Canaccord While Canadian oilfield services provider reported “solid” second-quarter financial results, Canaccord Genuity analyst John Bereznicki said management commentary was unable to “shake investor fears,” noting equities are fading even with the Street’s increased financial expectations.
“Despite numerous (and some sizeable) ‘beats’ along with bullish management Q2 commentary, domestic oilfield equities have followed oil downward since early June, declining an average of 14 per cent,” he said. “The sector is now trading roughly on par with (or below) levels seen in late 2018, when WTI declined precipitously from US$75 per barrel to US$45/bbl as investors feared central bank tightening. We thus believe OFS equities largely reflect commodity pricing that is well below strip, with investor demand destruction fears weighing on growth expectations for the sector. Against this backdrop, US job market strength has led some pundits to declare ‘no recession’, just as the US aggressively draws down its SPR (to levels not seen since the mid-1980s) and parts of Europe begin to ration energy ahead of the coming winter. While the market remains focused on Chinese lockdowns and the potential lifting of Iranian sanctions, the OPEC Secretary General recently stated that the global physical oil market remains tight, and member countries have been generally challenged to meet their recent production quotas.”
In a research report released Friday, Mr. Bereznicki noted estimate revisions from analysts have generally been positive through the second quarter earnings season,” placing “further downward pressure on FTM sector EV/EBITDA multiples to levels not seen even in the 2014 and 2020 downturns.”
He said the Street now expects EBITDA to grow by an average of 65 per cent in 2022 and 30 per cent in 2023 on a year-over-year basis. However, he thinks equities in the sector “reflect a much lower growth rate next year.”
“Inflationary headwinds likely peaked in Q2, but labour remains a challenge,” he noted. “Based on OFS management commentary, it appears inflationary pressures and supply chain challenges likely peaked in Q2/22 and are moderating somewhat into 2H22. That being said, labour constraints remain a challenge for at least some OFS providers, which we believe could gate the industry’s ability to add capacity to meet operator demand. In our view, this may also favour less labour-intensive OFS companies such as SES and CEU.”
“A dearth of OFS investment since 2014 is becoming increasingly apparent. Contract drillers point to a growing scarcity of highspec triples, with PD and ESI recently suggesting strong momentum in leading-edge pricing. We also believe the market for high-spec doubles is tightening in Canada while TCW continues to expect an undersupplied WCSB pressure pumping market in 2H22. We believe this is likely to become even more pronounced as LNG Canada begins to impact domestic oilfield activity more meaningfully (we also view the BC Oil and Gas Commission’s recent resumption of well license issuance as encouraging). Against this backdrop, we believe improved OFS pricing and fixed-cost absorption (along with moderating cost inflation) should support sector margin expansion through 2H22, barring a meaningful retrenchment of commodity prices.”
After updating his projections in response to the quarterly results, Mr. Bereznicki reduced his target prices for the six stocks in his coverage universe. His changes were:
* CES Energy Solutions Corp. ( “buy”) to $3.75 from $4.25. The average on the Street is $4.31.
* Ensign Energy Services Inc. ( “hold”) to $3.75 from $5.25. Average: $6.11.
* Precision Drilling Corp. (“hold”) to $100 from $115. Average: $132.73.
* Secure Energy Services Inc. ( “buy”) to $8.50 from $9.75. Average: $8.94.
* Trican Well Service Ltd. ( “buy”) to $5.25 from $6. Average: $5.63.
* Total Energy Services Inc. (“buy”) to $11.50 from $13.50. Average: $13.38.
“Given current strip commodity pricing (and a weak C$), we believe it is too early to make material revisions to our 2023 expectations,” he said. “We see value in the sector but are nonetheless cognizant of market sentiment and are lowering our target prices to reflect significant multiple compression. Until early June, one could have held virtually any OFS equity and been rewarded as fundamentals recovered from a severe (pandemic-induced) downturn. At this point, we are biased to OFS providers with strong exposure to natural gas (TCW and TOT) and production (SES, CEU and TOT).”