Natural Gas Demand Growth Will Drive Returns as Free Cash Flow Improves

Key Takeaways

• Global demand for natural gas and modernization of energy infrastructure drive recurring revenue growth and geographic diversification for Enerflex.
  
• Focus on emissions solutions, high-margin service businesses, and operational efficiencies supports improved margins, earnings stability, and capacity for reinvestment.
  
• Overdependence on traditional natural gas, weak decarbonization positioning, leadership instability, and cyclical risks threaten future growth, margin sustainability, and adaptation to evolving energy dynamics.

Catalysts

Offers energy infrastructure and energy transition solutions in North America, Latin America, and the Eastern Hemisphere.

• Enerflex is poised to benefit from sustained and rising global demand for natural gas as a key transition fuel, evidenced by strong demand and long-term contracts in the U.S. contract compression business, which supports visibility and growth in recurring revenue and stable utilization rates.
  
• Modernization and buildout of global energy infrastructure, including multi-decade upgrades in emerging markets, is reflected in the company's $1.2 billion backlog and robust BOOM projects internationally, indicating continued top-line revenue expansion and geographic diversification.
  
• Increased regulatory and customer focus on emissions reductions and produced water management is driving demand for Enerflex's technology and services, seen in the performance and expansion of produced water projects in Oman, which should underpin margin strength and potentially grow average project value.
  
• Strategic investments in expanding the high-margin, recurring After-Market Services and Energy Infrastructure businesses-contributing 65% of gross margin-are expected to improve earnings stability and net margins over time as these segments continue to outperform.
  
• Ongoing operational efficiency initiatives and realization of integration synergies-evident in lower SG&A and a drop in net debt-to-EBITDA to 1.3x-enhance free cash flow, lighten the balance sheet, and create capacity to reinvest in growth or return capital to shareholders, supporting future earnings and net margin improvement.

Enerflex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enerflex's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.5% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $120.5 million (and earnings per share of $1.18) by about September 2028, down from $129.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $136.0 million in earnings, and the most bearish expecting $57.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from 9.7x today. This future PE is greater than the current PE for the CA Energy Services industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 1.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Enerflex Future Earnings Per Share Growth

Risks

• Persistent dependence on traditional natural gas infrastructure and compression, combined with limited discussion on diversification into carbon-neutral solutions or renewable energy technologies, exposes Enerflex to the risk of long-term structural revenue decline if the energy transition accelerates and fossil fuel demand decreases.
  
• Lack of commentary on concrete decarbonization offerings (such as carbon capture or emissions reduction solutions) suggests Enerflex may be insufficiently positioned to benefit from, or comply with, tightening global regulatory frameworks on methane emissions and carbon pricing, possibly constraining future contract awards and pressuring net margins.
  
• Ongoing leadership transition-with both an interim CEO and CFO in place and an unresolved search for permanent executives-creates organizational uncertainty that could impair long-term execution of the company's growth strategy, slow decision-making, and ultimately impact earnings stability.
  
• While current and near-term demand is described as stable, margin normalization is anticipated in core Engineered Systems (ES) business lines, indicating that current elevated margins may not be sustainable, which could lead to declining profitability as historical averages reassert and competitive/intense market dynamics persist.
  
• The company's strategy emphasizes increasing capital allocation to U.S. compression fleet expansion and inventory build in a cyclical industry subject to commodity price volatility; in a scenario of weaker natural gas prices or oversupply, these investments could result in underutilized assets, increased working capital requirements, and negative impacts on both free cash flow and return on capital.

Valuation

• The analysts have a consensus price target of CA$17.179 for Enerflex 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$19.5, and the most bearish reporting a price target of just CA$14.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $120.5 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of CA$14.06, the analyst price target of CA$17.18 is 18.2% 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.