Canaccord Pricing power has titled back to the benefit of the oilfield services sector, said Canaccord Genuity analyst John Bereznicki, who raised his financial projections following a better-than-expected third-quarter earnings season.
“Given minimal OFS capacity growth since 2014, a tightening supply dynamic is pushing pricing higher as operators scramble to secure capacity,” he said in a note released Tuesday. “While high-spec equipment has generally enjoyed the strongest pricing gains thus far, we believe the mid-tier market is gaining momentum (we were frankly surprised by the cadence and breadth of OFS pricing gains in Q3/22). Service providers have focused on the upgrade of existing equipment (often with customer backing), and some segments of the industry are approaching new-build economics (most notably pressure pumping). However, we don’t expect meaningful new capacity additions for several reasons: i) Chronic labour constraints make it difficult to crew new capacity; ii) Oilfield companies that even contemplate new builds will incur the wrath of investors; and iii) Lead times for new OFS capacity of one year or greater are not uncommon.”
“Through mid-2022 OFS cash flow growth was driven primarily by a recovery in activity from a severe pandemic downturn in 2020-21. During this period, pricing increases were generally unable to keep pace with cost and supply chain pressures, resulting in OFS margin challenges. We expect operator spending growth (and rigs adds) to moderate through 2023, with continued pricing gains and improved fixed-cost absorption driving sector margins higher (particularly as cost pressures ease). Barring a meaningful commodity price pullback, we expect this to drive consensus estimates higher as margin gains fall straight to the bottom line of OFS service providers. If producers (who are significantly underspending cash flow) choose to curtail spending in response to increased OFS pricing, this is likely bullish for commodity prices and the sustainability of the current up-cycle.”
Mr. Bereznicki said companies in his oilfield coverage universe beat the Street’s quarterly EBITDA projections by an average of 14 per cent, which he said reflects improved pricing, margin expansion and “some moderation” in inflationary headwinds. He also noted management commentary was “almost uniformly constructive,” leading equities to rise by almost 12 per cent during the earnings season from Oct. 28 to Nov. 11.
“While our OFS coverage universe is up an average of almost 75 per cent year-to-date, FTM [forward 12-month] consensus EV/EBITDA in the space has steadily declined over most of this same period and is now highly depressed from an historical perspective at 4 times,” he said. “Said otherwise, equity tailwinds have been driven by consensus estimate revisions rather than multiple expansion. We believe this is reflective of fundamental anxiety and investor perception the sector may be approaching peak earnings in 2023 (not to mention global decarbonization objectives). Should investors gain increased conviction in the sustainability of the current up-cycle and shift capital into the sector, we believe multiple expansion could drive another tailwind to OFS equities.”
Raising his estimates based on higher price assumptions, he increased his targets for stocks in his coverage universe. His changes were:
- CES Energy Solutions Corp. ( “buy”) to $4.50 from $3.50. The average on the Street is $4.34.
- Ensign Energy Services Inc. ( “hold”) to $4.50 from $3. Average: $5.69.
- Precision Drilling Corp. ( “hold”) to $130 from $110. Average: $144.47.
- Secure Energy Services Inc. ( “buy”) to $10 from $9.50. Average: $10.27.
- Trican Well Service Ltd. ( “buy”) to $5.75 from $4.75. Average: $5.85.
- Total Energy Services Inc. ( “buy”) to $16 from $10.50. Average: $13.88.
“We view our target price multiples as reflective of current market sentiment to the sector. We believe TOT offers the most upside potential in our coverage universe, followed by CEU and TCW,” he concluded.