Our view: RBC hosted Investor meetings with Secure Energy’s CEO, Rene Amirault and CFO, Chad Magus in New York this week. The meetings focused on the company’s growth exposure, free cash flow priorities, and revenue profile. We remain constructive on SES shares and believe the company is well positioned for valuation accretion given its strong FCF margins, stable production based revenue growth, and improving shareholder returns profile. We maintain an Outperform and $11.00 PT.
Key points:
Strategic priorities geared toward active and passive growth. Secure discussed the key initiatives of its five-year plan. The discussions honed in on growth opportunities in Western Canada, including need for disposal of a growing amount of produced water, increasing exposure to the Clearwater heavy oil play, and higher mandated decommissioning spending in Alberta. In our minds, each of these opportunities have the potential to drive low-single digit y/y revenue growth for Secure.
FCF priorities: Balance sheet, shareholder returns, and infrastructure growth. Secure plans to allocate free cash between debt repayment, shareholder returns, and growth projects. In 2023, we expect Secure to generate $193MM of post-dividend FCF (CFO-capex-dividend). After additional debt reduction, SES could execute about 85% of its 22MM share NCIB at current prices, representing 6% of its outstanding shares.
Recent margin expansion appears durable. Secure’s 2H22 EBITDA margins of 36% expanded by approximately 200bps y/y. The expansion looks durable given the following underlying factors 1) Improved facility utilization, utilization is approximately 65% across the network, 2) Capture of its $75MM synergies from the Tervita merger, 3) Ability to pass along inflation.
Keeping an eye on potential divestitures. In the meetings, Secure expressed its preference for assets that integrate/expand its infrastructure footprint. We expect certain assets, including its fluid management business could ultimately go on the sale block. We estimate the fluid management business earns about $30-50MM in annual EBITDA, implying about $120-250MM proceeds at a 4-5x sale multiple.
Positioned for valuation accretion. Secure is trading at 2023 and 2024 EV/ EBITDA multiples espectively. Our price target of $11/ share is based on a 7.0x multiple of consolidated EBITDA as we believe the company is well positioned for valuation accretion from its high FCF margins and relatively stable production based revenue growth. On a sum- of-the-parts basis, our valuation breaks down into an EV/EBITDA multiple of about 5.5x for Environmental and Fluid Management and 8.0x for the Midstream infrastructure segment. Canadian Pipeline and Midstream peers trade at an average FY23 EV/EBITDA multiple of 9.9x