Electrification And Technology Initiatives Will Reduce Costs And Improve Efficiency

Key Takeaways

• Investments in electrification and tech modernization are set to boost margins and earnings through enhanced efficiency and cost reduction initiatives.
  
• Strategic partnerships and location investments aim to expand market share and boost revenues by reducing logistics costs and accessing new regions.
  
• Potential tariffs, pricing pressures, capacity limitations, and costly tech investments could constrain Trican's growth, adversely impacting margins and earnings.

Catalysts

An equipment services company, provides various products, equipment, services, and technology for use in the drilling, completion, stimulation, and reworking of oil and gas wells in Canada.

• The electrification of ancillary frac support equipment is an ongoing initiative, expected to reduce costs and improve efficiency, positively impacting net margins over time.
  
• Trican is investing in a technology modernization initiative, including a world-class integrated ERP platform and advanced data analytics capabilities, which will enhance operational efficiency and potentially increase earnings.
  
• The partnership with AECOs is expected to expand the coiled tubing market share, allowing access to new regions and services, which should boost revenues as market share increases.
  
• The opening of LNG Canada for exports is expected to improve natural gas pricing, benefitting revenue growth as demand for Trican’s services increases.
  
• Strategic location investments, like the transload facility in Northeast BC, aim to reduce logistics costs for sand transportation, which will enhance profitability and net margins through improved efficiencies.

Trican Well Service Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trican Well Service's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 12.8% in 3 years time.
• Analysts expect earnings to reach CA$125.2 million (and earnings per share of CA$0.67) by about March 2028, up from CA$109.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$166.3 million in earnings, and the most bearish expecting CA$84 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the CA Energy Services industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Trican Well Service Future Earnings Per Share Growth

Risks

• Potential retaliatory tariffs from Canada on U.S. goods, including essential frac sand, could increase costs and impact margins if costs cannot be passed on to customers, affecting net margins and earnings.
  
• Pricing pressure from competitors, despite busy schedules, could negatively impact margins and reduce profitability, affecting net earnings.
  
• The uncertainty of U.S. tariffs on Canadian oil and gas introduces volatility and potential activity level impacts, which may affect revenue projections.
  
• Limited spare capacity in the fleet and the need for costly investments to upgrade equipment could constrain growth potential, impacting future revenue and profit margins.
  
• The introduction and implementation of new technology, such as the ERP platform and AI, present significant investment costs without guaranteed efficiency improvements, potentially impacting G&A expenses and net earnings.

Valuation

• The analysts have a consensus price target of CA$5.875 for Trican Well Service 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$6.75, and the most bearish reporting a price target of just CA$5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$978.8 million, earnings will come to CA$125.2 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$4.47, the analyst price target of CA$5.88 is 23.9% 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.