“If we had a rating above ‘top pick’ we would be applying it to STEP.” Clearly CIBC Capital Markets is enthused about a recent acquisition by STEP Energy Services. The lack of adequate superlatives aside, CIBC sees the oil- and gas-field services stock doubling in price to $24 per share.
Calgary-based CIBC Capital Markets analyst Jon Morrison views STEP Energy Services Ltd.’s purchase of Tucker Energy Services Holdings, Inc.’s US platform as “one of the most attractive oilfield services transactions in recent history”. He gives STEP a whopping $24 per share target price and states: “If we had a rating above ‘top pick’ we would be applying it to STEP.”
Calgary-headquartered STEP Energy Services (TSX—STEP) is a coiled tubing, pumping and hydraulic fracturing services company, which has a prominent presence across the Western Canadian Sedimentary Basin and the Southern US, with a particular presence in the Anadarko basin in western Oklahoma and the north Texas panhandle.
Mr. Morrison recommends STEP as an “outperformer”.
In late February, STEP acquired all of the issued and outstanding capital stock of Tucker for a total cash consideration of US$275 million, before closing adjustments. Tucker was a privately owned and geographically-focused provider of fracturing and completion solutions.
Commenting on the Tucker acquisition, Mr. Morrison says: “Not only does the Tucker acquisition materially diversify the company’s revenue base across geographies and customers, but it does so at very accretive financial metrics. It also adds what we view as one of the best run, yet relatively unknown, private US pressure pumping businesses to its platform.
“We also believe it is important to note that at the 16 per cent return on investment capital (ROIC) the company achieved in 2017, STEP is in the 94th percentile for ROIC for all publicly-listed companies in Canada. Yet the stock trades in the sixth percentile for a forward EV/EBITDA (enterprise value-to-earnings before interest, taxes, depreciation and amortization) multiple on 2019 forecasts.
Not just a bargain stock, but bargain-basement-cheap
“As such, we view the stock as extremely cheap across a number of metrics.
“Through the transaction, STEP has added 192,500 horsepower of fracturing capacity, two coiled tubing units, 15 wireline trucks, around 400 employees (which will likely grow to around 500 by the year end of 2018) and a number of ancillary/infrastructure assets.
“The purchase also comes with a portfolio of clients that echoes the one that STEP has enjoyed in Canada over the past five years. Specifically, it’s an industry-leading set of well-established tier-one producers that is tremendously atypical for an oilfield services company of Tucker’s size to be able to call ‘core clients’.
“The net impact of the acquisition, financing and fourth-quarter 2017 results is: a 32 per cent/33 per cent increase to our 2018/2019 EBITDA estimates (which equates to 25 per cent or 24 per cent increase in our 2018/2019 EBITDA estimates on a per share basis), respectively; and a 19 per cent/21 per cent increase to our 2018/2019 cash flow per share estimates.”
This is an edited version of an article that was originally published for subscribers in the May 11, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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