material capital to shareholder merits investment in CES Energy Solutions.
• There are no changes to our EBITDAS forecasts, $3.75/sh target price (7.0x 2021e EV/EBITDAS) or BUY rating with this update.
We have a positive view of CEU’s business given its production focus, high barriers to entry and technical complexity and capital-light operating model. As we show in Figure 4 within the document, the company’s ability to convert EBITDAS into free cash flow is second best amongst its Canadian OFS peers under SNCFE coverage. Moreover, the company’s balance sheet is attractive, and management remains focused on paying down debt and returning capital to shareholders via its NCIB and dividend.
The market threw the baby out with the bathwater when it rerated CEU’s multiple lower. CEU has rectified the margin compression issues in 2017-2018 and we believe concerns about the U.S. are overdone. Our Stifel, Nicolaus & Company, Incorporated (“SNC”) forecasts indicate that Permian oil production will continue to grow into 2022e, and we are forecasting a 7% decline in Permian rigs y/y, which we view as priced in given the ~40% decline in CEU’s share price in the past year.
Despite these attributes, CEU trades at a discounted 4.4x 2021e EV/EBITDAS and 9.6x 2021e P/E. Compared to the oilfield waste disposal peer average (SES and TEV), CEU has a higher ROCE, better FCF generation and a similar balance sheet, yet it trades at a 1.1x EV/EBITDAS discount. This discrepancy is even more apparent given the recent U.S. production chemicals transaction between Apergy and Ecolabs at 9.5x 2020e EV/EBITDAS after synergies.