Enerflex Ltd T.EFX

TD Notes

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Q1/23 Preview

Refining Our Outlook Following Recent Commodity Price Volatility Range-bound Activity Outlook Remains Unchanged

TD Investment Conclusion

Updated Energy Services Sector Macro Outlook: Crude-oil pricing deteriorated meaningfully toward the end of Q1/23, as a result of increasing global recession risk that was exacerbated by weakness in the banking sector. North American natural- gas pricing also continued to decline in Q1/23 as a result of an unseasonably warm winter and the continued impact of reduced LNG export capacity that was caused by the extended outage at Freeport LNG (now reportedly back at full capacity). Although we expect natural-gas-directed drilling and completions (D&C) activity to decline modestly in the near term, we believe that OPEC+'s recent decision to cut crude- oil production by ~1 mmbbl/d decreases the probability of a meaningful reduction in North American D&C activity in the near term. As a result, our 2023 Canadian and U.S. rig-count forecasts decrease by 4% and 7%, respectively, and we would reiterate our previous expectations of range-bound activity despite recent volatility, albeit at the lower end of the range.

Q1/23 Preview & Estimate Changes: Canadian D&C activity got off to a slow start due to extremely cold weather conditions early in the quarter, which was more than offset by a relatively dry spring. The U.S. rig count declined modestly in the quarter, largely a function of decreased activity derived from private E&Ps that are more sensitive to fluctuations in commodity prices. Overall, we believe that fundamentals were strong throughout the quarter and that there should be very few surprises in disclosed results. Given the commodity-price volatility noted above, we expect that commentary around 2023 E&P capital spending guidance may prove to be more meaningful to our coverage universe share-price performance and sentiment than actual Q1/23 results or outlook commentary from the coverage universe.

Our Sector Stance: OVERWEIGHT

We continue to expect that D&C activity will be relatively range-bound in 2023 and 2024, a scenario that should provide strong free-cash-flow generation for the coverage universe that we expect will broadly be used to deleverage and/or pursue more meaningful shareholder return initiatives. With this update, Precision Drilling (PD-T, BUY, $130.00 target price) moves to the top of our pecking order. Since reporting Q4/22 results, Precision has underperformed the peer group (-14.9% vs. the peer-group average of -7.5%) due to stock-based compensation expenses that many investors viewed as excessive, as well as the commodity price volatility noted above. As a result, we believe that Precision's prevailing valuation represents an attractive buying opportunity (2023 FCF yield of 25% vs. the peer-group average of 21%). To this end, we would characterize both Enerflex (EFX-T, BUY, $16.00 target price) and Precision as top picks for Energy Services sector exposure.