Modernizing Fleet And Expansion Into Vaca Muerta Will Improve Future Efficiency

Key Takeaways

• The fleet modernization program and next-gen tech adoption are expected to enhance efficiency and potentially boost pricing power, positively affecting revenue and margins.
  
• Expansion efforts in Argentina and energy projects in Canada are set to improve regional revenue, while U.S. supply chain strategies aim to control costs.
  
• Decreased U.S. activity and increased costs challenge Calfrac's growth and margins, as fleet modernization strains finances amid potential pricing recovery concerns.

Catalysts

Provides specialized oilfield services in Canada, the United States, and Argentina.

• The transition to next-generation technologies, such as Tier IV pumps, through the fleet modernization program is expected to improve operational efficiency and potentially increase pricing power, impacting both revenue and net margins positively in the future.
  
• The expansion in Argentina, particularly with the deployment of a second large fracturing fleet in the Vaca Muerta shale play ahead of schedule, is anticipated to drive increased revenue and utilization rates in the region, boosting earnings.
  
• The completion of energy infrastructure projects in Canada offers a medium-term positive outlook for the regional market, likely to stabilize or increase revenue from the Canadian operations.
  
• Efforts to mitigate the impact of U.S. tariffs by investigating local supply chain alternatives and potential tariff exemptions could help maintain or improve net margins by controlling costs.
  
• The anticipated return to operations in the Marcellus and the focus on higher utilization through aligning with strong customers in areas like the Bakken and Appalachia may strengthen revenue and stabilize earnings despite current pricing challenges.

Calfrac Well Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Calfrac Well Services's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 4.1% in 3 years time.
• Analysts expect earnings to reach CA$62.8 million (and earnings per share of CA$0.7) by about April 2028, up from CA$8.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, down from 34.3x today. This future PE is greater than the current PE for the CA Energy Services industry at 7.5x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Calfrac Well Services Future Earnings Per Share Growth

Risks

• Calfrac experienced a 10% revenue decline in Q4 2024 compared to the previous year, mainly due to decreased activity and pricing in the United States, impacting the company's revenue and potentially its long-term growth.
  
• Adjusted EBITDA dropped by 45% in Q4 2024 compared to Q4 2023 due to lower utilization and unplanned downtime, affecting the company's profitability and operating margins.
  
• The net loss from continuing operations in Q4 2024 of $6.4 million, compared to net income in 2023, was influenced by a $12.7 million write-off of obsolete assets and a significant impact on depreciation expense, potentially affecting the company's future earnings stability.
  
• The tariffs on imports from the U.S., such as sand and chemicals, may increase operating costs unless local supply chain alternatives or exemptions are found, impacting Calfrac's operating margins.
  
• The focus on fleet modernization increases capital expenditures but remains necessary for improved utilization in the competitive U.S. market; however, this could strain financial resources and affect net margins if pricing does not recover.

Valuation

• The analysts have a consensus price target of CA$4.833 for Calfrac Well Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.5, and the most bearish reporting a price target of just CA$4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.5 billion, earnings will come to CA$62.8 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 9.1%.
• Given the current share price of CA$3.41, the analyst price target of CA$4.83 is 29.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.