Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil services company that offers services like drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals, transportation, wireline services, and production testing services. 

Key Highlights:

• Impressive Cost structure and Cost Management: The company has reported a consistent decline in its general and administrative expense over the quarters, which is a key positive. Moreover, the company reports ~20% of its expenses as fixed costs, which is lower than the industry average. As most of the cost structure is variable in nature, the company does not face the burden of high fixed costs during lower drilling cycles. During FY20, the general and administrative expense was lower at CAD 43.567 million compared to CAD 55.064 million in FY19.                             

Source: Company Report

• Improved Financial Flexibility through lower net debt and lower interest expense: The company reported a reduction in interest costs and a lower net debt in the recent past, which indicates better financial flexibility. Interest expense for FY20 stood at CAD 107.374 million, lower than CAD 135.245 million in FY19. The group reported total debt of CAD 1,398.9 million in Q4FY20, reflecting a reduction of 11.11% and 15.82% from Q2FY20 and Q1FY20, respectively.

Source: Company Presentation

• Result Update: The group would report its first quarter FY20 result on May 10, 2021.

FY20 Financial Highlights:

• In FY20, ESI posted a 41% y-o-y decline in its top line at CAD 936.818 million. The revenue was impacted by the significant correction in international crude oil prices due to demand supply mismatch.
• Adjusted EBITDA stood at CAD 241.525 million, as compared to CAD 412.468 million in FY19. The decline was due to a lower revenue.
• The company reported an improved bottom-line, wherein net loss from continuing operations was recorded at CAD 66.740 million, significantly lower than a loss of CAD 159.090 million in FY19.

Source: Company Report

Risk: The company’s revenue is directly correlated to the international crude oil prices as this affect the drilling decision of the oil explorer. Volatility in price would dampen the company’s revenue and cash flows.

Valuation Methodology (Illustrative): Price to CF -based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Apart from its presence in the US and Canada, the company has a decent presence across the Middle East, Australia and Latin America. In Australia, the company is the largest drilling contractor and has a prominent market share across the three major states in LNG and utility operations. Recently, the company acquired TDI Joint Venture operating in Kuwait and Bahrain, which has high-margin contracts and is expected to enhance the company’s upcoming prospects. Notable, the company’s operation remained unaffected during the pandemic and reported zero operational interruptions.

Source: Company Presentation

We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Precision Drilling Corp, Step Energy Services Ltd and Calfrac Well Services Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 1.09 on April 23, 2021.

One-Year Price Chart (as on April 23, 2021). Source: Refinitiv (Thomson Reuters)

 Crown Capital Partners Inc.

Crown Capital Partners Inc. (TSX: CRWN) is a specialty finance company that provides investment management services and capital to middle-market companies. Its financing solutions include subordinated term and bridge loans, perpetual debt, income streaming, and royalties. The company operates through two segments namely, Specialty finance and Network services.

Key highlights 

• Capital addition across Distributed Power business: A significant portion of the company’s operation comes from power generation assets that provide electricity under long-term contracts to mid-to large-scale electricity users. Currently, the company has deployed its capital across three new operating partners and construction of multiple projects, which would lead to the total number of operating assets to eleven. Due to the nature of the business, the company is expected to deliver stable cash flows and income in the coming quarters. 

• Increase in Adjusted funds from operations: The group's adjusted funds from operations increased to CAD 13.1 million in 2020, up from CAD 6.2 million in 2019. The growth was largely attributed to the improvement in net realized profits (losses) from acquisitions, as well as a full quarter of operating income from Galaxy, which was partly offset by reduced interest and fee revenue.

• Increased Liquidity: The company reported an increase in the credit facilities at CAD 62.9 million in FY20 v/s CAD 38.4 million in FY19. We believe the increase in the credit facilities is likely to support the company’s overall liquidity while the group would likely to meet its working capital and capital investments requirements. Its cash and cash equivalents also increased by CAD 10.8 million to CAD 19.2 million as on December 31, 2020. 

Financial overview of FY2020

Source: Company 

• Total revenue in FY2020 increased to CAD 44.8 million, against CAD 25.2 million in 2019. The rise was mainly due to higher network services revenue from the acquisitions of WireIE Holdings International and Galaxy Broadband Communications and higher net gains on investments in 2020 versus 2019.
• The period was marked by an increase in salaries and benefits (CAD 5.3 million v/s CAD 4.5 million in FY19), significantly higher cost of network services revenue (CAD 5.7 million v/s CAD 1.4 million in FY19) and a higher finance cost (CAD 6.3 million v/s CAD 3.9 million in FY19).
• Net loss widened to CAD 13.2 million from a loss of CAD 0.2 million in FY19. The decline was due to a loss from non-controlling interest amounting to CAD 13.4 million. 

Risks associated with investment

The group’s operations might be impacted due to adverse economic conditions, interest rates volatility, etc. Contract cancelation and non-renewal of existing contracts also bear a risk for the company, which might impact its operations. 

Stock recommendation

The group reported a stable operation during the pandemic. The majority of the segments remain largely unaffected despite the pandemic, while a small part of the portfolio remained under pressure due to the financial restructurings. The recent acquisition of Galaxy Broadband Communications in Q3FY20 would expand the company’s presence across the Network Services platform and would provide connectivity to remote and underserviced enterprise customers across Canada, which is a key positive. Notably, the company’s PenEquity witnessed a deterioration in the value of specific development properties, due to the impact that COVID-19. On the valuation front, the stock is available at forward Price to Book Value multiple of 0.51x, which is significantly lower than the industry (Investment Banking & Investment Services) median of 2.03x. Hence, considering the above rationale, we suggest a “Speculative Buy” recommendation on the stock at the closing price of CAD 5.00 on April 23, 2021.

1-Year Price Chart (as on April 23, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.