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Strong Buy
CEU - Canadian Energy Services Upgraded to a Focus PickScotiabank
Upgrading to Focus Stock: Spring-loaded for Success - 1 Year target C$6.50 OUR TAKE: With activity rebounding off multi-decade lows and the strategic execution undertaken during this downturn, we believe CEU is positioned for significant earnings torque over the near-term with meaningful growth in the years ahead. While commodities may continue to be choppy (making our call potentially premature), our bias is that current prices will, eventually, move higher driving more business for CEU. Management has built the internal infrastructure that now puts them in a position to execute on their vision to become one of the top chemical companies to supply North America's energy industry. With the Catalyst acquisition, we note nearly 70% of revenue comes from the U.S.; see page 3 for most recent acquisition metrics (now estimated at US$70M) and highlights from our meeting with Mr. Disney. KEY POINTS Drilling segment should see meaningful operational torque. In Canada, CEU expects to maintain their market share (33%) but they are doing deeper jobs. CEU is now working for the top five SAGD producers, which could open doors to treat production. They are active on 44 jobs; we model 39/44 jobs for Q3/Q4. At today's level, CEU is profitable for 3 of 4 quarters. In the U.S., AES has 10% share and is active on 51 rigs (we model 48/53 for Q3/Q4). We believe Catalyst should open more doors not only in the the Delaware-Permian, but other basins as well. Also, major rival Baker Hughes appears to be exiting the mud business (with the exception on NE U.S. and Gulf Coast). Separately, in July, AES started to invoice frac chemistry. Production chemicals growth continues. At PureChem, CEU continues to win new business in heavy oil, oil sands, and added a new frac customer in July. Because of increased volumes, CEU is expanding it's blending plant at Carlyle. At JACAM, July throughput has recovered as some of the shut-in wells have come back, wet weather is less of a factor, and JACAM continues to win new business. Also, the nitrite plant is expected to be commissioned in Q3, which should help expand the product offering and create margin on existing business. Sialco also continues to bring a variety of solutions for all the business units and management sees major wins ahead. In particular, there is opportunity to sell SuperCorr in industrial markets. |
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