Q4/23 Preview
Continued Weakness in Commodity Prices
Pushes U.S. Recovery Timeline Further Out
TD Investment Conclusion
Revisions to Our Industry Outlook: Based on feedback from our recent London
Energy & Power Conference, Canadian drilling and completions capital programs are
expected to remain resilient in the face of continued weakness in both crude oil and
natural-gas commodity prices. In our view, this is largely a function of expectations
of an improvement in market access for Canadian E&Ps in the near term. That said,
we have observed a further negative shift in U.S. sentiment since we published our
most recent Energy Services industry update on December 20, 2023 (full report).
As a result, our 2024 and 2025 U.S. rig count forecasts decrease to 645 rigs and
685 rigs, respectively. In the fall, there was a broadly held view that activity would
recover in the new year, but with the recovery timeline pushed out, we believe that
this will also have negative consequences for pricing. As a result, we are reducing
our estimates for several companies in our coverage universe with meaningful U.S.
exposure (details on page 3).
Q4/23 Preview: With a few notable exceptions, we expect that Q4/23 will largely play
out with expectations articulated with Q3/23 disclosures. That said, we are reducing
our estimates for Enerflex (EFX-T, BUY, $10.00 TP) and Pason (PSI-T, BUY, $21.00
TP) to account for the continued devaluation of the Argentinean peso. On the other
hand, we are increasing our estimates for CES (CEU-T, BUY, $5.00 TP) to reflect
increasing market-share capture as U.S. fundamentals deteriorate and continued
strength in margin performance.
Sector Stance: MARKET WEIGHT
Despite the meaningful pullback in equity performance across the coverage
universe, we are not yet ready to take a more positive stance on the sector.
That said, our coverage universe remains well-positioned to deliver strong free-
cash-flow generation in 2024 that will be utilized to deleverage and/or pursue
more meaningful shareholder-return initiatives. Within our coverage universe, we
highlight Precision's (PD-T, BUY, $125.00 TP) exceptional value on a free-cash-
flow yield basis, as well as a relative outperformance thesis for both CES
(CEU-T, BUY, $5.00 TP) and Pason (PSI-T, BUY, $21.00 TP) based on company-
specific factors.