One Small Cap Energy to Stock to Hold – EFX

Enerflex Ltd (TSX: EFX) is a company which engineers, designs, manufactures and provides aftermarket support for equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

Key highlights

• Rising global energy demand: Today, the global energy demand is satisfied by a diverse fuel mix, and natural gas is the world’s fastest-growing source of fossil fuel. Global natural gas consumption is projected to increase by over 30% from 2020 to 2050. We believe this scenario would benefit the company as it is in the business of providing services and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

                       Source: Company Presentation

• Clocked strong bookings: Engineered Systems bookings were significantly improved during the fourth quarter and twelve months of 2021. The company received bookings worth CAD 324.4 million in Q4 2021, up substantially from CAD 52.7 million in pcp, while for FY 2021 it stood at CAD 768.7 million against CAD 273.7 million in FY 2020, which mirrors the optimism in the recovering oil and gas sector and is reflected in the increased activity in the Engineered Systems business.

     Source: Company Filing

• Acquisition of Exterran: The Company announced the acquisition of Exterran corporation on January 24, 2022, for a total transaction value of USD 735 million. The agreement is expected to finalize in the second or third quarter of 2022, according to management. Furthermore, the Exterran purchase will result in rapid development of recurring revenues, which are estimated to account for nearly 70% of the combined entity's pro forma gross margin, as well as almost doubling EBITDA, which is a critical positive.

Risks associated with investment

Due to high dependency on the oil and gas clients, the adverse effect on crude oil demand can hit the company's revenues. Lower demand for crude oil would result in lower drilling activity, which would impact the company's prospects. Furthermore, the supply chain disruptions and prevailing rates of inflation will likely put some pressure on margins, at least in the short term.

 Financial overview of FY 2021

Source: Company

• In FY 2021, the company clocked lower revenues at CAD 960.1 million compared to CAD 1,217.0 million in the previous corresponding period. The decline in revenue was mainly due to lower Engineered Systems revenue from each geography.
• The gross profit in the reported period fell to CAD 219.5 million against CAD 298.8 million in FY 2020, on the back of lower revenues.
• In FY 2021, selling and administrative expenditures as a percentage of sales grew to 17%, up from 15% in pcp. As a consequence of reduced gross profit and increased S&A expenditures as a percentage of revenue, the company's operating income fell to CAD 54.2 million from CAD 116.0 million in the previous quarter.
• In the reported period the company clocked net loss of CAD 18.4 million against net profit of CAD 88.2 million in pcp, partially supported by lower interest expense.
  

 Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock recommendation

Enerflex delivered strong quarterly results compared to the third quarter of 2021 and a fourth consecutive quarter of backlog growth with CAD 324 million in Engineered Systems bookings. This rally in bookings is supported by robust demand for natural gas, natural gas liquids, and crude oil. It also secured a 10-year extension on a BOOM asset in the Rest of World segment, extending these revenues with no new capital expenditures, which is a key positive.

Furthermore an acquisition of Exterran corporation will result in accelerated growth of recurring revenues, expected to account for approximately 70% of the combined entity’s pro forma gross margin, as well as approximately doubling EBITDA, which would be a key positive. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 8.29 on March 24, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 24, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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