Secure Energy Services Inc T.SES

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Secure Energy Services Inc.

(SES-T) C$4.19

Q2/21 Results

Event

Secure reported Q2/21 results.

Impact: POSITIVE

Q2/21 Results: Secure reported Q2/21 EBITDAS of $30.4 million, well above our estimate of $23.2 million and consensus of $25.6 million. The beat was primarily driven by higher-than-expected gross margin performance (37.9% vs. our estimate of 32.3%) as a result of cost-control initiatives implemented in late-2020. Given that Secure's acquisition of Tervita closed less than four weeks ago, the Q2/21 disclosures did not feature any meaningful updates related to the integration of the combined company or progress toward its $75.0 million annualized synergies target. Details on page 3.

Addressing Concerns that We Believe have Resulted in a Discounted Valuation: We calculate that Secure is trading at a discount to our oilfield services coverage universe despite having several desirable attributes, including a resilient, production-weighted business model, strong free-cash-flow generation, and a catalyst-rich outlook resulting from the Tervita acquisition. We believe that the valuation overhang could be the result of a combination of three factors related to the Tervita acquisition, that include: 1) competition bureau concerns; 2) Secure's ability to achieve its $75 million synergy guidance; and 3) concerns that Solus (Tervita's largest shareholder) may look to sell its position in the near term. We address these concerns on page 2 and discuss relative valuation on page 5.

Estimate Changes: Despite a stronger-than-expected quarter, we are not making any material changes to our go-forward estimates. Details on page 4.

TD Investment Conclusion

In light of continued E&P capital discipline, we continue to prefer companies with production-weighted revenue streams (discussed in more detail here). Within this broader sector view, we believe that Secure's consolidating acquisition of Tervita creates several near-term catalysts, creates barriers to entry, paves the way for increased resilience in financial performance throughout the inherent cyclicality of the energy sector, and separates the company from a market-relevance perspective. As a result, Secure is among our best ideas in the oilfield services sector and we are maintaining our BUY rating with an increased target price of $7.50 ($6.50 previously)