CES Energy Solutions Corp T.CEU

Scotia Report and New Target $5.85

[savyinvestor333]

CES Energy Solutions Corp.

• CEU-T: C$4.77
• Target: C$5.85
  Old: C$5.30
• Rating: Sector Outperform

Don't Stop Me Now

OUR TAKE: Positive. We’re running out of superlatives to describe the strong operating performance that continues to surpass expectations (4Q was the 12th beat in a row; 20th going back to 2019). For context, 2023 ROIC of 14.6% was the highest since 2011 (and >400bp above 2013-14). The tone on the earnings call gives us confidence that momentum carries into 2024 with management seeing room for share and margins to go higher this year. Working capital improvements seem structural with the reinvestment rate hovering around 29% for the past two quarters compared to historicals of 35% (each 1% of w/c improvement translates to $22 million of FCF at current revenue levels). We forecast FCF of ~$160 million in 2024 (14% yield) which provides ample optionality for debt repayment and (note conjunction) return of capital.

CEU trades at 5x EV/EBITDA on our 2024E compared to the company’s (depressed) five-year average of 5.5x. Given the significant enhancements in the business over the past four years (with more to come) and secular tailwinds, namely increased fluid intensity, we believe shares should trade at a premium. We raised our estimates by 3% and our multiple to 5.75x (both may prove conservative). Our target price goes to $5.85/share.

KEY POINTS

CES reported 4Q23 sales and adjusted EBITDA (margin) of $554 million and $84.6 million (15.3%) versus consensus of $541 million and $76.6 million (14.2%) – see Exhibit 1. U.S. drilling fluid share hit a record of 22.3% in the quarter versus 12.8% in 2019. Permian share was also a record at 33.1%. Management anticipates it can increase share from current levels. With the new barite grinding facility the company is able to supply 100% of its needs going forward, which should support share gains and margin expansion. Regarding the Haynesville entry, the company is currently working on one rig in the play.

Adjusted EBITDA margins were 15.3% in 4Q and 14.6% for the year versus the previous guidance range of 13.5% to 14.5%. On the call, management said that 14% to 15% is sustainable going forward. Capex guidance for 2023 of $70 million is split evenly between maintenance and growth. Management qualified that expansion capex includes projects that not only increase revenues but expand margins .

In 2023, CES returned ~$94 million to shareholders via dividends ($22.5 million) and buybacks ($71 million). To date, the company has repurchased 17.6 million shares under its current NCIB of 18.7 million, which it intends to max out and renew this July.