Secure Energy Services Inc T.SES

RBC Raise Target

[retiredcf]

Their upside scenario target is also raised to $17.00. GLTA

May 2, 2024

Secure Energy
Delivers on shareholder return commitment

Our view: Secure announced $400MM in share repurchases including a Substantial Issuer Bid and shareholder repurchase agreement. The amount was broadly in line with our expectations and improves Secure's FCF/share metrics by about 14% from Q1 levels. We add a DCF to our valuation and maintain our Sector Perform rating with a $14 price target ($13 prior).

Key points:

Agreement with shareholder to repurchase 4.77%. Secure is repurchasing $150MM shares from TPG Angelo Gordon at $11.38/share. TPG's pro forma ownership will decrease from 19.01% to 14.96%, before the SIB. Assuming completion of the SIB, TPG's position would be approximately 16%.

Substantial Issuer Bid to repurchase 8.34% of outstanding shares. In addition to the shareholder repurchase agreement, Secure announced a $250MM SIB. Holders (other than TPG) may tender shares between $11.40-13/share in a modified Dutch auction format. The combined $400MM stock repurchase plans improve FCF per share by about $0.11 (13-14%) vs. Q1 share levels.

Liquidity remains strong. The repurchases bring SES Q2 net debt level to about $400MM, or 1.0x net debt/EBITDA. This leaves $400-600MM debt liquidity to remain within SES's 2-2.5x net debt/EBITDA leverage target. We expect SES to generate $222MM FCF in 2024 (CFO-capex), for a 7% yield. Revenue Q1

Share repurchase commitment should support multiple expansion. Secure trades at 2024E/25E EV/EBITDA multiples of 6.8x/6.7x, compared to 12.6x/11.5x for waste management firms, 9.1x/8.6x for midstream firms and 5.0x/4.5x for oilfield services. With continued FCF execution, share count reduction, and potentially lower cost of debt capital we would expect to see Secure's multiple expand further over time.

Adding DCF to our valuation. Given the bulk of Secure's cash flows are tied to oil & gas production and associated high-margin waste, we think an intrinsic valuation adds important support to EV/EBITDA approach. Using a 2-stage valuation, with a 5-year up-cycle with 6%/yr revenue growth, followed by a 3-yr down-cycle, and 3% terminal growth, we see a $15/share value.

Maintain Sector Perform rating with a $14 price target ($13 prior). Our $14 price target is based on a 50/50 weighting of 7.5x multiple of the company's consolidated FY25E EBITDA and our DCF valuation. Secure trades at a 6.8x FY24E EV/EBITDA multiple vs. its long-term average of 6.5x. We see potential for the multiple to expand as SES generates FCF and realizes stronger through-cycle results.