CES Energy Solutions Corp T.CEU

From Scotia this Morning Target to $10.50 from $9.00

[savyinvestor333]

Don't Be Crude

OUR TAKE: Positive. Shares whipsawed between $7.15 and $8.50 between Q2 and Q3, which we attribute to oil price volatility. Meanwhile, CEU continues to report record results in a stable activity environment supported by increased fluid intensity and strong execution. 2019 provides an interesting split screen: U.S. rig count is 35% lower, but CEU revenue/EBITDA per share are 90%/160% higher. ROIC has expanded >5x while net leverage was 1.1x exiting 3Q compared with 2.5x in 2019. The outlook calls for a small uptick in activity beginning in 1Q25 and better overall activity in 2025 compared with 2H24.

We raised our 2024E/2025E EBITDA by 3%/4% and our valuation multiple to 7.25x. Our valuation methodology is based on a SOTP approach using 6.5x for drilling fluids (in line with OFS peers) and ~8x for production chemicals (a 20% discount to SLB/CHX takeout multiple), which may prove conservative. We increased our target price to $10.50/share (from $9.00). CEU has been the best performing stock in our universe YTD (by a wide margin). Shares trade at 6.5x EV/EBITDA on our 2025E or an 11.2% FCF yield. We think that is undemanding for a company with good FCF visibility and a demonstrated willingness to return capital to shareholders.

KEY POINTS

CEU reported a 3% beat driven by higher sales. 3Q24 sales and adjusted EBITDA (margin) of $607 million and $102.5 million (16.9%) compared to consensus of $587 million and $99.2 million (16.9%). Revenues increased 13% y/y (+16% Canada; +11% U.S.) despite lower activity levels. Adjusted EBITDA margin of 16.9% compared to 15.0% last year and 17.3% last quarter and above the guidance range of 15.5% to 16.5%.

FCF per our calculation (after leases and w/c) was $39 million (YTD $152 million). Working capital efficiency continued to improve with cash conversion cycle down to 101 days compared with 110 days last year and working capital reinvestment rate at 26.1% compared with 28.6% last year. Capex guidance was raised to $85 million (from $75 million to $80 million) and is “weighted towards expansion capital to support higher activity levels” (previously “split evenly between maintenance and expansion capital to support sustained revenue levels”). Capex is expected to decline to $75 million in 2025. The quarterly dividend was maintained at $0.03/share ($0.12/share annualized). In the quarter, the company repurchased 6 million shares for $46 million (avg. price $7.68). The company can repurchase 19.2 million shares under the current NCIB, which expires July 2025.