CES Energy Solutions Corp T.CEU

Scotia Report and Target now $4.75

[savyinvestor333]

CES Energy Solutions Corp.

• CEU-T: C$2.99
• Target: C$4.75
  Old: C$4.60
• Rating: Sector Outperform

A Well-Oiled Machine

OUR TAKE: Positive. Over the next six quarters, we expect CEU to generate ~$210 million of FCF. Our estimates may prove conservative given recent improvements in working capital efficiency. Assuming the company exercises the full NCIB at the current share price (~$60 million), keeps the dividend unchanged (~$35 million), and delevers towards its target of 1.0x debt to EBITDA (~$10 million on our estimates), we estimate it would still leave the company with $100 million, or ~50% of FCF, to pursue additional return of capital opportunities.

Despite the move in the shares over the past four weeks (+17%), they are trading at 4.2x EV/EBITDA on our 2024E, only modestly above the driller peer group, despite about 50% of CES’s business being production chemicals. Closet PC peer, CHX-US, trades 8.8x. On a P/B basis, shares trade at 1.3x, a 35% discount to historicals and in-line with the trough during 2015/2016.

KEY POINTS

CES reported 2Q23 sales and adjusted EBITDA (margin) of $516 million and $73.9 million (14.3%) versus consensus of $507 million and $67.8 million (13.4%) (see First Take). The results (and those of peers) confirm our view that this will be a margin cycle rather than a build cycle. Adjusted EBITDA margins of 14.3% expanded 50 bp q/q and 20 bp y/y despite lower rig counts in the U.S. (-6% q/q) and flat y/y in Canada. As of August 11, rig counts were sitting at 654 in the U.S. (oil rigs flat w/w) and 190 in Canada (+2 rigs y/y). Peers noted they expect activity levels to bottom in 3Q. Besides structural tailwinds of increased fluid intensity, management noted that compared to previous cycles, the operating environment is more rational following the exit of several international players from the NA market and the larger players not chasing share.

The company provided new guidance around capital allocation, namely: (1) it expects 2023 capex of $60 million (+$5 million from previous guide); (2) it plans to repurchase the maximum number of shares under its NCIB of 18.7 million (10% of float) through July 24, 2024; (3) it will continue paying the dividend ($0.10/share annualized) while keeping flexibility to adjust it; and (4) it will use the remaining FCF to repay debt towards its target of 1.0x debt to TTM EBITDA.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly Adj EBITDA (M)	Q1	Q2	Q3	Q4	Year	Current EV/Adj EBITDA
2021A	$34	$32	$42	$48	$156	8.0x
2022A	$42	$61	$73	$80	$257	4.8x
2023E	$77A	$74A	$76	$76	$295	4.2x
2024E	$77	$73	$78	$77	$305	4.1x

Exhibit 1 - U.S. Total Active Rig Counts

Source: Baker Hughes; Scotiabank GBM.

Exhibit 2 - Canadian Total Active Rig Counts

Source: Baker Hughes; Scotiabank GBM.

Exhibit 3 - Financial Forecasts ($ Millions, Unless Otherwise Noted)

Source: Company reports; Scotiabank GBM estimates.

Exhibit 4 - North American Peer Group

Source: Company reports; FactSet; Scotiabank GBM estimates for CES Energy Solutions Corp.

Company Overview

Company Description

CES Energy Solutions Corp. (CEU) designs, implements, and manufactures consumable drilling fluids and specialty chemicals for the North American market.