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Disclosure: Enterprise Group, Inc. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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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.
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
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
CAPEX increased 222% YoY to $10M, to purchase new equipment to fulfill heightened demand from clients
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
Source: FRC/Company
Can raise up to $2.30M from in-the-money options, which should lower debt/capital
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 
As Q3 revenue, and margins were significantly stronger than expected, we are raising our 2023 and 2024 revenue, and EPS forecasts
Source: FRC
As a result, our DCF valuation increased from $1.86 to $1.98/share
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%)
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
