With “strong” price fundamentals, “something’s gotta give on valuations” for oilfield services providers in the near term, according to Stifel analyst Cole Pereira.
“OFS return metrics are near or above 10-year highs, FCF generation is at an all-time high and leverage is effectively evaporating from the sector,” he said. “However, despite these points the equities trade at a meaningful discount to prior activity growth years, which supports our bullish view on the space. We expect more modest forward activity growth but stronger pricing fundamentals, and favour businesses with a higher degree of pricing upside - namely drilling and pressure pumping. We view U.S. services as relatively lower-risk, however the Canadian outlook remains attractive and view any concerns on WCSB activity from the natural gas pullback as minimal given the catalysts.”
“The OFS sector’s fortunes have continued to improve as increasing demand for oilfield services and a dwindling supply of excess field-ready equipment have shifted supply-demand and pricing fundamentals in their favour. Moreover, the 3-year average ROCE for many names under coverage is well above the 2017-2019 peak and is near or above the 2011-2014 peak despite activity being meaningfully lower. Additionally, FCF generation is higher than it has ever been with more than half our coverage set to repay their EVs in approximately five years based off 2024 estimated FCF. This is also driving meaningful debt reduction with our sector experiencing an aggregate decline in net debt of 78 per cent to $1.4-billion from $6.2-billion over the next two years, with half of our coverage universe debt free by the end of 2024. We believe these points support higher valuations and yet the sector trades at EV/EBITDAS multiples of 3.8 times in 2023 and 3.5 times in 2024E vs. prior activity growth periods where the space traded at 6-7 times FTM [forward 12-month] EV/EBITDAS.”
The analyst made these target changes:
- Precision Drilling Corp. (PD-T, “buy”) to $185 from $165. Average: $152.72.
- Cathedral Energy Services Ltd. (CET-T, “buy”) to $2.50 from $2.25. Average: $3.33.
- PHX Energy Services Corp. (PHX-T, “buy”) to $13 from $12.50. Average: $10.80.
- CES Energy Solutions Corp. (CEU-T, “buy”) to $4 from $4.50. Average: $4.49.
- Calfrac Well Services Ltd. (CFW-T, “buy”) to $14 from $13. Average: $11.42.
- Step Energy Services Ltd. (STEP-T, “buy”) to $12 from $11.75. Average: $10.39.