Step Energy Services Ltd. (
) is “increasingly positioned to benefit from a soldout U.S. fracturing market,” according to RBC Dominion Securities analyst Keith Mackey, who expects it to “drive more consistent utilization and stronger service pricing.”
“Increased FCF generation should also allow the company to de-lever its balance sheet and enable modest multiple expansion,” he added.
That led Mr. Mackey to raise his recommendation for the Calgary-based company to “outperform” from “sector perform” previously.
“We expect U.S. industry fracturing horsepower utilization to average 80-90-plus per cent in 2022/23, with many contractors effectively sold out,” he said. “A growing chorus of providers have also pledged to focus on growing margins versus market share. As a result, industry prices have increased sharply, particularly in the Permian where STEP primarily operates. The current environment should support strong corporate utilization and margins, despite historical utilization swings. We estimate STEP’s 1Q22 annualized EBITDA/fleet was approximately $9-10-million, which we expect to improve to $11.7-million per fleet in FY22 and $13.8-million in FY23.
“Canada has generally been a solid contributor. 1Q22 EBITDA margin of 22 per cent increased 6 per cent year-over-year on 34-per-cent higher revenue from strong equipment operating days. The impact of 10-15-per-cent price increases part way through 1Q22 should also be reflected in subsequent quarters. We are modeling strong 81-per-cent utilization on STEP’s active pressure pumping horsepower through 2022.”
Mr. Mackey raised his target to $8 from $4 and above the $6.18 average.
Separately, he raised his targets for these stocks”
* CES Energy Solutions Corp. (
) to $3.25 from $2.75 with an “outperform” rating. Average: $3.80.
“CEU’s stronger 1Q22 results relative to both Street/RBC estimates were driven by a softer landing on pricing versus inflationary factors, primarily later in the quarter. Looking ahead, the company’s ability to grow revenue alongside industry rig activity while converting working capital into free cash flow remains a key input to our constructive thesis,” he said.
* Shawcor Ltd. (
) to $8 from $7 with an “outperform” rating. Average: $7.25.
“Shawcor’s 1Q22 results were better than expected as product demand surged in the latter stages of the quarter. Margins moved upward y/y in two of three divisions, and its healthy backlog signifies strong product demand and further margin accretion heading into upcycles in many of its key markets. The company remains committed to aligning with businesses that create full-cycle value,” he said.
* Trican Well Service Ltd. (
) to $6 from $5.50 with an “outperform” rating. Average: $5.25.
“Trican’s 1Q22 results were broadly in line with our expectations. We expect the company to generate double-digit revenue and EBITDA growth through 2023 and believe the company remains in a solid position to benefit from increased Canadian pressure pumping demand,” he said.