Secure Energy Services Inc

Secure Energy Services Inc (TSX: SES) provides treatments and disposal services to the oil and gas industry which constitutes midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products.

Key highlights

• Event update: the company would release its 2020 fourth quarter and year-end financial and operating results after market close on Thursday, February 25, 2021.

• Executing cost reduction plans:The management undertook some prudent steps to implement cost reductions to align the corporation’s cost structure with expected industry activity. By doing this, the management expects annualized savings by more than CAD40 million in Adjusted EBITDA. 

• Increase in cash flows from operating activities: In Q3 2020, the company generated cash flows from operating activities of CAD 38.5 million, increased by 7% against the cash flows from operating activities in the previous corresponding period. The rise in cash flows was primarily due to changes in non‐cash working capital corresponding to reduced industry activity levels, reduced asset retirement costs.

Source: Company

• Improving macro scenarios: Based on current macroeconomic conditions and commodity prices, the company expects a modest increase in drilling and completion activity in the coming quarter and FY 2021 from current levels, as producers seek to add production to offset natural declines to maintain flat production levels to hold cash flow levels. These improvements would be a key positive for the group. 

Financial overview of Q3 2020

Source: Company

• The Company declared its quarterly numbers and reported a decline in the revenues, which stood at CAD 452 million, as compared to CAD 727 million in the previous corresponding period. Both segments reported degrowth.

• Midstream Infrastructure segment revenue (excluding oil purchase and resale) decreased by 40% to CAD 44.8 million, due to lower processing and disposal volumes at the Company’s midstream infrastructure facilities as there were low drilling and completion activity across the WCSB and North Dakota since March 2020.

• Oil purchase and resale revenue decreased by 40% to CAD 348.7 million due to a decrease in Canadian light oil benchmark pricing by 29% during the reported quarter.

• Adjusted EBITDA stood at CAD37 million in Q3 2020 decreased by 14%, as compared to previous corresponding period, the reason behind this drop was the decreased level of production and contracted volumes during a period of reduced drilling and completion activity levels. 

• In Q3 2020, the Company reported a net loss attributable to shareholders of CAD 4.6 million, as against a loss of CAD 0.63 million in Q3 2019. The increase in net loss is primarily due to lower Adjusted EBITDA. 

Risks associated with investment

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

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

For 2021, the Company would continue to focus on maintaining financial resiliency by maximizing cash flows and paying down debt with discretionary free cash flow. By doing so, the Corporation would remain well-positioned to respond to the market's needs when activity levels increase. The Company also undertook some prudent steps to execute cost reductions to align the Corporation’s cost structure with expected industry activity and expects an annualized savings by more than CAD40 million in Adjusted EBITDA. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 3.01 as on February 8, 2021. We have considered Mullen Group Ltd, CES Energy Solutions Corp, Enerflex Ltd, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil services company that offers services in 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:

• Bullish Technical outlook: The stock of ESI closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. Moreover, the stock soared ~160% and ~135%, respectively in the last three months and nine months, respectively driven improved crude oil prices.

Source: Refinitiv (Thomson Reuters)

• Impressive Guidance: For FY21, the group expects a capital expenditure of ~CAD 50 million, which would allocate for certifications and preventative maintenance for its global high-spec drilling rig fleet and other service lines. Moreover, the group would also concentrate on reducing its debt components and preserving the liquidity, which augurs well for better financial flexibility. The group targets to enhance its profitability and expects EBITDA to Interest Expense at 1.75: 1.00 during Q4FY20 and expects to improve to 2.50:1.00 by Q3FY21, seems encouraging. For the next financial year, the group is targeting to reduce its Senior Debt to EBITDA to 3:1, which is a key positive. 

• Favorable costs structure: The company has a favorable cost-structure, which includes a larger part of variable costs and a lower fixed cost. Thus, during economic cycles, despite a correction in demand, the variable costs tend to decline simultaneously, which supports the overall profitability. Notably, the company has only ~20% of fixed costs, as the Field labour expense categorized under the variable cost.

Source: Company Presentation

• Reducing Net Debt and Interest Expense: The company has reduced its net debt levels and interest expenses in the recent past, which augurs well for higher financial flexibility and would support the company’s bottom-line as well.

Source: Company Presentations

Q3FY20 Financial Highlights:

• ESI announced its quarterly results, wherein the company posted revenue of CAD 156.933 million, significantly lower than CAD 393.412 million in Q3FY19. The decline was primarily attributed to a 67% y-o-y decline in income from US segment at CAD 83.3 million, while income from international segment stood at CAD 51.8 million, reflecting a slide of 31% on y-o-y basis.
• Adjusted EBITDA stood at CAD 39.476 million, significantly lower than CAD 97.943 million in the previous corresponding period.
• Net loss from continuing operations stood at CAD 36.129 million, as compared to CAD 37.635 million in pcp.
• The group reported a cash balance of CAD 56.973 million, while total assets were recorded at CAD 3,242.76 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing pressure from the industry, such as OPEC’s regulation for the production and the supply of crude oil coupled with existing high crude oil inventories, overall demand might be low, which would subsequently impact the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation: In order to battle with lower commodity prices, the company is focusing on maintaining production levels and cash preservation and would tune its drilling programs as well, which would support the company’s liquidity and operations. We believe, due to the flexible cost-structure, the company has the upper hand over its peers. Also, lower cost structure would help the company to stay afloat during recessions. 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, Calfrac Well Services Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.24 on February 08, 2021.

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

Disclaimer

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