Enerflex outlook is Bullish.
Enerflex Ltd. (TSX: EFX) (NYSE: EFXT) a premier integrated global provider of energy infrastructure and energy transition solutions.
ABOUT ENERFLEX
Transforming Energy for a Sustainable Future. Enerflex is a premier integrated global provider of energy infrastructure and energy transition solutions, delivering natural gas processing, compression, power generation, refrigeration, cryogenic, and produced water solutions.
Headquartered in Calgary, Alberta, Canada, Enerflex, its subsidiaries, interests in associates, and joint ventures, operate in more than 100 locations in: Canada, the United States, Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, the United Kingdom, the Netherlands, the United Arab Emirates, Bahrain, Oman, Egypt, Kuwait, India, Iraq, Nigeria, Pakistan, Saudi Arabia, Australia, New Zealand, China, Indonesia, Malaysia, Singapore, and Thailand.
"The completion of the Exterran acquisition and strong global natural gas and energy transition market fundamentals, which has driven our combined backlog of $1.5 billion in modularized natural gas and carbon capture solutions, paves the way for the most exciting time in Enerflex's forty-year history," said Marc Rossiter, Enerflex's President and Chief Executive Officer. "Our asset base of nearly two million horsepower of compression and over 25 gas plants worldwide provides cash flows that are low-risk, long-term, and diverse in geographies, counterparties, and commodity drivers. This stable portfolio of natural gas assets, the $1.5 billion backlog in Engineered Systems, and solid progress on three major Energy Infrastructure investments, will drive success on our three key value-creating priorities throughout 2023: strengthening our financial position; delivering on expected synergies; and growing our free cash flow, all in support of an attractive capital allocation framework."
OUTLOOK
On October 13, 2022, Enerflex successfully completed the previously announced acquisition (the "Transaction") of Exterran Corporation ("Exterran"). Building upon strong third-quarter 2022 results, Enerflex is entering this transformative phase in a position of strength, and is well-positioned to capitalize on robust global natural gas and energy transition market fundamentals.
Enerflex is focused on integrating the two companies and delivering on expected annual run-rate synergies of approximately U.S.$60 million, which are expected to be captured within 12 to 18 months of the closing of the Transaction and be attained primarily through increased operational efficiencies and reductions in overhead.
For the balance of 2022 and through 2023, Enerflex plans to complete the following three Energy Infrastructure investments and one cryogenic natural gas processing facility currently in progress in the Middle East:
-A natural gas infrastructure asset that will be operational before year-end 2022, and is underpinned by a 10-year take-or-pay contract with a national oil company.
-A build-own-operate-maintain ("BOOM") produced water facility that started operations in early November 2022, and is underpinned by a four-year take-or-pay contract with a national oil company.
-A BOOM produced water facility that is expected to be completed in the first half of 2023, and is underpinned by a 10-year take-or-pay contract with a joint venture between a national oil company and an international super-major oil and gas company.
-The delivery of a modularized cryogenic natural gas processing facility that is expected to be completed in 2023 and will be accounted for as a product sale.
Upon completion, Enerflex anticipates generating significant excess cash flow, which will be used to strengthen the Company's financial position.
Enerflex continues to expand its Energy Transition business, securing approximately $100 million of Energy Transition bookings during the third quarter of 2022. Once in operation, these carbon capture projects will collectively capture and permanently sequester over one million tonnes of carbon dioxide ("CO2") per annum. The projects are included in the Company's Engineered Systems bookings and backlog.
Of significant note, Enerflex entered into an agreement with a customer to provide a modularized integrated carbon capture facility that will abate approximately 450,000 tonnes of CO2 per annum.
With public policy increasingly supportive of investments required to decarbonize, Enerflex will continue to leverage its expertise in delivering modularized integrated process technology solutions to grow its Energy Transition business and support its customers in improving their emissions profiles while driving the global decarbonization agenda towards a sustainable future.
Together with the cost savings and synergies expected to be captured from the Transaction, as well as a combined pro forma backlog of approximately $1.5 billion, Enerflex has de-risked its deleveraging plan following the closing of the Transaction.
Enerflex expects to reduce its bank-adjusted net debt to earnings before finance costs, income taxes, depreciation, and amortization ("EBITDA") ratio to below 2.5 times within 12 to 18 months of the closing of the Transaction.
As of November 9, 2022, Enerflex's net debt balance was approximately $1.36 billion.
Once Enerflex meets its debt reduction targets, the Company expects to have greater optionality to deliver increased returns of capital to shareholders and to profitably invest in strategic growth projects. Enerflex expects to continue paying its quarterly dividend of at least $0.025 per share and will be disciplined in its investments and discretionary spending to protect its financial position.
Key Financial Results
Enerflex experienced continued momentum in its Engineered Systems business, particularly in the U.S.A. segment, with bookings of $348 million recorded during the quarter, the Company's largest quarterly booking since 2018, to support a growing backlog of $884 million. Including Exterran's product sales backlog, the combined pro forma backlog was approximately $1.5 billion at September 30, 2022.
Revenue of $393 million increased for the sixth consecutive quarter, driven primarily by a large Engineered Systems opening backlog, a record-high utilization rate for the U.S.A. contract compression fleet, and favourable currency translation effects from a strengthening U.S. dollar.
The ongoing economic recovery has allowed the Company to capture higher-margin work. Enerflex's third-quarter 2022 gross margin increased to $79 million, or 20.0%, from $64 million, or 17.1%, in the second quarter of 2022.
The gross margins for Service and Engineered Systems product lines improved, increasing to 17.0% and 13.6%, respectively, as margins for the two product lines continue to trend positively towards pre-pandemic levels.
The gross margin for the Energy Infrastructure product line modestly increased to 39.5%, reflecting the stability of the revenue and cost profiles associated with the Company's long-term BOOM solutions, infrastructure leases, and contract compression solutions.
Enerflex delivered an adjusted EBITDA of $53 million during the third quarter of 2022, increasing by approximately $8 million from the second quarter of 2022, and reflecting continued improvements in business activity.
Enerflex recognized a net loss of $33 million during the quarter. While strong business performance drove improvements in the Company's revenue and gross margin during the period, rising interest rates resulted in the Company recording a non-cash impairment charge of $48 million on previously recognized goodwill associated with its Canada segment.
Financial Position
Maintaining a strong financial position is a key tenet of Enerflex's long-term strategy. As of September 30, 2022, Enerflex's long-term debt balance was $368 million, its net debt balance was $170 million, and its bank-adjusted net debt to EBITDA ratio was 1.03 times, excluding non-recourse debt.
In connection with the Transaction, Enerflex established a new debt capital structure comprised of the following:
U.S.$700 million three-year secured revolving credit facility (the "Revolving Credit Facility")
U.S.$625 million aggregate principal amount of 9.00% senior secured notes due 2027 (the "Notes")
U.S.$150 million three-year secured term loan facility (the "Term Loan Facility")
Upon closing of the Transaction, using the net proceeds of the Notes, the Term Loan Facility, an initial draw on the Revolving Credit Facility, and cash on hand, Enerflex fully repaid the existing Enerflex and Exterran notes and revolving credit facilities.
Strong business performance and a combined pro forma backlog of approximately $1.5 billion has provided visibility into the Company's revenue-generating capabilities in 2023. Accordingly, Enerflex expects to reduce its bank-adjusted net debt to EBITDA ratio to below 2.5 times within 12 to 18 months of the closing of the Transaction. As of November 9, 2022, Enerflex's net debt balance was approximately $1.36 billion.
Returns to Shareholders
Enerflex is committed to delivering a sustainable dividend to shareholders, declaring a dividend of $0.025 per share ($2.2 million in aggregate) during the third quarter of 2022, resulting in cumulative dividends declared of $0.075 per share ($6.7 million in aggregate) through the nine months ended September 30, 2022.
Subsequent to September 30, 2022, the Board of Directors declared a quarterly dividend of $0.025 per share, payable on January 12, 2023, to shareholders of record on November 24, 2022. The ex-dividend date is November 23, 2022.
Capital Expenditures and Work-in-progress ("WIP") Related to Finance Leases
Enerflex invested approximately $46 million in Energy Infrastructure capital expenditures and WIP related to finance leases during the third quarter of 2022.
$27 million was invested in the Company's rental assets, including $22 million for the organic expansion of its contract compression fleet, primarily to meet growing customer demand in the U.S.A. segment.
$19 million was invested in the large natural gas infrastructure project underway in the Middle East, which remains scheduled to be completed before year-end 2022.
During the nine months ended September 30, 2022, Enerflex invested approximately $101 million in Energy Infrastructure capital expenditures and WIP related to finance leases.
U.S.A.
The U.S.A. segment continued to be the primary driver of Enerflex's strong business performance. Increased resource development in the Permian Basin and liquefied natural gas exports off the U.S. Gulf Coast have resulted in significant demand for the Company's products and services. Additionally, Enerflex has observed increased interest in its carbon capture and electrification solutions as customers begin to invest in initiatives to lower their emissions.
During the quarter, Enerflex grew the U.S.A. segment's Engineered Systems backlog by 31% from the prior quarter.
Enerflex's U.S.A. contract compression fleet reached a record-high average utilization rate of 95% during the period.
Canada
The Canada segment observed modest declines in revenue and gross margin relative to the second quarter of 2022. However, performance for the segment has strengthened considerably year-over-year as a result of higher Engineered Systems bookings and an increased number of parts orders and maintenance service agreements.
During the third quarter of 2022, Enerflex recorded a non-cash impairment charge of $48 million on previously recognized goodwill associated with its Canada segment.
In August 2022, the British Columbia Oil & Gas Commission recommenced issuing licenses for resource development activities in the province. Enerflex expects Canadian activity to increase once a mutually beneficial resolution of outstanding issues between the Blueberry River First Nations and the Government of British Columbia is fully agreed upon.
Rest of World
Long-term Energy Infrastructure and Service agreements continued to provide stability in the Rest of World segment's results, while Engineered Systems revenues decreased from the second quarter of 2022 due to the completion of a major project in Latin America.