Our view: We have a positive first impression of SES’s 3Q21 results, as revenue/EBITDA came in 13%/8% ahead of Street expectations. We remain encouraged by the operational potential of the combined SES/ TEV footprint, particularly heading into next year’s favourable macro conditions. Secure is also well on its way toward delivering its targeted $75MM annual cost savings by the end of next year, having achieved nearly half to-date. Conference call on Friday, October 29, at 11AM ET; dial-in 1-888-664-6383.
First impression: Positive
• Revenue: $317MM, RBC/Street: $283/281MM • Adj. EBITDA: $105MM, RBC/Street: $96/97MM • Net debt: $1,191MM, RBC $1,107M
Solid revenue generation and segment margins, with some merger noise.
Revenue was 12% ahead of our estimate, driven by 31% higher Env. and Fluid Management (EFM) revenue, partially offset by 7% lower Midstream Infrastructure (MI) revenue. EFM segment EBITDA margin outperformed our expectation by 220bps, and MI outperformed by 250bps. Corporate EBITDA margins of 33% were 80bps below our expectations on revenue mix and higher corporate costs.
Outlook: Improving macro environment leading to cash flow growth.
Secure foresees rising industry drilling & completion activity levels, underpinned by strong commodity prices leading to improved utilization at its processing facilities in 4Q21 and beyond. SES also expects higher activity levels in the EFM segment due to increased drilling, abandonment, remediation, and reclamation activity supported by the federal government’s $1.7bn site rehabilitation stimulus package.
Merger cost-reduction initiatives on track. Secure has achieved approximately 40% of its targeted $75MM annual cost savings. The company remains on track to hit its overall target by YE22. Focus areas to-date have included operational optimizations, reduced public company costs, and headcount. Total reductions are split 60%/40% operational optimizations/corporate initiatives.
Initial 2022 capital spending outlook. Secure spent $13MM capex in 3Q and plans to spend $7–10MM in 4Q, weighted mostly to maintenance activities. Its initial 2022 budget includes $40MM for sustaining and $15MM for landfill expansion. Additional growth will likely be focused on oil & water gathering pipelines. Debt repayment remains a key priority.
Near-term emission goal added as ESG remains a priority. Secure is targeting a 5% reduction in Scope 1 emissions in 2022 and is in the process of formalizing a roadmap to reducing its carbon intensity by half by 2030 and hitting net zero by 2050.
Key conference call topic: Competition Tribunal hearings set for 2Q22.
Findings are expected by YE22. Secure has previously indicated that potential competition remedies relate to only a small part of its combined asset base and are not material to its overall operations.