Secure Energy Services Inc. (TSX: SES) provides fluids and solids solutions to the oil and gas industry. The company operates in two segments, namely, Midstream Infrastructure and Environmental & Fluid Management. Midstream Infrastructure owns and operates a network of facilities throughout western Canada, North Dakota, and Oklahoma. 

Key updates:

• Elevated Revenue and higher profitability: In Q1FY22, the company reported a solid growth from its operations, supported by strong demand dynamics and posted higher total revenue of CAD 1,750 million, reflecting a growth on 165% on y-o-y basis. This was supported by higher Oil purchase and resale activity during the period. Meanwhile, the company’s Adjusted EBITDA also rose 215% on y-o-y basis to CAD 126 million.

• Poor working capital management: The company is struggling to fund its short-term liability through its current assets and posted quick ratio and current ratio of 1.10x and 1.31x, respectively, in Q1FY22, as compared to the industry median of 1.60x and 2.00x, respectively. This remains a key concern, and continuation of the trend would likely to impact the company’s short-term liquidity.

• Highly leveraged balance sheet: In Q1FY22, the company reported a higher debt to equity ratio of 1.06x, as compared to the industry median of 0.39x, which indicates lower financial flexibility when compared to the industry median. Moreover, investors of SES are prone to higher balance sheet risks, as long-term debt to total capital stood at 50.4% in Q1FY22, as compared to the industry median of 18.1%.

Stock Recommendation:

The company ended its first quarter on a mixed note. Revenue and profitability stood strong in the quarter due to robust commodity prices on account of weak macros. However, the company reported a weak working capital management along with a highly leveraged balance sheet. Continuation of the above trend might dampen the company’s upcoming performance. Meanwhile the stock of SES soared ~74% and ~59% in the last nine months and one-year respectively and trading at the upper band of its 52-weeks trading range. We believe the stock price has moved ahead of its fundamentals and hence we prefer to remain on the sidelines. The stock of SES is available at a price to earnings multiples of 16.7x on NTM basis, higher than the industry (Oil & Gas related equipment services) mean of 7.3x. Considering the aforesaid facts and stretched valuations, we give a ‘Wait and Watch’ stance on the stock of SES at the last closing price of CAD 6.90 on May 17, 2022.

One-Year Technical Price Chart (as of May 17, 2022). Analysis by Kalkine Group 

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario. 

  Technical Analysis Summary

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