Q3 EPS turned positive, beating our estimate by 60%, amid higher revenue and gross margins.

Revenue growth came from multiple new contracts from tier-one clients. According to the Alberta Energy Regulator, Canadian oil and gas CAPEX spending will increase 18% this year, and 2% in 2024. We believe higher CAPEX spending should directly benefit service providers such as E.

We are anticipating strong revenue growth in Q4 as well. Note that Q1 and Q4 are historically stronger quarters due to seasonality.

Oil prices are down 6% since our previous report in August 2023. We believe that oil prices could see material gains, amid a vulnerable supply chain, and a high probability of escalating geopolitical tensions in the Middle East.

In Q3, Patterson-UTI Energy (NASDAQ: PTEN) acquired NexTier Oilfield Solutions for US$1.9B, and Ulterra Drilling Technologies for US$0.8B, reflecting the ongoing consolidation trend in the oilfield services sector. Given our favorable outlook on the sector, we anticipate further M&A activity in the near-term. Note that E’s forward EV/EBITDA is 30% lower than the sector average. Upcoming catalysts include strong.

Enterprise vs Larger Players 

 

Enterprise vs Larger Players                                                                                            Source: FRC / S&P Capital IQ

Enterprise has higher gross margins, and lower debt to capital 

However, Enterprise’ EV/R and EV/EBITDA are 18% lower on average 



Financials 


Statement of Operations


Margins

Q3 revenue was up 61% YoY, beating our estimate by 12%

Margins improved across the board; gross margins were 3 ppt higher than expected

EPS turned positive, and was 60% higher than expected 

 


Summary of cash flows

 

CAPEX increased 222% YoY to $10M, to purchase new equipment to fulfill heightened demand from clients

 



Liquidity and capital structure

 

As a result, FCF declined in 2023 (9M), and debt to capital increased 8 ppt QoQ, indicating higher risk in the event of a pullback in sector activity




Options

                                                                               Source: FRC/Company

Can raise up to $2.30M from in-the-money options, which should lower debt/capital



Oil & Gas Price Outlook



Oil & Gas Price Outlook                                                                                              Source: FRC/Sproule/GLJ

Consensus price forecasts (near-term and long-term) are well above historic averages, implying a positive outlook for the oilfield services sector



FRC Projections and Valuation 


FRC Projections and Valuation

 

As Q3 revenue, and margins were significantly stronger than expected, we are raising our 2023 and 2024 revenue, and EPS forecasts 

 


DCF model                                                                                                          Source: FRC 

As a result, our DCF valuation increased from $1.86 to $1.98/share



Comparable Companies                                                                                              Source: FRC / S&P Capital IQ 

Sector multiples are up 25% on average since our previous report in August 2023

E is trading at a 18% discount (previously 10%) 



Valuation Method                                                                                                        Source: FRC 

Our weighted average valuation increased from $1.07 to $1.26/share

 

We are maintaining our BUY rating, and adjusting our fair value estimate from $1.07 to $1.26/share. Given our favorable outlook on the sector, we anticipate further M&A activity in the near-term. Upcoming catalysts include strong Q4 results, and increased CAPEX budgets at oil and gas companies. 


Risks

We believe the company is exposed to the following key risks (not exhaustive):

1. The oil/gas field services market is highly dependent on oil and gas prices

2. Operates in a competitive space

3. As the company uses leverage, a downturn in business activities can negatively impact its balance sheet