ATB Raise Target Anticipating outperformance from the Canadian energy services industry, ATB Capital Markets analysts Tim Monachello and Waqar Syed believe “significant upside remains for well-positioned companies.”
“Canadian energy services stocks have performed well both over the past 12 months and year-to-daye, with ATB’s custom energy services index up 47 per cent and 20 per cent over those periods, respectively,” they said. “Most notably, the strong performance of energy services stocks has come during a period of relatively tepid North American activity levels with the U.S. land rig count down 14 per cent over the past 12 months, and the Canadian rig count up just 1.5 per cent year-to-date from 2023 levels.
“While the dislocation of energy services stocks from activity levels is a notable divergence from historical trends, we believe it is a reflection of the resilience of energy services company margins and cash generation over the period, and the fact that most energy services companies have significantly deleveraged their balance sheets. Overall, we believe energy services companies are proving to be lower beta in a more range-bound E&P capital spending environment, and this stability of earnings along with increasing returns to shareholder is being rewarded by the market.”
In a research report released Friday previewing second-quarter earnings season, the analysts pointed to a pair of factors that driven outperformance for small and mid-cap stocks in the sector. They are:
1. Earnings expectations and performance
“Companies that have stable or improving earnings outlooks have outperformed ,” they said. “Across our Canadian SMid-cap energy services universe, the top performing four stocks (CEU, NOA, TOT and PHX) since January 2023 have been the ones with the most resilient consensus earnings outlooks. TCW is an outlier as its earnings outlook has been middling, though its shares have outperformed likely given its top-tier shareholder returns.”
2. Shareholder returns
“Companies that have deleveraged and are returning cash to shareholders are outperforming,” he said. “We note that the four of the top five performing energy services stocks in our Canadian SMid-cap energy services universe are also stocks that have reached their long-term leverage targets and are returning top-tier levels of cash to shareholders.”
While those trends likely to be “resilient performance drivers,” Mr. Monachello and Mr. Syed emphasized they “must also be put in the context of valuation, and investors must consider the exposures and company-specific elements that could underpin fundamental earnings performance over the coming years.”
“Looking forward, we highlight four potential drivers of fundamental earnings outperformance including 1) high exposure to Canada which we believe will be the strongest growth market over the medium term (TCW, PD); 2) exposure to gas production which continues to be a reliable source of growth and less volatile than exposure to natural gas prices and gas directed activity levels (EFX); 3) exposure to the trend of increasing service intensity per well (CEU, CET, PD, PHX), and 4) exposure to companies with unique growth opportunities that can drive outperformance vs macro and industry activity trends (CET),” they said.
The analysts made a series of target price adjustments to stocks in their coverage universe on Friday due largely to reduced U.S. field activity assumptions. They are:
- Akita Drilling Ltd. (AKA.A-T, “outperform”) to $3.25 from $3.75. The average on the Street is $3.75.
- Cathedral Energy Services Ltd. (CET-T, “outperform”) to $1.50 from $1.60. Average: $1.76.
- CES Energy Solutions Corp. (CEU-T, “outperform”) to $8.50 from $8.25. Average: $8.47.
- Enerflex Ltd. (EFX-T, “outperform”) to $12 from $12.50. Average: $10.56.
- PHX Energy Services Corp. (PHX-T, “outperform”) to $11.75 from $12.25. Average: $9.94.
- Questor Technology Inc. ( “sector perform”) to 65 cents from 60 cents. Average: 73 cents.
“We highlight CET, PD, and TOT as our top picks. CET is positioned as a high-return, low capital intensity directional driller with substantial Canadian exposure, exposure to increasing service intensity, and likely the most significant company specific growth opportunity in our coverage,” the analyst said. “CET trades at 1.1 times/0.4 times EV/EBITDAS with a 21 per cent/39 per cent FCF yield in 2024/2025. PD is the largest Canadian driller with a dominant position in BC which will likely be the area with the highest growth and most service intensive wells. In addition, PD is rapidly deleveraging with visibility to meaningfully accelerated returns to shareholders in 2025. PD trades at 4.1 times/3.3 times EV/EBITDAS with a 20-per-cent FCF yields in 2024/2025 respectively. TOT offers a diversified business featuring elevated Canadian exposure, a differentiated growth wedge through its Australian business, and exposure to natural gas production through its compression and processing business. a diversified business with. TOT has a clean balance sheet, a track record of strong FCF generation and prudent capital allocation, and offers top-tier shareholder returns. TOT trades at 2.5 times/1.9 times EV/EBITDAS with a 15 per cent/36 per cent FCF yield in 2024/2025.”