National Bank Financial analyst Michael Robertson thinks recent results from its peers point to a record third quarter for CES Energy Solutions Corp.
“[Tuesday] evening, CES peer ChampionX Corp. (CHX-Q, Not Rated) reported better than expected Q3/22 results with Chemical Technologies revenue increasing 17 per cent quarter-over-quarter and segment EBITDA margins expanding approximately 180 basis points sequentially, driven by an increase in pricing and sales volumes,” he said.
“Oilfield service peer Q3 results have thus far reinforced our positive outlook for CEU, supporting expectations for continued top-line expansion and margin improvement in Q3 (implying quarterly highs in both revenue and adj. EBITDA after a record-breaking Q2).”
With that view, Mr. Robertson raised his third-quarter EBITDA for CES by 9 per cent to $70-million, exceeding the consensus estimate on the Street by 3 per cent ($68-million), ahead of the Nov. 10 earnings release. He also increased his full-year 2022 and 2023 revenue and earnings expectations.
“We update our rig count expectations to align with the most recent forecasts from our colleagues in Calgary and with peer results reinforcing our confidence in a supportive pricing and margin backdrop, our revenue and EBITDA forecasts climb modestly higher,” he said. “We continue to see meaningful potential upside to our 2023
EBITDA estimate dependent on margin trajectory in the coming quarters (with peers expecting further expansion) and the duration of the favourable backdrop.”
Seeing “deep value” in CES shares, Mr. Robertson bumped up his target by 15 cents to $3.85, keeping an “outperform” rating and predicting a “wave of free cash flow (and leverage reduction) on the horizon. The average on the Street is $4.35.
“With the growth rate of industry activity levels appearing to moderate, we expect CEU to generate significant free cash flow in the coming quarters driven in part by working capital monetization (given CEU’s counter-cyclical balance sheet and the rapid expansion in North American rig counts and production levels from the trough levels reached during the pandemic),” he said. “Our forecasts point to net debt/TTM [trailing 12-month] EBITDA below 2.0 times exiting 2022 (a material improvement vs. 2.5 times exiting the second quarter) driven by EBITDA growth as well as the application of free cash flow to the balance sheet.”