Black Gold: Q3 2022 - CES Energy Solutions

Ticker Symbol: CEU-T

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CES ENERGY SOLUTIONS

FINANCIAL HIGHLIGHTS

Black Gold: Q3 2022 - CES Energy Solutions

CEU Q3/22 RESULTS & ANALYSIS

  • CEU provides fluids for drilling and producing energy companies. In Q3/22 with the improvement in the commodity prices for the sector and higher utilization, they saw an increase of 77% in US revenues to $350M and a 49% increase in Canadian revenues to $175M. These were record Q3 revenues for the company on both sides of the border. Overall revenues rose to $525M from $314M in Q3/21. CEU reports in Canadian dollars. Funds flow from operations was $49M in Q3/22 up from $35M in Q3/21 or $0.19 per share versus $0.14 per share in Q3/21. With tightening conditions price increases are occurring to increase CEU’s margins. EBITDA margins lifted very nicely rising to 14.0% in the quarter from 13.4% in Q3/21. They are targeting peak margins of 15% for the business. CEU has the ability to expand capacity readily if needed. The key issue of manpower fortunately has not been a problem this year as they added 13% to their employee count to handle the growth in business.
  • Going forward they plan to further strengthen the business and using free cash flow to improve the balance sheet, buy back shares and pay a regular quarterly dividend. The rate was raised to $0.02 per quarter from $0.016 quarterly or $0.08 annually, providing a yield of 2.8%. They have long-term debt of $566M but have a working capital surplus of $666M. Thus net debt is a negative $100M, due to this strong working capital position.
  • Under our SER Quality Scoring system we rate CEU as a ‘B’ – a Survivor entity. The US provided 67% of revenues and Canada 33% in Q3/22. CEU now has a 23% market share in the US (in the important Permian basin they have a 28% market share), while in Canada it has a dominant 38% market share. Capex in 2022 is forecast at $50M of which $25M is expansion capital and $25M for maintenance. Our forecast for 2022 is for revenues to rise to $1.6B, funds flow to come in at $175M, and funds flow per share to be at $0.69 per share (up from $0.46 per share in 2021).

SER Quality Score

Black Gold: Q3 2022 - CES Energy Solutions

Leading Provider of Consumable Chemical Solutions

Black Gold: Q3 2022 - CES Energy Solutions

Source: CES Energy Solutions Investor Presentation August 2022

Well Positioned for Growth with Decentralized Model

Black Gold: Q3 2022 - CES Energy Solutions

Source: CES Energy Solutions Investor Presentation August 2022

CES Energy Solutions – Weekly

Black Gold: Q3 2022 - CES Energy Solutions

Source: stockcharts November 17, 2022

CES Energy Solutions – Monthly

Black Gold: Q3 2022 - CES Energy Solutions

Source: stockcharts November 17, 2022

Valuation Comparison

Black Gold: Q3 2022 - CES Energy Solutions

Source: Corporate Reports & SER Forecasts

Conclusion: BUY on Tax Loss Season Correction

  • We await the next low-risk BUY signal to add the stock again to our Action BUY list. Below $2.40 (range $2.20-$2.40) the stock would again be an attractive BUY. Our BUY levels assume that CEU trades at below 1.0x book value and below 3.5x our 2022 cash flow forecast. The stock weakens as market declines occur. During the summer 2022 stock market meltdown, CEU fell 35% from $3.07 per share to $2.00 per share. Our 12-month target is $3.50 per share and our Bull Market Peak target is $11.00 per share.
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