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Inside the Market’s roundup of some of today’s key analyst actions

Raymond James analyst Andrew Bradford thinks Canadian oilfield service companies will see their EBITDA drop “materially” in the near term, leading to “profound” changes in the sector.

“There are no scenarios by which producer capital and OFS demand don’t drop materially over the coming months,” he said in a research report released Tuesday. “It’s as unavoidable as taxes. We see nothing stopping the U.S. rig count from dropping toward 400 by summer and perhaps dipping into the high-300s. In Canada, we won’t be surprised to see rig count drop below 2016 levels by mid-to late spring.”

He pointed to three significant impacts from Monday’s plummet in oil prices:

  • The potential for U.S. drilling EBITDA to decline 60-65 per cent year-over-year in 2020, adding: “And even with its relatively strong start in 1Q, Canadian drilling EBITDA could drop 25-35 per cent in 2020 - though 2H20 annualized EBITDA would be down closer to 50 per cent.”
  • An even more pronounced decline in earnings for pressure pumpers, “though pricing simply cannot fall too far from today’s levels given the already thin margins.”
  • “As we move further from the drill bit and into more production-oriented services, the declines will be less severe, and we wouldn’t expect EBITDA to revisit 2016 levels, primarily because drilling-oriented revenues in these mixed-companies are far lower than in 2014-2016, while production of every product is considerably higher.”

Noting the market “wasted no time” on Monday in punishing share prices with a median 1-day decline in his coverage group of 26 per cent, Mr. Bradford made a series a rating changes. They are:

Ensign Energy Services Inc. (ESI-T) to “market perform” from “strong buy” with a $4.40 target. The average on the Street is $3.46.

Essential Energy Services Ltd. (ESN-T) to “market perform” from “outperform” with a 40-cent target. Average: 44 cents.

Precision Drilling Corp. (PD-T) to “outperform” from “strong buy” with a $3.25 target. Average: $2.98.

STEP Energy Services Ltd. (STEP-T) to “market perform” from “outperform” with a $1.80 target. Average: $2.02.

Strad Inc. (SDY-T) to “market perform” from “strong buy” with a $1.80 target. Average: $2.65.

Mr. Bradford also noted the market overreacted for a pair of stocks:

CES Energy Solutions Corp. (CEU-T, “outperform," $3 target), which was down 35 per cent on Monday.

“We expect the market looks back to 2016 when CEU’s EBITDA bottomed at $45-million and thinks this is where we’re heading again,” he said. “CEU’s U.S. revenue is 26 per cent higher than in 2014, but its U.S. drilling fluids group is servicing 23 per cent fewer rigs. The implication is that production chemicals is generating considerably more of CEU’s EBITDA than it was during the prior downturn. We expect EBITDA could drop into the $110-million range, which would imply an EBITDA multiple in the low-7 times range and a FCF yield in the high-teens to low-20s . Debt ratios remain below 3 times as CEU should expect at least $100-million in working capital harvest. CEU should not be under any pressure to cut its $16-million annual dividend obligation (5-per-cent yield).”

Secure Energy Services Inc. (SES-T, “strong buy,” $7 target), which slid 41 per cent.

“2016 EBITDA dropped to $93-million,” he said. “Since then, Secure has added a contracted feeder pipeline that contributes at least $20-million to annual EBITDA, it has second feeder pipeline in the construction queue, and its disposal volumes are approximately 2 times higher than in 2014 before the prior downturn. We think SES EBITDA could drop into the $125-130-million range, which would imply an EBITDA multiple in the high 6 times range, and a FCF yield in the midto-high 20s. Debt could rise to over 4 times by year-end 2020, but EBITDA would need to decline to $100-million before covenants on its 1st or 2nd lien debt require addressing. It might be prudent for SES to cut or suspend its $43-million per year dividend obligation (15-per-cent yield).”


Amid decreasing demand and increasing supply stemming from the ongoing OPEC price war, Industrial Alliance Securities analyst Elias Foscolos slashed his North American rig count projections for 2020 and 2021, leading to a re-rating of the Canadian Energy Services and Diversified Energy sectors.

“We are now projecting significant activity declines in North American oil & gas, particularly in the U.S.,” said Mr. Foscolos in a research note released Tuesday.

The analyst dropped his Canadian rig forecasts for 2020 and 2021 by 15 per cent and 17 per cent, respectively.

“Drilling in Q1/20 has been strong, but as rig counts decline heading into spring, we expect the remainder of the year to reflect worsening macro conditions and downward revisions to capital budgets,” he said. “We believe that rigs will hit a bottom at 50 in Q2/20, similar to 2016, after which we project modestly higher activity in 2021 weighted to H2/20 due to incremental pipeline capacity from L3R that is expected to come online partway through the year, relieving some pressure on Canadian crude discounts.”

For the United States, Mr. Foscolos's projections plummeted by 32 per cent and 36 per cent, respectively.

“U.S. drilling has already steeply declined from high 2018 levels, as investors demand greater returns from the sector and independents have exited the industry amongst creditor pressures," the analyst said. “Commentary has been suggesting that U.S. shale is played out, and we can expect production to grow at a much slower normalized rate going forward – and that was before Saudi Arabia put the pressure on. With a wider supply/demand balance and lower prices, we believe we will see continued activity declines in the U.S. as E&Ps struggle to generate returns and capital becomes harder to come by. We now project U.S. land rigs finding a support level in the mid-400s before stabilization.”

Those changes prompted Mr. Foscolos to make steep cuts to his financial projections for companies in his coverage universe. That led to a series of ratings changes.

For energy services firms in his coverage universe, Mr. Foscolos made the following changes:

CES Energy Solutions Corp. (CEU-T) to “speculative buy” from “strong buy” with a $1.75 target from $3.25. The average on the Street is $3.50.

“While CEU remains partially insulated from declines in drilling due to its Production Chemicals exposure, the impact on the Company’s Drilling Services division should be substantial,” he said. “As the rate of production growth from U.S. shale is already close to zero, we could likely see near-term production declining based on our revised forecasts, which could have an impact on the Company’s Production Chemicals division as well, though not as pronounced as drilling.”

High Arctic Energy Services Inc. (HWO-T) to “hold” from “speculative buy” with a $1.50 target from $2.80. Average: $2.90.

McCoy Global Inc. (MCB-T) to “hold” from “speculative buy” with an 80-cent target from $1.25. Average: $1.07.

Pason Systems Inc. (PSI-T) to “sell” from “hold” with an $8.50 target from $14.50. Average: $17.08.

Pulse Seismic Inc. (PSD-T) to “hold” from “buy” with a $1.60 target from $2.90. Average: $2.90.

“We believe it is likely that Canadian E&P capital budgets will see downward revisions, and that M&A activity is likely to remain very low,” he said. “We now expect 2020 results to be lower than 2019 before rebounding back to 2019 levels in 2021. With our revised outlook, although PSD is capable of generating cash flow at very low levels of activity, we believe the Company could struggle to make material repayments on its debt, thereby extending the timeframe of repayment before we see any resumption of share repurchases.”

Source Energy Services Ltd. (SHLE-T) to “sell” from “hold" with a 50-cent target (unchanged). Average: 32 cents.

STEP Energy Services Ltd. (STEP-T) to “sell” from “hold” with a 50-cent target from $2. Average: $2.02.

Mr. Foscolos kept a “buy” rating for Computer Modelling Group Ltd. (CMG-T) with a $7.75 target, down from $9. The average is $8.64.

For diversified energy companies, his changes were:

Enerflex Ltd. (EFX-T) to “speculative buy” from “buy” with a $7.50 target from $13.50. Average: $14.

Mullen Group Ltd. (MTL-T) to “buy” from “strong buy” with a $10 target from $14. Average: $11.56.

ShawCor Ltd. (SCL-T) to “speculative buy” from “buy” with a $7.50 target from $14. Average: $12.91.

He kept his ratings but lowered his targets for:

Badger Daylighting Ltd. (BAD-T, “hold”) to $30 from $41. Average: $43.14.

“While BAD remains relatively insulated from macro events surrounding drilling activity, the Company does have exposure to U.S. economic activity,” said Mr. Foscolos. “However, we cannot ignore the fact that Badger’s cost structure remains elevated due to the implementation of an ERP system and that the current run rate of costs has pinched margins. Badger’s low debt will make a dividend reduction unlikely and positions it well to weather the upcoming economic uncertainty.”

Strad Energy Services Inc. (SDY-T, “hold”) to $1.95 from $2.39. Average: $2.65.


In a separate note, Mr. Foscolos lowered his target price for shares of Source Energy Services Ltd. (SHLE-T) to 0 cents with a “sell” rating, believing its “liquidity risk has become too great to ignore" following the release of its fourth-quarter and 2019 year-end results last Thursday and expecting the Calgary-based company to be forced to restructure financially.

“SHLE’s Q4/19 results beat expectations, but we are shifting our focus away from the quarterly results and looking at the bigger picture," he said. “With projected decreases in WCSB activity and the lack of positive funds flow, we believe there is a strong likelihood that SHLE’s creditors leave no residual value for equity holders.”

“We project negative funds flow from operations (FFO) in 2020 and 2021, and fixed charge coverage of 1.0 times in 2020. We do not see the Company breaking even on free cash flow (FCF) without winding down working capital. An improvement in production and terminal efficiency, rail fleet lease cost reductions, or increasing demand for terminal and trans loading services for diversified products could improve cash flow, but overall there is no room for error. Furthermore, with SHLE’s debt coming due in December 2021, we do not see a high likelihood that it will be able to refinance debt providing residual value to common equity holders.”

Mr. Foscolos’s previous target for the stock was 50 cents, which exceeded the current average on the Street of 32 cents.


Though Black Diamond Group Ltd. (BDI-T) exceeding his expectations in the fourth quarter, Raymond James analyst Frederic Bastien downgraded the Calgary-based workforce accommodation provider to “outperform” from “strong perform."

“[Monday’s] energy market rout further validates Black Diamond’s decision to expand its Modular Space Solutions (MSS) business in the more receptive U.S. infrastructure markets and find creative ways to put its underutilized Workforce Solutions (WFS) assets to work,” he said. “Unfortunately for BDI shareholders, we believe it will also drive investors to snub illiquid small-cap Canadian stocks in favour of large, defensive and globally diversified companies.”

Mr. Bastien said the company’s WFS segment showed signs of improvement, however, given the struggles of the energy sector, its potential in 2020 is “a bit for more blurry.”

“During the quarter, occupancy improved at the Horn River and Little Prairie lodges in Alberta, as well as the Sukunka Lodge (which serves the Coast GasLink project). Utilization increased across all regions, with strong catering and instillation activity playing their part in the improved quarterly performance," he said. "We fear WFS will have difficulty sustaining this momentum, however, with oil and gas activity poised to take another leg down in the wake of yesterday’s precipitous fall in oil prices. We have trimmed our expectations for the division accordingly.”

After lowering his 2020 financial expectations, Mr. Bastien trimmed his target for Black Diamond shares to $2.50 from $2.70. The average is $2.75.

“Our valuation is predicated on a multiple of 6.0 times our 2020 EBITDA estimate," he said. "Although we believe Black Diamond’s smaller capitalization and higher concentration risk explain its discount to other modular space and workforce solutions providers, which have averaged multiples of 6.7 times and 8.3 times over the past five years, we expect it to narrow as MSS gains further scale and effects more stable and predictable cash flow growth for the entire company.”


Equity analysts at Canaccord Genuity made a series of rating changes to TSX-listed energy sector stocks.

Anthony Petrucci made the following changes;

Crescent Point Energy Corp. (CPG-T) to “speculative buy” from “buy” with a $2.50 target, down from $7.50. Average: $7.51.

Painted Pony Energy Ltd. (PONY-T) to “hold” from “speculative buy” with a 40-cent target, down from $1.25. Average: $1.01.

Kelt Exploration Ltd. (KEL-T) to “speculative buy” from “buy” with a $2.50 target, down from $5.50. Average: $5.96.

NuVista Energy Ltd. (NVA-T) to “hold” from “buy” with a $1.25 target, down from $3.50. Average: $4.22.

Peyto Exploration & Development Corp. (PEY-T) to “hold” from “buy” with a $1.75 target, sliding from $5.50. Average: $3.91.

Surge Energy Inc. (SGY-T) to “hold” from “buy” with a 60-cent target, down from $1.75. Average: $1.57.

Tamarack Valley Energy Ltd. (TVE-T) to “speculative buy” from “buy” with a $1.50 target, down from $3. Average: $3.75.

Seven Generations Energy Ltd. (VII-T) to “hold” from “buy” with a $3.50 target, dropping from $11. Average: $12.06.

Analyst John Bereznicki lowered CES Energy Solutions Corp. (CEU-T) to “hold” from “buy” with a $1.50 target, down from $3.75 and below the average of $3.32.

Analyst Dennis Fong dropped Athabasca Oil Corp. (ATH-T) to “sell” from “speculative buy” with a 20-cent target, down from 85 cents. Average: 70 cents.

Conversely, Mr. Fong raised Husky Energy Inc. (HSE-T) to “hold” from “sell” with a $5 target, down from $10. The average on the Street is $9.16.


RBC Dominion Securities analyst Mitch Steves expects Qualcomm Inc.'s (QCOM-Q) results for the current quarter to come in closer to the low end of its guidance range due to smartphone supply chain disruptions.

“Supply chain disruptions related to handsets are likely impacting both the Marqtr and the upcoming guidance as well,” he said. “With this in mind, we think it is prudent to move our near-term estimates lower and wait for the conference call to get a better understanding of full year CY20E results. On a positive note, our checks suggest that the Chinese supply chain/ manufacturing is picking up at this point of time (but not at full capacity).”

Mr. Steves lowered his revenue projection for the quarter to US$4.985-billion from US$5.221-billion, while his earnings per share projection slid to 86 US cents from 91 US cents. The company’s guidance was revenue of $4.9-$5.7-billion and EPS of 80-95 US cents.

“The Company has historically met or exceeded the highend of EPS (last quarter broke the high end and the quarter before hit the high-end) causing us to believe that OPEX levers can be controlled despite weaker near-term revenue,” Mr. Steves said.

Keeping a “sector perform” rating, he reduced his target to US$81 from US$92. The average is US$99.33.

Separately, Mr. Steves lowered his target for Semtech Corp. (SMTC-Q) to US$43 from US$49 due to the supply chain disruptions. The average on the Street is US$51.92.

“Similar to what we’ve seen over the past two weeks, we think fundamentals will be less material when compared to the overall macro climate,” said Mr. Steves, keeping an “outperform” rating. “On the back of Apple pre-announcing negatively and Dialog Semiconductor reporting a soft Mar-quarter guide, we think estimates for SMTC need to come down as well (Apr-quarter). On a positive note, since the Company is on a Jan-quarter end we think the risk to the quarter is limited and the Apr-quarter is where estimates will likely move down.”


H.C. Wainwright analyst Amit Dayal raised Ballard Power Systems Inc. (BLDP-Q; BLDP-T) to “buy” from “neutral” with a US$16 target. The average is currently US$9.54.

Mr. Dayal said: “We are upgrading Ballard Power Systems ... driven by:(1) management maintaining its timeline for Weichai-Ballard JV facility to be commissioned and operating by mid-2020; (2) expectations that current JV build out losses should shift to profits with ramp in production;(3) factoring cash flows from the JV into our projections that we had previously not accounted for; and (4) greater probability of meaningfully commercializing fuel cells in new end markets (such as trains and marine). Industry reports indicate that over 2.5M commercial light- to heavy-duty trucks and buses are sold in China annually. We believe Fuel Cell Electric Vehicles (FCEVs),which are better suited for heavy-duty applications vs. Battery Electric Vehicles (BEVs), currently comprise less than 0.15 per cent of this market and remain under penetrated. Accordingly, in our opinion the Weichai-Ballard partnership that is essentially unrivaled in China, brings together the resources and technology to aggressively take share of this market in an environment where adoption of clean energy vehicles is being supported at the regulatory and corporate-strategy levels. We believe Weichai’s ability to scale operations and lower costs should also open up new markets and continue to keep FCEVs competitive to other alternatives. Accordingly, in our opinion, Ballard enjoys a technology,manufacturing, and distribution moat making it one of only a handful of publicly investible opportunities to participate in growth from the developing Hydrogen powered economy. We believe investors are now recognizing this, resulting in the recent relative strength in the stock despite severe market volatility.”


In other analyst actions:

In the wake of the release of its updated reserves, reduced outlook and dividend cut, Industrial Alliance Securities analyst Michael Charlton lowered Surge Energy Inc. (SGY-T) to “speculative buy” from “buy” with a 75-cent target, down from $1.50. The average target is $1.57.

“Previously we had mentioned that 'we would be remiss if we didn’t note that the current 9.4% dividend comes with some risk’ and it would seem that we were correct,” he said. “While Surge has worked to reduce its debt since 2018, the bank has also continued to reduce the Company’s credit availability. Following this years’ reserve impairment of $181-million and $270-million in abandonment liabilities, we anticipate that the bank will continue to claw back the Company’s credit line at the upcoming semi-annual redetermination and likely what prompted the drastic dividend reduction/elimination to 1 cent per share. With lower commodity prices, a minimal dividend and a cash flow only budget in the forecast to try and maintain production, we can’t help but think that Surge will remain on the ropes and focused on debt repayments for the foreseeable future.”

TD Securities analyst Greg Barnes cut Franco-Nevada Corp. (FNV-N, FNV-T) to “hold” from “buy” with a target of US$120, down from US$125. The average on the Street is US$111.95.

RBC Dominion Securities analyst Keith Mackey cut Ensign Energy Services Inc. (ESI-T) to “sector perform” from “outperform” with a $1.50 target, down from $4.25. The average is $3.58.

National Bank Financial analyst Greg Colman lowered Pason Systems Inc. (PSI-T) to “sector perform” from “outperform” with a $15 target, down from $17. The average is $16.42.

Mr. Colman also dropped Trican Well Service Ltd. (TCW-T) to “sector perform” from “outperform: with a $1.25 target, sliding from $1.60. The average is $1.29.

Morgan Stanley cut Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to “equalweight” from “overweight” with a US$15.50 target, down from US$17. The average is US$15.80.

Wolfe Research analyst Travis Harbauer initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with an “outperform” rating and US$67 target. The average is US$74.99.

Maxim Group LLC initiated coverage of Appili Therapeutics Inc. (APLI-X) with a “buy” rating and $2 target, which falls below the $4 average.

Cormark Securities analyst David McFadgen raised Great Canadian Gaming Corp. (GC-T) to “market perform” from “reduce” with a $37 target, up from $34 but below the average of $50.33.

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