Introduction
Total Energy Services (OTCPK:TOTZF) (TSX:TOT:CA) is a Canadian energy services provider with four main divisions: Contract drilling services with 94 drill rigs), rentals and transportation services, well servicing and compression and process services. The company is active in Canada, the US and Australia where it recently bolstered its presence through a US$37M acquisition from SLB.
The 9M 2023 results were strong, and that paved the way to pursue an acquisition
During the first nine months of 2023, Total Energy Services clearly benefited from a strengthening market as its total revenue came in at C$679M, which is just over 20% higher than in the first nine months of the preceding year.
Total Energy Services Investor Relations
Despite this, the total operating income increased by approximately 81%. That being said, the third quarter was somewhat weaker as the 12% revenue increase resulted in an increase of the operating income by just under 10% although the comparison loses a few percent due to the increase in (non-cash) share based compensation compared to the same quarter a year before.
Total Energy Services Investor Relations
The company’s financial performance was very strong with a pre-tax income of C$23.1M in the third quarter and C$58.1M in the first nine months of the year, resulting in a net profit of respectively C$19.2M and C$49.5M. This resulted in an EPS of C$1.22 during the first nine months of the year with approximately C$0.48 of that EPS generated in the third quarter. Thanks to the reduced share count (the company repurchased a net amount of 1.5M shares or almost 4% of its share count in the first nine months of 2023), the EPS increased at a faster pace than the reported net income in absolute numbers.
The “paper profit” also is backed up by the cash flow statement. As you can see below, the company reported an operating cash flow of C$118.9M in the first nine months of the year (before changes in the working capital), but we should still deduct the C$4.7M in lease payments and C$5.3M in interest payments. This means the underlying operating cash flow was approximately C$109M. Also keep in mind the entire C$8.5M tax bill was deferred which had a positive impact on the company’s cash flow result.
Total Energy Services Investor Relations
The total capex during the first nine months of the year was approximately C$60M resulting in a net free cash flow result of approximately C$50M which is almost exactly the reported net profit. The free cash flow result based on the total net share count at the end of the third quarter was approximately C$1.25 per share. I don’t expect any free cash flow in Q4 as the company will be spending more cash on capex than I anticipate will come in as operating cash flow.
Thanks to the strong cash flow profile and its robust balance sheet, Total Energy Services is able to pursue acquisitions as well. The company announced earlier this week it entered into an agreement with SLB (SLB), formerly known as Schlumberger, to acquire Saxon Energy Services Australia for US$37M. That company owns a fleet of 11 land drilling rigs, thereby expanding its existing operations and activities in Australia. The company did not provide any financial details on the acquisition, but we can expect the multiple to be reasonable while Total Energy Services can likely also expect to generate some synergy benefits.
Looking forward to 2024
Total Energy Services also already provided the market with an update on its budget for 2024. In the current financial year, the company plans to spend C$46.5M on capital expenditures including C$22.4M in expansion capex which means the maintenance capex is approximately C$24.1M.
As the full-year capex will be substantially lower than the C$92M the company planned to spend in FY 2023, we should see a very strong reported free cash flow result, subject to unexpected changes in the working capital position.
Investment thesis
Considering the analyst consensus estimates call for an EBITDA of almost C$190M in FY 2024 and as we know the full-year EBITDA will likely be approximately C$80M (excluding the impact of the Australian acquisition which still has to close), and given the low net debt position, the company will likely post a pre-tax income of C$100M and a net profit of around C$70M which works out to C$1.75 per share. That by itself is a good enough reason to buy the stock while it’s still in the single digits, but as the total capex plus lease payments of less than C$60M will be about C$20-25M lower than the depreciation expenses, the net free cash flow result will be slightly higher than that, and we can expect that free cash flow result to exceed C$2/share in 2024 (given normal market circumstances and excluding a total collapse of the oil services sector).
This also means the net debt position of C$73M at the end of September should decrease towards the end of this year, notwithstanding the US$37M cash acquisition.
I currently have no position in Total Energy Services but after taking a 70% profit on competitor Trican Well Service (TCW:CA) (OTCPK:TOLWF) I would be interested in going long at the current price level.
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