Enerflex Ltd.

Enerflex Ltd. (TSX: EFX) 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. The Company’s broad in-house resources offer the capability to engineer, design, manufacture, construct, commission, and service hydrocarbon handling systems.

The Company declared a quarterly dividend of CAD 0.02 per common share, payable on October 1, 2020.

Q2FY20 Financial Highlights: EFX announced its quarterly results, wherein the Company posted revenue of CAD 287.4 million, reflecting a steep decline from CAD 541.9 million recorded in the previous corresponding period (pcp). The decline was primarily attributable to decreased Engineered Systems revenue due to lower opening backlog on reduced bookings during the recent past, while service revenue was lower due to travel restrictions related to COVID-19. The Company reported an 11.9% decline in its recurring revenue, as compared to a 23.3% growth in the same during the previous corresponding period. Gross margin and EBIT stood significantly lower at CAD 65.8 million and CAD 15.4 million, respectively as compared to CAD 110.3 million and CAD 64 million, respectively. The quarter was marked by higher SG&A costs within the USA segment coupled with higher bad debt provisions, which impacted the overall margin of the Company. The Company’s adjusted EBITDA was considerably lower at CAD 33.5 million against CAD 83.5 million in pcp. Net earnings fell to CAD 7.4 million from CAD 40.6 million in the previous corresponding quarter.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks:  Engineered Systems segment is likely to witness major setbacks across the U.S. and other regions which would put pressure on the overall revenue and the cashflow of the Company.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock tumbled ~52% so far this year amid a demand destruction scenario for oil on account of COVID-19 pandemic. The Company’s performance was highly impacted by lower income from high margin Engineered Systems revenue. Further, a lower performance due to reduced activity levels and lower parts and equipment sales and decrease in the rental’s revenue due to lower utilization of the rental fleet in Latin America remained a drag for the Company. The Company’s backlog reported a steep decline and stood at CAD 291 million as compared to CAD 974 million in the previous corresponding quarter, which is a major setback. Lower backlog indicates lower revenue visibility. The group mentioned that Engineered Systems revenues in the Canada and USA regions are likely to experience pressure through 2020 and 2021, though order flow is seeing some success from non-traditional applications. Business lines oriented toward the customers’ opex in North America, namely Service and Rentals, would also experience pressure throughout the year. We have valued the stock using P/CF based relative valuation method and have arrived at a single digit upside (in percentage terms). For the said purposes, we have considered Tervita Corp, Mullen Group Ltd and CES Energy Solutions Corp etc., as a peer group. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 5.92 on August 26, 2020.

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

Pason Systems Inc.

Pason Systems Inc. (TSX: PSI) is a leading global provider of specialized data management systems used for drilling rigs. The Group offers remote communications, web-based information management, data acquisition, wellsite reporting, and analytics, enable collaboration between the rig and the office. The Company operates through four segments, namely Drilling Data, Mud Management & Safety, Communications, Drilling Intelligence and Analytics & Other.

The Management declared a quarterly dividend of CAD 0.05 per share, payable on September 30, 2020.

Q2FY20 Financial Highlights: Pason Systems declared its quarterly results, wherein the company posted total revenue of CAD 26.848 million, reflecting a fall of 63% on y-o-y basis. The fall was primarily driven by drastic fall from each of the segments due to an unprecedented drop in drilling rig activity coupled with a drop in Revenue per EDR day, due in most part to a change in the mix of customers, and selected price concessions. Adjusted EBITDA loss stood at CAD 0.848 million as compared to a profit of CAD 30.741 million, primarily attributable to a CAD 31.8 million reductions in the gross profit. The Company posted a net loss of CAD 4.799 million, as compared to a profit of CAD 9.245 million in Q2FY19, due to inclusion of several unusual losses including government wage assistance, reorganization costs, and a derecognition of an onerous lease etc. Free cash flow stood at CAD 29.888 million as compared to CAD 32.547 million in pcp, aided by lower cash from operating activities coupled with an 81% reduction in capital expenditures.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The Company provides integrated oil services to the oil-producing companies and a fall in the drilling activities would result in a drop in the demand for the services required by the oil explorer, which is a key challenge for the company.

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 PSI fell ~51% and ~62% in the last six months and one year respectively. In response to market conditions and the uncertainty regarding the trajectory of our industry, Pason reduced capital expenditures by 81% in the second quarter compared to the previous year and expects to spend up to CAD 10 million in 2020. Pason's balance sheet remains in pristine condition. As a result of the significant reduction in capital expenditures, and the release of working capital as the business shrank during the period, cash and short-term investments increased from the first quarter and stood at CAD 176 million. Further, there is no interest-bearing debt in the balance sheet. Oil drilling came to a screeching halt and the number of land rigs active across North America. The Company provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports across the client's wellsite and offices. The Company provides services for the oil producers, and a lower demand for crude oil combined with falling prices has posed challenges for the oil producers for further capital investments. The group expects that oilfield activity will remain very low in the second half of 2020 before a slow recovery starts in 2021. We have valued the stock using Price to Cash flow based relative valuation method and have arrived at a target downside of high single digit (in percentage terms). For the said purposes, we have peers like Mullen Group Ltd, Trican Well Service Ltd and CES Energy Solutions Corp etc. Hence, we recommend a 'Watch' stance on the stock at the closing market price of CAD 5.94 on August 26, 2020.

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

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