From late last week. Initiated a position on today's checkback in price. GLTA
Refining Our 2023 Outlook; Introducing Our 2024 Estimates
Continued Capital Discipline to Keep Activity Levels Range-bound
TD Investment Conclusion
Details: In advance of our year-ahead Energy sector outlook event (register here), we are making relatively minor adjustments to our 2022/2023 estimates and introducing our 2024 estimates (details on page 5). The major considerations we contemplated with our revised outlook are as follows:
Inflation in the Energy Sector: A pervasive issue in 2022 that is easing for several energy sector input costs (diesel, frac sand, labour, and steel), but we expect that Energy Services companies will continue to push pricing higher to achieve the margin expansion that we would typically expect in a cyclical upswing. In this context, it is challenging from our perspective to expect meaningful production growth in 2023 in the context of E&P shareholder return commitments, declining strip commodity prices, and rising costs.
Recession Fears: The Energy Services sector is not typically thought of as one that is resilient heading into a recession. Unlike previous cycles, North American E&Ps continue to pursue modest growth, limiting potential activity downside scenarios, in our view. Specifically, we calculate an average WTI price of ~US$85/bbl over the last five quarters and year-over-year U.S. crude oil production growth of 8% over the last four quarters. This compares with ~US$58/bbl and 15% between 2017-2019 and ~US$89/bbl and 17% between 2012-2015, respectively.
Current E&P Capital Spending and Production Growth Guidance and Consensus: Current estimates are challenging to reconcile, in our view, as estimates continue to call for modest production growth, despite minimal year-over-year increases in capital spending. As a result, we expect upward revisions to E&P capital spending in 2023 as the year progresses.
Our Sector Stance: OVERWEIGHT
Based on the considerations noted above, we expect that Drilling and Completions (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. Within our coverage universe, we highlight Enerflex (EFX-T, BUY, $16.00 target price) as our top pick for 2023, based on an incredibly strong global natural-gas macro, including an Engineered Systems backlog of $1.5 billion, and what we believe will be several near-term company- specific catalysts following the recently completed acquisition of Exterran as the company shifts to focus on debt reduction (target <2.5x) and other shareholder-return initiatives after reaching its debt target.