Tidewater Midstream and Infrastructure Ltd.

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) operates in natural gas processing, NGL extraction, gas storage, crude oil and NGL terminalling infrastructure, refining operations and marketing to end-use markets through transmission pipelines, trucking and rail systems. The company operates from three core areas in the Western Canadian Sedimentary Basin (Deep Basin, Montney and Edmonton) as well as in central British Columbia.

Recent Update:

• The group together with its partner TransAlta Corporation has entered into an updated Purchase and Sale Agreement with ATCO Gas and Pipelines Ltd. to sell the Pioneer Pipeline to ATCO for a purchase price of CAD 255 million under similar terms to the previously announced transaction with NOVA Gas Transmission Ltd.
• The Management declared a quarterly dividend of CAD 0.01 per common share, payable on October 30, 2020.

Q2FY20 Financial Highlights: TWM impresses its quarterly results, wherein the company reported improved revenue of CAD 178.568 million, as compared to CAD 155.311 million in Q2FY19. The increase was due to the positive impact of the recent acquisition of Prince George Refinery. However, as a result of the sharp declining in crude oil and refining product prices, the company witnessed a slide in the overall performances. Adjusted EBITDA soared to CAD 41.873 million, against CAD 21.786 million in the previous corresponding quarter, driven the positive impact from the acquisition coupled with the commissioning of the Pipestone Gas Plant. The company reported an improved bottom-line and reported a net loss of CAD 0.311 million, as compared to a net loss of CAD 4.086 million in Q2FY19.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Falling crude oil prices would dampen the overall realization price for crude oil and prices for refining products which would is likely to take a toll on the top-line.

Valuation Methodology: EV to EBITDA (Illustrative)

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

Stock Recommendation: The stock of TWM gained handsomely in the recent past and appreciated ~69% in the last six months. The organization has cut-down its FY20 CAPEX planning, which is a prudent strategy and would support the company’s liquidity. Pioneer Transaction is likely to generate CAD 138 million to the group, which would be used for the reduction of the debt component. The management expects performance in the second half of FY20 to improve as demand within the facilities, including PGR, has shown sign of improvement. During the month of May 2020, the Company witnessed a surge in the volume and saw stability in commodity prices coupled with improved demand in the refined products.  The management expects its FY20 Adjusted EBITDA, in between CAD 175 million to CAD 185 million, which is impressive. The group debottlenecked various processing units at PGR. As a result, PGR is seeing record throughput at over 12,000 bbls/day and combined gasoline and diesel production of over 10,500 bbls/day. The Pipestone Gas Plant had its strongest run times and cash flow generation to date in the second quarter, and the group expects this to continue throughout the remainder of 2020. The facility remains fully contracted. Despite the challenging operating environment, the group continued with its dividend program; which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a lucrative dividend yield of ~5.06%.  We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have peers like AltaGas Ltd, CES Energy Solutions Corp and Secure Energy Services Inc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 0.76 on October 1, 2020.

TMW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Secure Energy Services Inc.

Secure Energy Services Inc. (TSX: SES) provides integrated treatments and disposal service to the oil and gas industries which constitute midstream services, environmental services, systems and products required for the drilling, production and other specialized services and products. 

Key Highlights

• The company reported that it would disclose its third-quarter result on 28 October 2020. Furthermore, the Management announced a quarterly dividend of CAD 0.0075 per common share, payable on October 01, 2020.
• The company announced the extension of the group's existing CAD 130 million second lien credit facility to July 31, 2022. SES entered into an interest rate swaps to fix the interest rate for the Second Lien Facility at 5.5% to the maturity dated July 31, 2022.

Q2FY20 Financial Highlights: SES announced its quarterly numbers and reported a decline in the top-line. Revenue stood at CAD 291.190 million, reflecting a fall of 51% on y-o-y basis. Decline in the crude oil prices, in the recent past on account of lower demand and oversupply market scenario has contributed to the lower top-line. Revenue generated from Midstream Infrastructure services decreased 53% on y-o-y basis due to lower sales volumes coupled with production shut-ins and minimal drilling and completion activity across the WCSB and North Dakota. The company reported adjusted EBITDA at CAD 20.453 million, plunged 42% from Q2FY19, due to lower revenue, partially supported by the cost reduction initiatives which includes organizational restructuring and associated personnel lay-offs, salary reductions, and restricted discretionary spending across all operating segments. Net loss stood at CAD 20.889 million, as compared to CAD 1.678 million in the previous corresponding period (pcp). The Group reported cash flows from operating activities at CAD 22.098 million during the second quarter of FY20 compared to CAD 53.926 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Key Risks: The group’s performance is related to the demand and price of crude oil. Any volatility in crude oil prices or setback to demand would hamper the group’s performance.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of SES appreciated 37% in the last six months following a recovery in the oil prices. The second quarter was challenging for the company; however, the group was able to partially mitigate the reduced market optimization opportunities by capitalizing on its significant crude oil storage positions at the Kerrobert and Cushing facilities. The company took prudent measures and reduced personnel costs by 25% and discretionary fixed costs by 75% during the quarter. The group recorded stable revenue provided by contracted volumes associated with its oil feeder pipelines and pipeline-connected produced water disposal facilities. Further, the group implemented several cost restructuring strategies, and the group anticipates a CAD 40 million reductions in the cost of sales and general and administrative expenses on an annualized basis. As a result of the cost-cutting strategies, the Adjusted EBITDA margin improved 5 percentage points to 31% during the quarter despite the decrease to revenue. With the re-opening of the economies, we expect a revival in the crude oil prices, which would further support the company’s top-line. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (energy) median on the next twelve months (NTM) basis. Though we expect a recovery in demand for oil, however, it would take some time to reach it to pre-pandemic level. Further, the second wave of COVID-19 would be catastrophic for oil companies. Hence, considering the aforementioned facts, current price levels, we recommend a ‘Speculative Buy’ rating on SES stock at the closing market price of CAD 1.36 on October 1, 2020.

SES Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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