Total Energy Services: Beneficial Guidance, Undervalued

Total Energy Services Inc. (OTCPK:TOTZF) recently delivered beneficial guidance about the state of the energy industry. With a diversified number of products and services as well as international presence, I am unable to understand why the stock is at its current price mark. Further technological improvements like that of the NOMAD mobile compressor systems or the drilling technologies developed with Savanna will likely enhance future revenue growth. Even considering potential credit risks or failed forecasts about new projects, Total Energy Services appears undervalued.

Total Energy Services: Product Diversification, Geographic Diversification, And Optimistic Guidance For 2023

Based in Calgary, Alberta, Total Energy Services Inc. offers products and services to the energy and other resource industries in Canada, the United States, and Australia.

I believe that the number of services offered provide significant diversification for shareholders. Management manages four businesses, contract drilling services, rental of drilling equipment, production of oil and gas wells and fabrication, and sale of oil and natural gas process equipment and well servicing. The company provided further information about some of these business segments in the annual report:

With the company’s geographic diversification, which may protect from local crises in the energy industry, the guidance given recently is worth mentioning. In my view, management is optimistic about the year 2023 as it noted that global energy industry activity will likely continue to increase modestly during 2023.

The recovery in oil and natural gas prices over the course of 2021 and into 2022 has resulted in steadily improving industry conditions, particularly in North America.

While current indications are that global energy industry activity levels will continue to increase modestly during 2023, global economic and political uncertainty causes the Company to remain cautious and manage its business and affairs in a manner to protect its balance sheet and financial liquidity. Source: Quarterly Report

Expectations From Financial Analysts Include 13.6% Median Sales Growth, Median EBITDA Margin of 19%, And Median FCF Margin Of 9%.

I believe that the expectations of other financial analysts are so beneficial that they are worth noting here. Estimates include 2024 net sales close to CAD890 million along with net sales growth of 3.50%. 2024 EBITDA would be CAD181 million with an EBITDA margin of 20.38%. 2024 Operating profit would stand at CAD0.38 million, with pre tax profit of CAD79 million and a net income of CAD62 million. Finally, the free cash flow would be close to CAD91 million with a free cash flow margin of 10.25%.

Balance Sheet

As of September 30, 2022, the company reported cash of CAD34 million, accounts receivable of CAD164 million, and inventory of CAD93.390 million. Prepaid expenses stood at CAD19.313 million with total current assets of CAD314 million.

With an asset/liability ratio close to 3x, I believe that the balance sheet appears in good shape. Property stood at CAD571 million with income taxes receivable worth CAD7 million, goodwill of CAD4.053 million, and total assets of CAD897.084 million.

Total Energy Services also reported accounts payable worth CAD119.547 million, deferred revenue of CAD55.140 million, and a current portion of lease liabilities of CAD5.304 million. Current portion of long-term debt was CAD2.656 million, and total current liabilities stood at CAD185.164 million. Besides, long-term debt was equal to CAD145.906 million with a lease liability of CAD9.523 million, in addition to a deferred income tax liability of CAD40.951 million. I believe that total debt stands at close to 1x forward EBITDA, so I am not really worried about the company’s debt.

Under Normal Conditions, I Believe That The Fair Price Is $18.11 Per Share

Under normal conditions, I assumed that the company’s NOMAD mobile compressor systems, the drilling technologies developed with Savanna, and new innovation agreements will bring revenue growth. The company provided a significant amount of information about its innovation efforts on its corporate website.

I am quite optimistic about new agreements with other partners, like those signed with Savanna and Pason. Together with other players in the energy industry, management may receive and share know-how, which may enhance FCF generation in the coming years.

Since 2018 Savanna Drilling and Pason Systems have collaborated to develop existing and future industry-leading technologies and to make such technologies available to its customers in an efficient and cost-effective manner, supported by highly skilled drilling and technical support personnel. Savanna’s partnership with Pason allows customers to benefit from the strengths and expertise of both companies, providing one of the most cost-efficient solutions to enhance rates of penetration and the quality of well bore construction. Source: Savanna – Pason Alliance – Savanna Energy Services Corp.

In line with my previous commentary, I am also quite optimistic about the company’s proprietary models to optimize and assess drill dynamic information for improving the rate of penetration and WOB. Shareholders should keep in mind that further study and analysis could enhance drilling operations, which would bring cheaper production.

Finally, let’s say a few words about the CEO of Total Energy Services, who brings expertise in the securities industry. In my view, management will likely know how to capture the attention of investors. As a result, the cost of equity may lower as more communication and investor relations work is executed.

Under my base case scenario, I included 2033 net sales of CAD1.125 million, net sales growth of 2%, an EBITDA of CAD214 million, and an EBITDA margin of 19%. Free cash flow would be close to CAD117.1 million with a FCF margin of 10.4%. I believe that my financial figures are quite conservative.

If we include a WACC of 11%, the net present value of future FCF could be CAD593 million. Also, with cash of CAD34.3 million, debt of CAD148 million, and an EV/EBITDA multiple of CAD4 million, the terminal value would stand at CAD855 million with a NPV of TV of CAD271.3 million. Also, the enterprise value would be CAD865 million. Besides, I obtained an IRR of 4.98% with equity of CAD751 million. Finally, the fair price would be CAD18.11 per share.

Under My Bearish Case Scenario, The Fair Price Would Stand At CAD9 Per Share

Total Energy Services makes a lot of assumptions with regards to future free cash flow, fair value of acquisitions, and oil and gas projects. Management needs to make assumptions about the oil and gas prices, equipment prices, labor costs, and transportation costs. Its estimates could be wrong, which may lead to goodwill impairments, inventory reduction, or decreases in the book value per share. As a result, under this case scenario, I assumed reduction in the future free cash flow expectations and stock price declines.

Where impairment indicators exist or annually for goodwill, the recoverable amount of the asset or CGU is determined using the greater of fair value less costs to sell or value-in-use. Value-in-use calculations require assumptions for discount rates and estimations of the timing for events or circumstances that will affect future cash flows. Fair value less costs to sell requires management to make estimates of fair value using market conditions for similar assets as well as estimations for costs to sell taking into account dismantle and transportation costs. Source: Quarterly Report

I am also a bit concerned about the company’s credit risk and the risk coming from having a considerable amount of accounts receivables. If Total Energy Services does not receive payments in due time, free cash flow generation may decline, which may lower the company’s fair value. Management offered commentary in this regard in the last quarterly report.

A sustained increase in oil and gas prices has mitigated counterparty credit risk as a substantial portion of the Company’s dealings are with entities involved in the oil and gas industry. Notwithstanding such improvement in the industry environment, the Company remains focused on actively managing credit risk. Specifically, management has remained diligent in assessing credit levels granted to customers, monitoring the aging of receivables and taking proactive steps to secure and collect outstanding balances. Source: Quarterly Report

Under this case scenario, I included 2033 net sales of CAD707 million together with a net sales growth of -2.50%. 2033 EBITDA will be around CAD106 million together with an EBITDA margin of 15%, 2033 FCF close to CAD73.6 million, and a FCF margin of 10.4%.

If we also assume a discount of 15%, the NPV of future FCF would stand at CAD422.4 million, with cash of CAD34.3 million and debt of CAD148 million. Also, with an exit multiple of EV/EBITDA of 2.55x, 2033 terminal value would be CAD271 million with a NPV of TV of CAD58.2 million. If we also assume a share count of 41.5 million, the IRR would be -0.27%, with equity of CAD367 million and a fair price of CAD9 per share.

Conclusion

Offering beneficial guidance, Total Energy Services offers a considerable number of services in the energy industry in different countries. In my view, with more partnerships and technological innovation to enhance the rate of penetration, and WOB in operations could bring significant revenue growth and FCF generation. Besides, I believe that the current valuation given by the market fails to represent the company’s fair value. Even considering credit risks and forecasting risks, Total Energy Services appears undervalued.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.