We hosted Rene Amirault (President & CEO) and Anil Aggarwala (VP Treasury & IR) for a sales desk update following the company's quarterly report. Secure is on our Global Energy Best Ideas list.
Highlights:
Net debt targets in sight.
Once debt reduction targets are met, Secure will focus on optimizing three main FCF avenues: increasing its fixed dividend, share buybacks, and further debt reduction. We see the company reducing its net debt/EBITDA leverage to 2.0x by YE22 and 1.2x by YE23 (excluding lease liabilities).
Exposure to full cycle E&P spending. Secure has meaningful exposure to E&P capex as well as opex spending as production grows. The company also focuses on increasing its contracted cash flow stream through take/pay or area dedication. Provincial mandates for abandonment liability spending should underpin landfill volumes and project work.
Moving into business optimization phase. In the first nine months post- merger, Secure focused on fitting its combined business together. In the next six months, the company will move into the asset optimization phase, with a focus on businesses where it is a top 1-2 player. Secure expects increased EBITDA and potential asset sales to provide dry power for potential future acquisitions.
Margins increase vs. 5-year average. Secure recorded 35% EBITDA margins in 1Q22, versus its 5-year trailing average of 29%. The company expects continued cost reductions, combined with its fixed cost footprint to support margins. As for inflation, Secure's big ticket costs include natural gas, power, labour, repairs & maintenance, diesel, and chemicals. The company remains focused on passing higher input costs to customers.
Synergy realization ahead of schedule. Secure expects to realize the full effect of its $75MM annualized merger cost savings in 2H22. The company expects these savings to further enable its debt reduction efforts. Case in point, Secure expects to reduce its annual interest outlay to $90MM from its trailing 12-month of $102MM.
$100MM annual capital spending. Secure sees $100MM as a reasonable proxy for capital spending going forward. Spending should consist of its $55MM maintenance commitment, plus $45MM growth (RBC est. $100/115MM in 2022/23). The company's facility base is about 60% utilized, implying it does not need to add facilities in lock-step with activity, but will focus on optimizing its asset base.
Competition bureau. Competition Bureau hearings commenced recently. Secure expects the final outcome in approximately 1Q23. The process has reinforced its stance any impact will not be material to the business