On today’s Breakouts report, there are 20 stocks on the positive breakouts list (stocks with positive price momentum), and 33 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list – PHX Energy Services Corp. (PHX-T). The stock has a unanimous “buy” recommendation from four analysts with an average target price of $11.56, implying a potential price return of 40 per cent.
Management is committed to returning capital to its shareholders. This week, the company announced a 33-per-cent dividend increase along with better-than-expected quarterly earnings results. The quarterly dividend was raised to 20 cents per share from 15 cents per share, equating to a current annualized yield of 9.7 per cent.
However, while the yield is very attractive, the share price can be very volatile. This is illustrated by looking at a long-term chart, for instance, looking at the share price action since 2005. Even a short-term chart illustrates the price volatility. In Jan., the share price traded above $8, only to fall to below $6 by the end of May. There are periods when the high yield is offset by steep share price dips. As a result, this stock should be considered by investors with a higher risk tolerance within a diversified portfolio.
A brief outline on PHX Energy is provided below on the company that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Calgary-based PHX Energy supplies horizontal and directional drilling services to oil and gas companies.
In 2022, 79 per cent of total revenue stemmed from the U.S., 20 per cent from Canada and 1 per cent internationally (operations in Albania).
Investment thesis
- Drilling technology that enables companies to drill faster, resulting in greater well productivity.
- High dividend yield of 9.7 per cent. The company’s return of capital strategy program targets 70 per cent of excess cash flow to be returned to shareholders.
- Attractive valuation.
- Beneficiary of the rising U.S. dollar with the majority of the company’s revenue stemming from its U.S. operations.
- Management has “skin in the game.” At the company’s annual general meeting held in May, management noted that executive ownership stood at 14 per cent.
- Key potential risks to consider: 1) volatility in commodity prices; 2) lower drilling activity. The weekly Baker Hughes rig count reported on Nov. 3 showed the U.S. rig count declined to 618 rigs, down from 770 rigs last year and down from 625 rigs last week.
Quarterly earnings and outlook
After the market closed on Nov. 7, the company reported better-than-expected third-quarter financial results. Revenue came in at a record $169.4-million, up 19 per cent year-over-year and surpassing the Street’s estimate of $159-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations came in at $43.5-million, topping the consensus estimate of $33-million and up 59 per cent year-over-year.
In the earnings release, president Michael Buker provided a cautious outlook, “Global concerns around the possibility of a recession in North America, issues surrounding the economy in China plus regional conflicts in Europe and the Middle East provide a backdrop of uncertainty for the near to mid-term. Despite this, we are optimistic that our operating and financial performance will remain strong through the deployment of our premium fleet of technology, particularly RSS (rotary steerable systems). We will remain diligent with protecting our balance sheet and deliver on our commitment to continue to reward our shareholders.”
Management does not host quarterly earnings calls.
Dividend policy
On Nov. 7, management announced a 33-per-cent increase to its dividend, raising its quarterly dividend to 20 cents per share, up from 15 cents per share, equating to a current annualized yield of 9.7 per cent.
This is the fifth dividend increase since the dividend program was reinstated in Dec. 2020 (the dividend was discontinued in 2016).
Analysts’ recommendations
This small-cap stock with a market capitalization of $400-million has a unanimous buy-equivalent recommendation from four analysts.
The firms providing research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, Peters & Co., and Stifel Canada.
Revised recommendations
After the company released its third-quarter financial results, all four analysts raised their expectations .
- ATB’s Tim Monachello increased his target price to $12 from $11.
- BMO’s John Gibson lifted his target price by $2 to $11.50.
- Peters’ James Gourlay tweaked his target price to $10.25 (the low on the Street) from $9.50.
- Stifel’s Cole Pereira raised his target price to $12.50 (the high on the Street) from $10.
Financial forecasts
According to Bloomberg, the Street is forecasting revenue of $655-million in 2023, up from $536-million reported in 2022, and $701-million in 2024. EBITDA is anticipated to come in at $155-million in 2023 and $153-million the following year.
Earnings expectations have been rising. Three months ago, the consensus revenue estimates were $642-million for 2023 and $673-million for 2024. The Street was anticipating EBITDA of $135-million in 2023 and $138-million in 2024.
Valuation
Analysts commonly value the stock on an enterprise value-to-EBITDA basis. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 2.9 times the 2024 consensus estimate, below its five-year historical average multiple of 3.6 times.
The average one-year target price is $11.56, implying the share price has 40 per cent upside potential. Individual target prices are: $10.25 (from Peters’ James Gourlay), $11.50, $12, and $12.50 (from Stifel’s Cole Pereira).
Insider transaction activity
Quarter-to-date, there has not been any trading activity in the public markets reported by insiders.
The most recent trade occurred on Sept. 7, when founder, chairman and chief executive officer John Hooks sold 26,800 shares at an average price per share of roughly $8.02, trimming this particular account’s position to 5,286,504 shares. Proceeds from the sale totaled over $214,000, not including trading fees.
Chart watch
Year-to-date, the share price is up 6 per cent, turning positive after the company reported better-than-expected third-quarter earnings results. Over the past two trading sessions, the share price has rallied over 16 per cent on high volume with over 735,000 shares traded on Nov. 8 and over 425,000 shares traded on Nov. 9. After such a strong move, the share price may trade sideways in order to digest these gains.
In terms of key technical resistance and support levels, the next major ceiling of resistance is around $9. After that, there is overhead resistance around $10. Looking at the downside, the share price has initial technical support around $7, near its 200-day moving average at $7.12. Failing that, there is support around $6.
The stock can be thinly traded, which can increase price volatility. The three-month historical daily average trading volume is approximately 113,000 shares.
ESG Risk Rating
Looking at three risk providers Sustainalytics, MSCI and Bloomberg, PHX Energy currently does not have an environmental, social and governance (ESG) risk rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.
Jennifer Dowty