Stifel analyst Cole Pereira reiterated his bullish view on North American Oilfield Services “even with the recent out-performance due to improving commodity prices and a demonstrated resiliency in pricing and unit economics.”
“In our view, the recent out-performance has been driven by (1) improving crude oil prices due to OPEC production cuts, and (2) a demonstrated resiliency in pricing, margins and unit economics through 2Q23 reporting despite year-to-date activity declines in the United States,” he said in a research report released Thursday.
“Since reporting 2Q23 results, our coverage universe is up 11 per cent on average, and ... stocks exhibiting strong FCF characteristics and returning capital to shareholders have outperformed and vice versa.”
Mr. Pereira said he expects continued outpeformance, preferring those stocks with above-average free cash flow and shareholder returns.
“We continue to favour OFS companies with resilient EBITDAS profiles, strong FCF generation and a focus on shareholder returns,” he said. “TCW and CEU are the best performing OFS stocks year-to-date, and are second and fourth best since reporting 2Q23 results. Both pay a dividend and have either completed or committed to fully utilizing their 10-per-cent NCIBs ... TCW has seen the largest year-to-date improvement in its 2024E EV/EBITDAS multiple (up 20 per cent to 3.7 times) as a result of its shareholder return progress, while EFX has seen the largest YTD reduction (down 20 per cent to 3.9 times) following a delay in its positive FCF and shareholder return timelines ... Canadian activity remains more stable, but has bifurcated, while U.S. activity likely has more upside in 2024 given a higher proportion of private E&Ps and resilient pricing and unit economics. While we continue to prefer large-cap names, the relative under-performance of small-caps could indicate they have a higher degree of upside longer-term.”
“Slightly” reducing his North American activity forecasts to “reflect a lower-than-expected trough in the U.S. rig count and a reduction in shallow-basin activity in Canada,” Mr. Pereira made four target price changes on Thursday.
He raised his targets for these stocks”
* Ensign Energy Services Inc. to $4 from $3.25 with a “hold” rating. The average on the Street is $4.79.
* Pason Systems Inc. to $15.50 from $15 with a “hold” rating. Average: $16.43.
* Trican Well Service Ltd. to $6.50 from $6 with a “buy” rating. Average: $5.94.
Conversely, he trimmed his target for Cathedral Energy Services Ltd. to $1.80, below the $1.87 average, from $1.90 with a “buy” rating.
“Top ideas are TCW, PD, CEU, EFX and CET ... we favour Trican, Precision Drilling, CES Energy Solutions and Enerflex,” the analyst said. “TCW remains a best in class OFS name, while CEU also screens as another attractive, stable OFS company with a shareholder returns focus. We continue to view PD as a higher-torque idea with meaningful FCF generation and material exposure to a recovery in U.S. land drilling. While Enerflex had a challenging few weeks since 2Q23 results, our long-term thesis is unchanged, and we see material upside from current levels. Cathedral Energy Services remains our top small-cap pick, as we view the company as well positioned to continue consolidating the North American directional drilling market.”