April 26, 2024
Secure Energy
1Q24 – Positioned for per share FCF accretion
Our view: Secure's 1Q24 results were better than we expected as the company teased an imminent Substantial Issuer Bid and raised FY24 EBITDA guidance. Notably, we see FCF in 2024 remaining flat despite selling about 25% of overall EBITDA, positioning Secure for a strong year of per share FCF accretion. We increase our 2024/25 EBITDA estimates by 2%/1% and maintain our Sector Perform rating and $13 price target.
Key points:
1Q24 financial results ahead of expectations. Adj. EBITDA of $132MM was 8% ahead of the Street. EBITDA margin of 36.7% was up, 37bps y/y. FCF (CFO-capex) of -$11MM included seasonal working capital build and additional crude purchases ahead of Trans Mountain Expansion Pipeline start-up in May.
Increasing buybacks with SIB. Secure repurchased $126MM shares under its NCIB in Q1 and intends to launch an SIB the week of April 29. We believe a $400-500MM SIB remains affordable given the company's pro forma ~ $1bn cash and credit liquidity, and may come in multiple tranches. For context, a $500MM buyback at $13/share would improve FCF per share by about $0.13 (16%) vs. Q1 share levels.
Nudging up 2024 guidance. SES increased its FY24 Adj. EBITDA guidance to $450-465MM ($440-465MM prior). SES's growth capital plan has also moved $25MM higher to $75MM for a produced water pipeline connection and processing equipment for phase three at the Clearwater terminal. Secure sees a solid pipeline of organic opportunities and closed a small specialty chemicals deal in Q1.
Strong free cash flow generation. We expect SES to generate $225MM FCF in 2024 (CFO-capex), for a 7% yield. This compares to our coverage average of 13%. FCF is aided by $65MM lower y/y interest expense from recent debt refinancing and lower debt levels. We have adjusted our 2024/25 EBITDA estimates to $458/470MM ($450/466MM prior).
Share repurchase commitment should support multiple expansion.
Secure trades at 2024E/25E EV/EBITDA multiples of 7.0/6.8X, compared to 12.5/11.4x for waste management firms, and 9.1/8.6x for midstream firms and 5.2/4.6x for oilfield services. With continued FCF execution and share count reduction, we would expect to see Secure's multiple expand further over time.
Maintain Sector Perform rating with a $13 price target. Our $13.00 price target is based on a 7.5x (7.0x prior) multiple of the company's consolidated FY25e EBITDA. Secure trades at a 7.0x FY24e EV/EBITDA multiple vs. its long-term average of 6.5x. We see potential for the multiple to expand as SES generates FCF and realizes stronger through-cycle results.