Acquisition Of Saxon And Upgraded Rigs Will Improve Future Operations In Canada And Australia

Key Takeaways

• The acquisition and equipment upgrades hint at bolstered revenue and improved margins, especially in Canadian and Australian markets.
  
• Increased dividends and strong free cash flow underscore a disciplined capital strategy, enhancing earnings and potential shareholder returns.
  
• Adverse weather, U.S. activity decline, and trade tensions threaten Total Energy Services' revenue, operating margins, and future growth, with increased costs and capital strain.

Catalysts

Operates as an energy services company primarily in Canada, the United States, and Australia.

• The acquisition of Saxon in March 2024 and increased operating days in Australia signify potential for increased revenues, as the integration of Saxon and the deployment of new drilling rigs are expected to bolster revenue streams.
  
• Upgraded rigs and increased utilization in Canadian and Australian markets are anticipated to improve net margins, offsetting weaker pricing in the U.S from increased efficiencies and pricing power.
  
• A substantial increase in the fabrication sales backlog, from $162.8 million to $189 million, indicates strong future revenue potential for the CPS segment due to high demand and increased order visibility.
  
• The strategic allocation of $34.3 million towards equipment upgrades and growth opportunities could lead to higher earnings by the fourth quarter of 2025, improving operational efficiency and expanding capacity.
  
• Strong free cash flow generation and an 11% increase in dividends reflect a disciplined capital deployment strategy, which could enhance earnings per share through returns to shareholders and potential share buybacks.

Total Energy Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Total Energy Services's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 8.2% in 3 years time.
• Analysts expect earnings to reach CA$85.0 million (and earnings per share of CA$2.14) by about April 2028, up from CA$60.8 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 8.4x on those 2028 earnings, up from 6.3x today. This future PE is lower than the current PE for the CA Energy Services industry at 8.9x.
• Analysts expect the number of shares outstanding to decline by 4.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Total Energy Services Future Earnings Per Share Growth

Risks

• Adverse weather conditions in Australia have negatively impacted operations, leading to delays and cost overruns in rig reactivation, which could continue to affect operating margins and revenue.
  
• The company experienced a substantial decline in U.S. activity, resulting in operating losses, which could persist and impact overall earnings if not addressed effectively.
  
• Tariff uncertainties and global trade tensions may disrupt supply chains and increase costs, potentially affecting the profitability of the Compression and Process Services (CPS) segment.
  
• Lower drilling and completion activity levels in the U.S. have decreased revenue and EBITDA, posing a risk to future growth if market conditions do not improve.
  
• The necessity for significant capital expenditure to upgrade existing rigs without guaranteed increases in demand or pricing could strain financial resources and pressure net margins.

Valuation

• The analysts have a consensus price target of CA$17.0 for Total Energy Services based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.0 billion, earnings will come to CA$85.0 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of CA$10.02, the analyst price target of CA$17.0 is 41.1% 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.