Ensign Energy Services Inc 

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based company which offers oilfield services that include drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals and transportation. The company provide these services in Canada, the United States and internationally.

Key Highlights

• Management insight on 2021 Capital Expenditures: The Company has budgeted capital expenditures for 2021 of approximately CAD 50.0 million focusing on certifications and preventative maintenance for its global high-spec drilling rig fleet and other service lines. In addition to the disciplined capital plan, the company would continue to focus on debt reduction throughout 2021 and onward, preserving liquidity and protecting its balance sheet.

• Extended credit facility: The Company prioritised on its balance sheet and liquidity preservation amidst a turbulent operating environment. On December 31, 2020, they amended and extended the existing CAD 900.0 million revolving credit facility agreement with its syndicate of lenders. The amendments and one-year extension provide access to the revolver capacity and near-term flexibility in a volatile oil price environment.

• Curtailing debts: The Company managed to decrease its total debt by CAD 159.4 million to CAD 1,474.3 million in Q3 2020, as compared to CAD1,633.7 million in Q3 2019, partially offset by CAD 10.0 million due to foreign currency exchange fluctuations. 

Financial Overview of Q3 2020

Source: Company

• The Company posted revenue of CAD 156.9 million, in Q3 2020, down by 60%, compared to CAD 393.4 million in the previous corresponding period, primarily due to adverse impact of the COVID-19 pandemic on the oil and natural gas industry.

• Adjusted EBITDA posted by the Company in Q3 2020 was CAD 39.5 million, decreased by 60%, compared to CAD 97.9 million in Q3 2019 due to above-stated reason. 

• The Company posted a Net loss from continued operations in Q3 2020, of CAD 36.2 million, compared to CAD 37.6 million in Q3 2019, primarily due to low revenue, higher depreciation and restructuring expenses, offset by a gain on repurchase of Senior unsecured notes. 

Risk associated with investment.

The company is exposed to a variety of risks including such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The energy industry witnessed large swing due to COVID-19 led difficulties. However, the recent recovery in the energy prices led by gradual recovery in the energy demand has extended some support to the energy sector stocks over the last couple of months. Also, possible production cut announcement by OPEC+ member could further boost energy prices in the international markets, which could lead to a positive impact on the energy companies.  Also, a stable demand scenario is likely to result in an increase in demand for drilling, servicing, and other related equipment. Therefore, based on the rationales discussed above and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 1.17 on January 11, 2021. We have considered Step Energy Services Ltd, Trican Well Service Ltd, and CES Energy Solutions Corp, etc. as the peer group.

1-year Price Chart (as on January 11, 2021). Source: Refinitiv (Thomson Reuters)

Computer Modelling Group Ltd.

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization. 

Key Highlights:

• Revenue Improved on a Sequential Quarter basis: The company’s revenue for the second quarter of FY20 stood at CAD 17.85 million, improved ~7.1% on a Q-o-Q basis.
• Improved EBITDA margin: In the three-month ended to September 30, the company reported EBITDA margin improved to 61% from 52% reported in the same quarter of the previous financial year, because, while both revenue and operating expenses decreased, operating expenses decreased by a higher percentage, as a result of the CEWS benefit and salary reductions. Moreover, second quarter EBITDA reported by the company soared up by ~61% on a sequential quarter basis led by improved revenue, and lower operating expenses.
• Free Cash Flow Per Share Jumped by 50% on Q-o-Q basis: In the second quarter of FY21, CMG’s reported free cash flow per share stood at CAD 0.09, leapt up by ~ 50% against CAD 0.06 reported in the previous quarter.

Q2FY21 Financial Highlights:

• CMG announced its quarterly results, wherein the company posted revenue of CAD 17.852 million, as compared to CAD 19.873 million in the previous corresponding period (pcp). The decline was primarily attributed to a lower annuity/maintenance license revenue, which declined by 14%, primarily due to the ongoing disruption within the oil and gas industry caused by the COVID-19 pandemic.
• Operating profit stood at CAD 9.861 million, higher than CAD 9.343 million in pcp. The improvement was driven by lower sales, marketing and professional services expenses (CAD 3.59 million, versus CAD 4.354 million in pcp) and a decline in research and development (CAD 3.107 million versus CAD 4.539 million in pcp).
• Net and total comprehensive income stood at CAD 6.760 million, slightly lower than Q2FY20, primarily due to a higher finance cost (CAD 598 million versus CAD 534 million in pcp) combined with a lower finance income (CAD 97 million versus CAD 541 million in pcp).

Financial Highlights: Source: Company Filings.

Risks: The Company’s operations may be affected by the ongoing outbreak of COVID-19. A further outbreak of COVID-19 pandemic could adversely impact CMG’s operations, including sales activities and financial performance.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The group’s performance is improving led by a gradual recovery in the oil & gas industry and prudent cost-saving measure conducted by the company, with Free Cash Flow Per Share Jumped by 50% on Q-o-Q basis and EBITDA improved drastically by 61% in the same period. We also believe that vaccine rollout would further boost energy demand and energy prices which will lead to increased spending in the oil and gas industry. The company is expected to report higher software license revenue backed up by improved traction from the oil-producing companies in the upcoming quarters. Further, CMG shares are featuring an impressive dividend yield of ~4.124% on an annualized basis, which higher than TSX Composite yield of ~3.30%. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Pason Systems Inc, mdf Commerce Inc and Kinaxis Inc. Considering the aforesaid facts; we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.78 on January 11, 2021.

1-Year Price Chart (as on January 11, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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