Despite fundamental tailwind growing for Canadian oilfield service providers, Canaccord Genuity analyst John Bereznicki warns pricing gains continue to “lag” as inflationary pressures increase.
“While most service providers have been able to implement pricing gains in over the past two quarters, we believe their margin impact has been muted by surging inflationary headwinds,” he said in a research note. “Our channel checks suggest broad-based cost pressures of approximately 5 per cent to 25 per cent thus far in 2022 for inputs such as labour, fuel, lodging, transport proppant, OCTG and oilfield chemicals. In our view, Q1/22 realized sector margins could disappoint as pricing usually lags cost inflation and oilfield service providers undertake non-recurring start-up and asset relocation costs. Should commodity prices remain robust, we believe the OFS sector should begin to realize more meaningful real pricing (and margin) gains by 2H22, supported by improved fixed cost absorption as activity recovers.”
Mr. Bereznicki said contract drillers have led the group thus far in 2022, pointing to the strong share price performance of both Precision Drilling Corp. and Ensign Energy Services Inc. , which have been “accompanied by some of the most significant upward revisions in consensus 2023 EBITDA expectations over this same period.”
“In our view, this at least partly reflects the typical lag between drilling, completion, and (ultimately) production spending,” he said. “We believe this creates opportunity elsewhere in the sector as cash flow expectations ultimately move higher. We note
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Total Energy Services Inc.] and [CES Energy Solutions Corp.] have had already experienced solid year-to-date EBITDA estimate revisions but have lagged in terms of relative share price performance.” Noting “forward EV/EBITDA valuations in the sector remain depressed by historic measures while lagging the commodity price recovery,” he made a trio of target price changes:
* Precision Drilling Corp. (“hold”) to $85 from $70. The average is $84.44.
* Trican Well Service Ltd. ( “buy”) to $4.50 from $4.30 . Average: $4.19.
* Total Energy Services Inc. (“buy”) to $11 from $10. Average: $9.81.
“We continue to favour SES and CEU but recommend TCW and TOT for those seeking relative natural gas exposure,” he said.