Q4/22 Preview
Reiterating Our Expectations for a Range-bound Industry Outlook
TD Investment Conclusion
Price Deck and Industry Forecasts Unchanged: Recall that we recently refined our 2023 outlook and introduced our 2024 estimates as part of our year-ahead outlook event in December 2022 (Energy Services Industry Note, 2023 North American Energy Outlook Presentation). Since that time, we have observed an improvement in WTI pricing (+8.0%) and a significant drop in Henry Hub natural- gas pricing (-28.9%) that was in line with our commodity price deck assumptions at that time. Additionally, we note that many Canadian E&Ps had already released either preliminary or full 2023 capital budgets, with U.S. E&Ps broadly expected to provide 2023 guidance with Q4/22 results. Finally, our forecast already assumed a modest incremental contribution from the Drilling and Completions (D&C) activity on the Blueberry River First Nation (BRFN) lands in H2/23. As a result, our commodity price outlook and industry forecasts are fundamentally unchanged.
BRFN/B.C. Government Resolution — Energy Services Exposure: As a follow- up to our colleague's report (Flash Note), we highlight Trican (TCW-T, BUY, $5.00 target price) for investors who are looking for positive exposure to this event. Trican is exclusively focused on the Canadian market and derives the majority of its revenues from the Montney. Other obvious beneficiaries, in our view, are drillers with AC Triple fleets, including Ensign (ESI-T, BUY, $6.50 target price) and Precision (PD-T, BUY, $145.00 target price) as these high-specification rigs are already in short supply. Finally, Enerflex (EFX-T, BUY, $16.00 target price) should also benefit as it supplies natural-gas compression and processing infrastructure.
Q4/22 Preview & Estimate Changes: Based on our ongoing dialogue with the coverage universe, we believe that Q4/22 activity and financial performance will feature a continuation of the strength we observed in Q3/22, up until the typical holiday slowdown in late December. Importantly, we expect that Enerflex's quarter will be noisy, given Exterran-related transaction items, including one-time transaction costs and the conversion of Exterran's reporting methodology from U.S. GAAP to IFRS. This is discussed in more detail on page 3.
Our Sector Stance: OVERWEIGHT
We continue to expect that D&C activity will be relatively range-bound in 2023 and 2024, a scenario that should provide strong free-cash-flow generation for the coverage universe that we expect will broadly be used to deleverage and/or pursue more meaningful shareholder return initiatives. Despite its recent relative outperformance (+26.8% vs. the remainder of our coverage universe since November 9, 2022), we continue to highlight Enerflex as our top pick for 2023, based on continued expectations of global natural-gas production growth (Engineered Systems backlog of $1.5 billion), and what we believe will be several near-term company-specific catalysts following the acquisition of Exterran as the company shifts its focus to debt reduction (target <2.5x) and other shareholder-return initiatives after reaching its debt target.