RBCThis may have been what put the pop in our SP yesterday. Not only did RBC raise their target by almost 25%, their upside scenario target is a whopping $26.00! In addition, FRC was also recently recommended by a Standard Life analyst named Capelle but I can't find the link. GLTA
January 6, 2014
Canyon Services Group Inc.
Upgrading to Outperform on Improving Canadian
Pumping Demand
Our view: Our upgrade is driven by FRC's position as a pure play
Canadian pumper and our expectation the Canadian pressure pumping
market supply/demand balance is tightening, driven primarily by rising
completion activity in the Montney/Duvernay plays. This should drive y/
y operating metric improvements and opens up the potential for pricing
power in 2H14. With strong FCF, dividend increases could also be potential
catalysts in 2014.
Key points:
2014 an inflection year for the Canadian pumping market: Well drilling
and licensing activity has begun to rise in the deep basin, a key pumping
intensive market in Canada as operators shift capital from less pumping
intensive oil plays (see page 3 for details). This is driving a tightening
of pumping supply in Western Canada and should drive improved y/y
operating metrics, potentially as early as Q4/13 results. With ~75% of
its revenues generated in the Montney and Duvernay plays currently,
we expect FRC to be among the primary beneficiaries of this improving
market.
Margin inflection as revenues rise, pricing a 2H14 story: In anticipation of
increasing activity, FRC has added employees and infrastructure in 2H13,
putting modest pressure on margins near term. This positions FRC for
margin expansion via its operating leverage as revenues rise. While we
expect Q4/13 and Q1/14 pumping activity to be up y/y, we do not expect
to see widespread pricing power. We view this as a 2H14 event, once
activity resumes post spring-breakup.
Growth and good FCF - A rare combination: Historically, OFS companies
have needed to fund growth via capacity additions, thereby generating
minimal FCF during these times. Given the surplus capacity for pressure
pumping, FRC should be able to post strong y/y growth while still providing
FCF (2014E $67MM, $1.06/share).
Dividend increases a potential catalyst: With a conservative $32.5MM
capital budget for 2014, we forecast FRC to generate ~$67MM in FCF
($1.06/share). As such, the potential exists for further dividend increases
as we move through 2014. FRC's current $0.60 per share dividend yields
~5% at current levels.
Potential upside to Q4/13 expectations: Our Q4/13 EBITDA estimate
of $19.7MM compares to consensus estimates at ~$17MM, providing a
potential catalyst for the stock.
Target price now $16. Our target price is now based on our 2015 estimates
and an EV/EBITDA multiple of 5.9x, at the low of end of the historical range
for its peers.