On today’s TSX Breakouts report, there are eight stocks on the positive breakouts list (stocks with positive price momentum), and 47 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list – PHX Energy Services Corp. The stock has a bullish inverse head and shoulders formation. In recent days, the share price has been rising on high volume. Quarter-to-date, the share price is up over 21 per cent and year-to-date the share price has rallied nearly 58 per cent.
The company offers both income and growth to its shareholders. Management is committed to returning capital to its shareholders, announcing two dividend hikes this year with the stock currently yielding 5.7 per cent. The stock has a unanimous buy-equivalent recommendation from four analysts with an average target price of $11.63, implying a potential price return of 65 per cent.
A brief outline on PHX Energy is provided below on the company that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Calgary-based PHX Energy supplies horizontal and directional drilling services to oil and gas companies.
In 2021, 78 per cent of its total revenue stemmed from the United States and 19 per cent was from Canada. In the second quarter of 2022, the company divested its Russian subsidiary.
PHX ENERGY SERVICES CORP
7.33+2.87 (64.35%)
YEAR TO DATE
Investment thesis
- Drilling technology that enables companies to drill faster, resulting in greater well productivity.
- Benefiting from elevated commodity prices.
- The weekly Baker Hughes rig count reported on Oct. 14 showed that the U.S. rig count expanded to 769 rigs, up from 762 rigs reported last week and 543 rigs reported last year.
- Healthy balance sheet.
- High yield of 5.7 per cent.
- Dividend increases (two hikes announced so far this year).
- Attractive valuation.
- Management has “skin in the game.” At the company’s annual general meeting held in May, management noted that executive ownership stood at 14 per cent.
- Beneficiary of the rising U.S. dollar with the majority of the company’s revenue stemming from its US operations.
Quarterly earnings and outlook
On Aug. 9, the company reported better-than-expected second-quarter financial results.
Revenue was $126.2-million, a record high for the second quarter and up 67 per cent year-over-year. This Street was expecting revenue of $113.7-million, according to Bloomberg. Revenue from its U.S. operations was $105.4-million, a record high for the second quarter. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations came in at $25.1-million, a record high for the second quarter, and above the consensus estimate of $18.1-million.
In the earnings release, the company stated, “Although there is some caution related to a possible recession, we believe the rig count will continue to grow and commodity prices will remain favourable as inventories are depleted due to the capital restraints of producers since 2014. As such premium equipment will remain in high demand as operators will not settle for mediocre drilling performance. This will bode well for our operations which will be equipped with additional job capacity from the large 2022 capital expenditures program. In the second quarter, our fleet operated near or at maximum capacity, and this constrained activity growth, however, this was partially offset by the ability to improve day rates. We will continue to receive equipment deliveries through the second half of the year and into 2023, and have built up our inventory to service this equipment in a market where this premium technology will be scarce. We have created a competitive advantage where we can continue to grow, potentially see further pricing increases, and further strengthen our financial position for additional shareholder rewards. In the current economic environment, there are challenges that us and the entire sector are facing including supply chain constraints such as long lead times for materials for repair, inflationary cost and labour shortages. We remain diligent in trying to proactively mitigate these through our resources in supply chain and training.”
Dividend policy
The company pays its shareholders a quarterly dividend of 10 cents per share or 40 cents per share yearly, equating to a current annualized yield of 5.7 per cent.
Year-to-date, management has announced two dividend increases. On Aug. 9, management announced a 33 per cent dividend increase to its current level of 10 cents per share, up from 7.5 cents per share. In Feb., management announced a 50-per-cent dividend hike.
Analysts’ recommendations
This small-cap stock has a unanimous buy recommendation from four analysts.
The firms providing research coverage on the company are : ATB Capital Markets, BMO Nesbitt Burns, Peters & Co., and Stifel Canada.
Revised recommendations
After the company released its second-quarter financial results, all four analysts raised their expectations.
- ATB’s Tim Monachello increased his target price twice since the company released its quarterly results. His target price now stands at $12, up from $9.50 prior to the earnings release.
- BMO’s John Gibson lifted his target price by 50 cents to $10 (the low on the Street).
- Peters’ James Gourlay tweaked his target price to $13.50 (the high on the Street) from $13.
- Stifel’s Cole Pereira raised his target price to $11 from $9.50.
Financial forecasts
According to Bloomberg, the Street is forecasting revenue of $536.5-million in 2022 and $665.5-million in 2023. EBITDA is anticipated to come in at $92.75-million in 2022 and $135-million the following year.
Earnings expectations have been rising. Three months ago, the consensus revenue estimates were $497.8-million for 2022 and $606.5-million for 2023. The Street was anticipating EBITDA of $81-million in 2022 and $119-million in 2023.
Valuation
Analysts commonly value the stock on an enterprise value-to-EBITDA basis. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 2.9 times the 2023 consensus estimate, below its five-year historical average of 3.9 times and near its trough level of approximately 2 times during this time period.
The average one-year target price is $11.63, implying the share price has 65 per cent upside potential. Individual target prices are: $10 (from BMO’s John Gibson), $11, $12, and $13.50 (from Peters’ James Gourlay).
Insider transaction activity
Between Sept. 19 and Oct. 18, senior vice-president of sales and marketing Jeff Shafer exercised his options, receiving a total of 50,000 shares at a cost per share of $2, and sold 50,000 shares at an average price per share of approximately $6.255. Net proceeds totaled over $212,000, not including any associated transaction charges. After these transactions, this specific account held 383,793 shares.
Between Oct. 4-7, senior vice-president of engineering and technology Craig Brown sold a total of 37,700 shares at an average price per share of roughly $6.156 with 563,333 shares remaining in this particular account. Proceeds from the sales exceeded $232,000, excluding trading fees.
Chart watch
The stock has a bullish inverse head and shoulders formation.
In recent days, the share price has been rising on very high volume. On Oct. 20, the share price rallied 2 per cent with over 470,000 shares trades, which is well above its three month historical daily average trading volume of approximately 113,000 shares. The prior day, the share price rallied 5 per cent with over 440,000 shares traded.
Quarter-to-date, the share price is up over 21 per cent, making it the fifth best performing stock out of 38 stocks in the S&P/TSX SmallCap Energy sector.
Year-to-date, the share price has rallied nearly 58 per cent.
In terms of key resistance and support levels, the next major ceiling of resistance is around $10. Looking at the downside, the share price has strong technical support around $6, near its 50-day moving average (at $6.27) and close to its 200-day moving average (at $5.90).