Bullboard - Stock Discussion Forum CES Energy Solutions Corp T.CEU

Alternate Symbol(s): CESDF

CES Energy Solutions Corp. is a Canada-based provider of consumable chemical solutions throughout the lifecycle of the oilfield. This includes solutions at the drill-bit, at the point of completion and stimulation, at the wellhead and pump-jack, and finally through to the pipeline and midstream market. Its core businesses include drilling fluids and production and specialty chemicals. Its... see more

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TSX:CEU - Post Discussion

CES Energy Solutions Corp > TD

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Post by retiredcf on Jun 10, 2024 8:43am

TD

Have a $9.00 target. GLTA

BEST SMIDCAP IDEAS: CES STILL HAS GAS IN THE TANK

THE TD COWEN INSIGHT

CES is our top Smidcap pick for 2024 based on its company-specific drivers that are leading to outperformance versus its peers. While our conservative stance prevents us from modeling continued positive rate-of-change in forward market share capture and margin performance, we see a plausible path to both based on the factors described below.

Summary Of Our Thesis: While CES' U.S. drilling fluids market share appears to have stabilized in the 20-22% range (from 13% in 2019), volume growth across its NAm footprint continues to be facilitated by continued well complexity and faster rates of penetration. Additionally, we believe that its NAm production chemicals market share of 18% (from 13% in 2021, source: Kimberlite) continues to have room for expansion, as the company ranks favorably on both cost and performance when compared to its peers. These factors support our 2024 EBITDAS growth forecast of +20% y/y and provide potential upside to estimates in 2025.

What Is Underappreciated Or Misunderstood? Expectations for a recovery in the U.S. rig count continue to be pushed out, and we continue to prefer companies like CES that are outperforming industry benchmarks. While the relative strength in CES' company specific revenue drivers has translated to outperformance in the stock year-to-date (~99% vs. peers ~8%), valuation is only at a modest premium to the peer group on a 2024E FCF yield basis. In our view, CES should trade at a higher premium, based on the potential catalysts noted below.

Catalysts & Milestones To Watch:

In our view, the SLB/CHX transaction provides a pathway to further market share expansion in the NAm production chemicals market.
CES continues to introduce new, high margin products that have positively impacted overall margin performance.
We believe that CES is well positioned for a material dividend increase as early as Q4/24.
CES will continue to pursue share repurchases upon renewal of its NCIB program next month.
CES will be added to the S&P/TSX composite index.

Price Target & How We Value The Stock: CES is a capital-light manufacturing business that features strong free-cash-flow conversion, but requires a material inventory balance relative to its EV. Our NAV approach puts a value on working capital and is reflected in our $9.00/share target price.

What Is The Bear Case & The Risks To Our Call? Our call is predicated on further NAm production chemicals market share capture, this may fail to materialize. Additionally, CES is beholden to broader industry cyclicality.