National Bank Financial analyst Dan Payne believes the fourth-quarter 2022 results for major U.S. oilfield services providers have “continued to reflect an expanding value proposition, where moderating rate of change & growth is yielding to an optimized and inclining return environment, in support of long-term fundamental value.”
In a research report released Tuesday, he said that trend falls in line with his view of Canadian peers ahead of their quarterly releases.
“The cadence of activity growth should similarly moderate, but a rebased top line with disproportionate return potential resulting from the group’s operating leverage is not currently priced in to sector valuations, which remain at a material discount to historical,” Mr. Payne said. “Domestic OFS participants should positively participate through this phase of the cycle on the basis of quality, with business orientation selectively compounding that narrative in support of free cash flow growth, option value and value upside off a low base of valuation over the cycle’s duration, and given our thesis and observations, the relative value-adjusted opportunity remains relatively well-balanced on a risk/reward basis across the group.”
Concurrent with his quarterly preview, Mr. Payne assumed coverage of Enerflex Ltd. and moved the firm’s recommendation to “sector perform” from “outperform,” despite seeing “opportunities abound.”
“The change in rating to Sector Perform is principally based on valuation (with EFX share appreciation of up 44 per cent in Q4/22 and 16 per cent year-to-date), leaving a return to target of approximately 9 per cent,” he said. “The value opportunity of execution remains ahead for the company, where asset integration, validation of returns and ultimate de-leveraging, should serve to support option-value to longterm shareholder returns.”
Ahead of the release of its results on March 1, which will reflect its first reporting period since the close of its Exterran business combination, he’s projected top-line revenue and adjusted EBITDA of $500-million and $85-million, respectively, which are increases of 27 per cent and 62 per cent quarter-over-quarter but below the consensus estimates of $631-million and $99-million.
“Looking through to the outlook and the potential embedded within the consolidated enterprise, EFX offers a stout global presence at scale, set to capitalize on the transformational nature of its pro-forma business mix and associated margin profile (while high-grading through synergies),” said Mr. Payne. “Principally, we continue to expect the high-emphasis within its Energy Infrastructure business unit to drive a significant pivot for its return profile (55-65-per-cent gross margin), which in association with its Service unit, provides visibility to high proportional recurring and resilient returns relative to historical (i.e. 20-per-cent blended margin vs. historical 15-20 per cent). Resulting from that improved return outlook, and paired with the strength of its more cyclical Engineered Systems business (solid $1.5-billion backlog, approximately one year conversion rate), and very manageable capex requirements ($200-million or 50-per-cent payout), the company has established a repeatable & ample free cash proposition from which to execute key strategic priorities in; a) de-leveraging the pro-forma business less than 2.5 times D/EBITDA (likely through 2023e), b) bolster shareholder returns (augmenting its current 1-per-cent cash yield, or buy-back as the case may be), and c) continued reinvestment (opportunistic and return-focused).”
He maintained a $10.75 target for Enerflex shares. The average on the Street is currently $12.58.