Stifel Raises Target Stifel analyst Cole Pereira reiterated his bullish view on the Canadian oilfield services industry heading into earnings season, seeing valuation upside.
“1Q24 was a strong quarter for OFS equities, with the average equity return of 13 per cent outpacing both the TSX Composite (up 6 per cent) and the S&P 500 (up 10 per cent),” he said. “Despite commodity price volatility, oilfield services activity was largely stable, reinforcing our thesis that OFS valuations need to move higher to better reflect the improved earnings resiliency of the sector. While EV/EBITDAS valuations have improved by 7 per cent on average year-to-date, they remain inexpensive at 3.5 times 2025 estimated EV/EBITDAS and 6.4 times 2025E P/E on average. We are also placing an increased focus on EPS moving forward given the improved earnings stability and high capital intensity, along with our emphasis on ROIC.
“For a trade specifically into 1Q24 results we like CEU and SES. Our CEU EBITDAS forecast is 5 per cent above the Street, and we believe there could be positive data points on margins, market share and SLB-CHX. Our SES EBITDAS forecast is 2 per cent above the Street, and we expect the company could provide a more detailed update on capital allocation. Our top ideas in the sector are CEU, TCW, PD, EFX and SES, while TOT is our top small-cap pick.”
Mr. Pereira said oilfield activity represented “another stable quarter” with Canadian drilling averaging 208 rigs, up 16 per cent sequentially but down 6 per cent year-over-year.
“The rig count in the deep plays was down 4 per cent year-over-year, though declines in the Montney (down 6 rigs) and Deep Basin (down 2 rigs) were partially offset by an increase in the Duvernay (up 4 rigs),” he explained. “In the U.S. the land rig count averaged 602 rigs in 1Q24, effectively flat quarter-over-quarter from 601 in 4Q23 but down 19 per cent on a year-over-year basis from 744 in 1Q23. The Permian saw the most net additions, up seven rigs, while the Haynesville saw the largest net reduction, down eight rigs.”
“Our 1Q24 EBITDAS estimates are in line with consensus on average while our EPS forecasts are 2 per cent below, or 8 per cent below adjusting for outliers. Our largest downside outliers from an EBITDAS perspective vs. the Street are PSI (down 9 per cent) and TCW (down 6 per cent), while we highlight CEU as a positive outlier (up 5 per cent). ... We like owning CEU and SES as a trade into their quarterly prints. For CEU we forecast 1Q24 EBITDAS of $85-million vs. the Street at $81-million, and expect investors to be focused on the potential for additional market share and margin gains, as well as any additional commentary surrounding SLB’s recently announced offer to acquire CHX. For SES, we forecast 1Q24 EBITDAS of $125-million vs. the Street at $122-million, and we expect investors to be focused on further details around capital allocation post-WCN sale, including whether it will pursue an SIB and/or more growth spending and M&A.”
After minor adjustments to his forecast, Mr. Pereira made three target changes:
* Precision Drilling Corp. ( “buy”) to $125 from $115. Average: $124.99.
Analyst: “Our PD EBITDAS forecasts decline 5 per cent in 2024 to $58-million and 4 per cent in 2025 to $651-million as we right-size our U.S. market share assumptions. However, we have also increased our target multiple to 4.2 times 2025E EV/EBITDAS (prior: 4.0 times) to better reflect the improved earnings stability of the sector. The net impact of these changes sees our target price increase.”
* Secure Energy Services Inc. ( “buy”) to $13.50 from $12.50. Average: $12.81.
Analyst: “Our SES EBITDAS forecasts decrease 1 per cent to $457-million in 2024 but increase 1 per cent in 2025 to $476-million. We have also increased our target multiple to 8.2 times 2025E EV/EBITDAS (prior: 7.6 times) to better reflect its improved earnings stability and significant optionality to add value to shareholders via increased shareholder returns, potential M&A and high-return growth opportunities.”
* Western Energy Services Corp. ( “hold”) target to $2.75 from $3. Average: $2.95.
Analyst: “Our WRG EBITDAS forecasts decline 2 per cent in 2024 to $47-million but increase 2 per cent in 2025 to $53-million. However, we have also reduced our target multiple to 3.7 times 2025E EV/EBITDAS (prior: 4.1 times) to reflect a more appropriate discount to peers given its higher leverage and lower return metrics.”