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Canada Research Published by Raymond James Ltd.
Please read domestic and foreign disclosure/risk information beginning on page 45 and Analyst Certification on page 43. Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Canadian Energy Services & Technology Corp. February 9, 2016 CEU-TSX Company Report - Initiation of Coverage Andrew Bradford CFA | 403.509.0503 | [email protected]
Tim Monachello (Associate) | 403.509.0562 | [email protected]
Oil & Gas Energy Services | Well Site & Other Services
The Relentless Pursuits of Expanding Market Share and Extending Reach into New Markets
Recommendation A top shelf management group coupled with a high-free cash flow yielding business is an attractive combination in its own right. We believe CES’s businesses enable structural growth through expanding into new verticals and growing market share within them, without significant capital expenditures.
As a caveat, we believe there is a good chance of a second dividend reduction this year, but the fact that CES is trading at 3-year lows presents a very attractive cyclical opportunity at current levels. We position CES as a core holding in any energy portfolio.
Analysis A key investment feature of CES’s business is its structurally low maintenance
capital requirements and the correspondingly high free cash flow yields this implies. We estimate that CES’s maintenance capital requirements are less than $10 mln annually. As such, we estimate free cash flow was $87 mln in 2015 (a 10% FCF yield) and will be $54 mln in 2016 (6% yield) and $97 mln in 2017 (11% yield).
CES has completed its transformation from a drilling fluids company into a full-service specialty oilfield chemicals company, with reach into every major basin in North America. Investors should expect that CES will grow market share via a combination of product innovation and a customer-oriented service culture. And while the drilling market is cyclically very weak, we think it’s noteworthy that CES’s US market share has been on a growing trend, even after correcting for acquisitions. That is, CES has leveraged organic growth through its acquired businesses.
CES has demonstrated a willingness to branch into new specialty chemicals verticals. This is most apparent with its fracturing chemicals product lines. But we think the acquisition of Sialco Materials provided evidence of a strategy to extend beyond its traditional markets. In the longer-term, we wouldn’t be surprised if CES were more frequently characterized as a diversified specialty chemicals provider.
Valuation CES is currently priced at 15.2x 2016E and 9.2x 2017E EBITDA. The 2017E EBITDA multiple is 17% below the post-2009 median (further below the average). Our 5-year DCF model implies $5.00 for a 12-month out price expectation. Our $4.75 target is 10.7x 2017E EBITDA, just below the mid-point of its historical multiple range (see our Valuation Considerations section for further details).
EBITDA 1Q 2Q 3Q 4Q Full Revenues Cash (mln) Mar Jun Sep Dec Year (mln) Flow (mln)
2014A C$44 C$31 C$55 C$48 C$179 C$973 C$145
2015E 39A 20A 24A 21 104 758 92
2016E 20 12 20 24 77 623 59
2017E 29 24 37 41 131 819 105
Source: Raymond James Ltd., Thomson One
Outperform 2 C$4.75 target price
Current Price ( Feb-05-16 ) C$3.87 Total Return to Target 28% 52-Week Range C$7.90 - C$3.18 Suitability High Risk/Growth
Market Data Market Capitalization (mln) C$852 Current Net Debt (mln) C$320 Enterprise Value (mil.) C$1,173 Shares Outstanding (mln, f.d.) 236.5 10 Day Avg Daily Volume (000s) 589 Dividend/Yield C$0.22/5.6%
Key Financial Metrics 2014A 2015E 2016E 2017E
EV/EBITDA 6.4x 11.2x 15.2x 9.2x
EPS C$0.32 C$0.04 C$(0.10) C$0.10
P/E 12.1x nm nm 38.0x
Capex (mln) C$107 C$82 C$30 C$20
Dividend (mln) C$61 C$72 C$48 C$49
BVPS C$0.50 C$0.66 C$0.45 C$0.45
Debt/EBITDA 2.1x 3.3x 4.4x 2.7x
ROE 19.6% 5.0% -0.2% 8.3%
Company Description CEU provides drilling fluids and specialty chemicals primarily to the oil and gas industry. CEU has operations throughout W. Canada and the US.
Canada Research | Page 2 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Table of Contents
Investment Thesis ................................................................................................................................................ 3
Key Financial Forecasts ........................................................................................................................................ 4
CES Valuation Considerations .............................................................................................................................. 5
CES’s Policies on Funding Growth and Capital Allocation .................................................................................... 8
Outlook for the Dividend ..................................................................................................................................... 9
The Businesses of Canadian Energy Services ....................................................................................................... 10
Drilling Fluids Competitive Setting and Dynamics ............................................................................................... 12
Specialty Chemicals Competitive Setting and Dynamics...................................................................................... 16
Acquisitions: Growth Through Leveraging Untapped Potential .......................................................................... 19
Appendix 1a: Drilling Fluids Products, Additives, and Functions ......................................................................... 23
Appendix 1b: Sample Specialty Chemicals Products, Additives, and Functions .................................................. 25
Appendix 2: Acquisitions ..................................................................................................................................... 32
Appendix 3: Company Description and Corporate Timeline ............................................................................... 36
Appendix 4: Financial Statements ....................................................................................................................... 38
Appendix 5: Management & Board of Directors.................................................................................................. 40
Appendix 6: Credit Facilities ................................................................................................................................ 41
Risks ..................................................................................................................................................................... 42
Canadian Energy Services & Technology Corp. Canada Research | Page 3 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Investment Thesis
Just about every dividend-paying energy company has either cut its dividend, or its stock is struggling with the unspoken overhang of a potential dividend cut. On Dec-10-2015, CES reduced its dividend by 35% – $25 mln annually – which at the time appeared to simultaneously bring its 2016 payout ratios back in line with its historical norms and remove the divided-cut overhang as an obstacle to performance. However, given the continued downward trend in drilling activity, we foresee the potential for a second dividend reduction before too long. From a tactical perspective, this could be viewed as an obstacle for near term performance, but the over-arching feature in our view is that the current price is a very attractive level at which to buy CES given its potential for multi-year growth.
Also tactically, energy investing has been very difficult through the now 20-month-old bear market: the traditional institutional investor base has become conspicuous by its absence in the day-to-day energy market, with the predictable result of severe volatility. But the severity of the decline only bolsters our confidence that under capitalization and ultimately reduced supply will motivate a general commodity correction and will drive E&P spending, CES revenues, and its stock higher (see our Feb-02-16 Industry Comment here).
On a strategic level, CES has completed its transformation from a drilling fluids company into a full-service specialty oilfield chemicals company, with reach into every major basin in North America. Investors should expect that CES will grow market share via a combination of product innovation and its customer-oriented service culture. We also believe that CES could be in the early stages of branching into new specialty chemicals verticals. In the longer-term, we wouldn’t be surprised if CES were more accurately characterized as a diversified specialty chemicals provider. We think December’s acquisition of Sialco Materials provided a clear piece of evidence of this long-term strategy.
We think the answer to the question of “how CES has generated market share and overall growth” is essential to characterizing its future growth potential, its free cash flow profile, and ultimately, its appropriate market value. In our view CES has generated growth by:
Driving market share gains through innovation and targeted product development, particularly in its Specialty Chemicals groups – we outline some of CES’ products in Appendix 1b.
A strong customer-oriented service culture. CES brings a highly customer-focused, oilfield service culture across its platform.
Effecting acquisitions through which it can lever additional growth via improved efficiencies, scale economies, and moving a broad product offering through the newly acquired distribution channels – we demonstrate this on pages 19 to 22.
Low capital intensity means high free cash flow generation and capacity for growth within its existing asset base
The bulk of CES’s capital includes light-duty trucks, light field equipment, warehousing facilities, and milling, blending, and chemical reacting facilities. On a weighted-average basis, the economic depreciation of this asset grouping is very low. Hence, we estimate maintenance capital is relatively low per dollar of EBITDA generation, which all things equal, makes its EBITDA worth relatively more.
And because the operating capacity within its facilities doesn’t degrade or go out of style, CES has considerable capacity for higher sales volumes within its existing asset base. That is, CES need not incur capital investment to accommodate rising sales, though it will need to incur working capital investment – and more than the average oilfield business given the inventory requirements of its products.
Cyclically attractive value for a high-quality performer
Our 5-year DCF analysis implies a $5.00 12-month-out price CES (Exhibit 3). Notwithstanding that 2015 and 2016 EBITDA estimates should be considered depressed, the current multiples of these estimates are below the average multiples over each of the previous 3 years. Our 2017 EBITDA estimate implies a 9.2x EBITDA multiple - 17% below the post-2009 median (further below the average) (see Exhibit 2). We think about 10.7x 2017E EBITDA will be realized in the market, implying our $4.75 target price.
Tactically, this is a very difficult market, and we won’t pretend to time it perfectly, but we do believe this is an unusually attractive level at which to buy CES.
Canada Research | Page 4 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Key Financial Forecasts
Expect EBITDA to be Lower Year-Over-Year Until 4Q16, Then Begins a Cyclical Recovery
We’re forecasting that 2015 EBITDA (“EBITDAC” in CES disclosures) will come in at $104 mln, which implies a sequential decline in 4Q15 EBITDA to $21 mln from $24 in 3Q15 and further means that 2H15 EBITDA will have been down approximately 57% year-over-year. We expect these year-over-year negative comps will continue through 2Q16, although the percentage disparity will gradually narrow: 1Q16 EBITDA will be down 48% year-over-year, and 2Q16 will be down 38%.
Our forecasts beyond the summer of 2016 are predicated on our belief that crude prices will have begun reflecting concerns that global crude production could begin to fall short of demand expectations as a direct consequence of what will have been almost 2 years of continuously reduced spending on crude developments around the world.
By 4Q16, it’s our expectations that firmer crude prices and renewed investment by North American producers will motivate a leveling and ultimately the beginnings of a recovery in North American rig counts, which are the main drivers for over half of CES’s revenue base. Consequently, we expect 4Q16 EBITDA will be the first positive year-over-year comparative since the beginning of the negative cycle.
On the whole we expect 2016 EBITDA will be down 26% year-over-year. This magnitude of decline isn’t reflected in the consensus figures, but we strongly suspect that it’s well-priced in the market sentiment. On a more granular level, we are forecasting that 4Q16 will be CES’s first quarter in which it reports year-over-year EBITDA growth since the negative cycle began.
In 2017, we’re forecasting that the onshore recovery in oilfield services will be underway, though maybe not to the degree implied by some of the more bullish forecasts out there. This, in combination with CES’s investments between late-2014 and early-2016 and market share growth within CES’s two specialty chemicals businesses should push revenues back above $800 mln, but not quite back to 2014 levels. We anticipate 2017 EBITDA will rise 71% to $131 mln as operational leverage amplifies revenue gains at the EBITDA line.
CES recently commissioned a large barite mill in Corpus Christie, Texas. Barite is the heavy inert mineral used to add weight (density) to most drilling fluids. Smaller drilling fluids providers purchase milled barite from 3
rd party providers. In CES’s case, these 3
rd party providers likely have
higher costs of capital than CES, so the financial equation indicates that CES can capture value by milling for its own purposes as well as marketing barite to other providers as required.
Funded Debt / EBITDA should peak at 4.4x in 4Q16.
Ultimately, CES’s future decisions on items such as its dividend and capital spending initiatives will determine future debt levels. As at Sep-30, 2015, substantially all of CES’s $310 mln debt resided in its $300 mln issue of senior unsecured notes. CES pays 7.375% interest on these notes and they mature in April 2020. The balance is primarily capitalized leases.
As an offset, CES also carried a $21 mln cash position on Sep-30, which in combination with its unused $200 mln credit facility, gave CES $221 mln in liquidity (Sep-30-15) - $321 mln including the accordion feature.
Our expectation is that CES’s debt level shouldn’t change much over the next 3 quarters, though the cash level will move around somewhat to accommodate working capital changes. By 3Q16, we’re expecting CES’s revenues to begin rising, which if correct, could drive a $30 mln to $35 mln working capital investment through 2H16, and consequently require CES to dip into its $200 mln senior credit facility. By year-end 2016, we expect – all else equal – that CES will be carrying about $320 mln debt net of cash.
Given our forecasts, this funded debt level will peak at 4.4x trailing EBITDA during 4Q16. CES’s covenant maximum is 4.5x EBITDA as amended earlier this year. Growing revenue in 2017 should give rise to further working capital investment - $48 mln according to our estimates. As a result, even though we forecast a $46 mln increase in 2017 cash flow, CES’s debt should rise again by about $10 mln through the year. We estimate CES’s net debt peaking at $337 mln in 3Q17, though this will only be 3.0x trailing EBITDA and the ratio will have dropped to 2.5x EBITDA by 2017 year-end.
4Q, 1Q, and 2Q EBITDA to be down 58%, 48% and 38% year-over-year, respectively. These estimates are slightly below the current consensus.
In 2017 we expect activity to improve noticeably, but EBITDA still not quite back to 2014 levels.
We expect that rising activity will necessitate working capital investment. As a result we expect net debt to rise to $322 mln by year-end 2016 and to peak at $337 mln in 3Q17.
Canadian Energy Services & Technology Corp. Canada Research | Page 5 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 1: Oil and Gas Services Macro Industry Forecasts
Source: Bloomberg, CAODC, Baker Hughes, Raymond James & Associates, Raymond James Ltd.
CES Valuation Considerations
CES has a narrow comparative group and its standard value metrics are higher-than-average for the Canadian oilpatch, the combination of which prompted us to place the value discussion up front in this report. Our summary valuation points are that
(1) CES is priced with an attractive yield of free cash flow – even of bottom-cycle free cash flow.
(2) EBITDA multiples that are structurally higher than average for oilfield services companies reflect the very low portion of EBITDA that is consumed by maintenance capital requirements.
(3) Discounted Cash Flow and Dividend Discount models suggest 2016 share prices in the $5.00 to $5.05 range (see Exhibit 3 on page 6 for a summary of our present value analysis).
CES’s EBITDA multiple structurally expanded from 2008 to 2014.
CES’s EV/EBITDA multiple range had been channeling higher since 2008 (Exhibit 2 to the right). By 2014 and 2015, CES’s multiple expansion phase had more or less leveled-out, albeit still in a broad intra-annual range between 9.0x and 15.5x. The very broad range in 2015 is a function of degrading EBITDA expectations through the year. Given Friday’s $3.87 share price, CES is priced at 15.2x 2016E and 9.2x 2017E EBITDA – roughly in-line with 2014.
Multiples that ordinarily expand in a down cycle haven’t expanded.
Unlike 2014, both 2015 and 2016 will reflect cyclically low economics. Ordinarily, multiples expand during downturns in anticipation of some degree of recovery, though today’s multiples show no discernable change from the 2013-2014 multiple range. In our view this says one of three things about CES’s stock: (1) the market believes that in retrospect, the stock was over-priced in 2013-2014 in the first place, (2) that the market doesn’t anticipate a recovery is coming, or (3) that the stock is just simply ‘oversold’.
First, with respect to CES’s 2013 and 2014 multiple range, our belief is that the market was adequately pricing CES’s economics. For instance, CES’s weighted average share price in 2014 was $9.28, which may seem high in terms of the EBITDA multiple (12.7x 2014 EBITDA), but also represented a fairly modest 7% free cash flow yield. In addition, by 2014 CES had delivered 22% average cash flow per share growth over the preceding 4 years. Those with a more bearish macro outlook would suggest that those growth rates were supported by macro tailwinds and that aren’t repeatable. Our view is that CES has a formula for organic and acquisition-driven growth that is repeatable. In other words, we expect market share gains from CES.
Estimates A nnual C hange
2009 2010 2011 2012 2013 2014 2015 2016 2017 2016 2017
Energy Prices
Nat G as - Nymex ($US/mcf) $4.16 $4.50 $4.03 $2.83 $3.73 $4.36 $2.66 $2.00 $2.65 -25% 33%
Nat G as - A EC O ($/G J ) $4.00 $4.01 $3.63 $2.32 $3.22 $4.51 $2.85 $1.74 $2.22 -39% 27%
C rude - W est T exas Inter (US$/bbl) $62.09 $77.35 $95.11 $94.15 $98.05 $93.25 $49.22 $50.00 $75.00 2% 50%
C rude - Edmonton Par ($/bbl) $65.56 $78.84 $95.35 $86.29 $93.47 $97.96 $55.30 $58.10 $80.00 5% 38%
Drilling Rig A ctiv ity
Utilization Rate (% ) 25% 41% 50% 42% 41% 46% 24% 23% 38%
A ctive Rig C ount (A vg.) 214 328 397 341 338 369 184 166 247 -10% 49%
U.S. Drilling Rig A ctiv ity
U.S. O nshore Drilling Rig C ount 1,047 1,507 1,842 1,871 1,705 1,804 947 594 1,048 -37% 76%
Exhibit 2: Historical EV/EBITDA Range
Source: Canadian Energy Services & Technology Corp., Bloomberg, Raymond James Ltd.
Our view is that CES has a formula for organic and acquisition-driven growth that is repeatable. In other words, we expect market share gains from CES.
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
Canada Research | Page 6 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Second, the market should anticipate a recovery. Whether it ‘gets worse before it gets better’ is definitely debatable, but less debatable is that the current pace of North American oil development is too low. That is, as North American crude production slides, core global demand growth will ultimately outstrip supply. The further production falls, the sharper the recovery will be. Our 2017 estimates are predicated on US$75-WTI crude, which we estimate will translate into 49% rig count growth in Canada and 76% rig count growth in the US year-over-year, which in turn will contribute to a 71% EBITDA recovery in 2017 (see Exhibit 1 above).
Third, it’s not unusual for any given energy stock to be ‘oversold’ during a bear market; at risk of stating the obvious, this is what gives rise to pro-cyclical stock performance. Given our $131 mln EBITDA estimate CES is priced at 9.2x 2017E EBITDA, which is below its average multiple for every year since 2011 when its EBITDA was just $77 mln, and 17% below its post-2009 median multiple. Hence, we position CES’s stock as oversold.
Discounted Cash Flow Models Suggest a $5.00 Price Expectation this Year
Many oilfield companies are priced in the market based on historical multiple ranges. Contract drillers are the perfect example here. However, this method falls short for companies with lower maintenance capital requirements and growth potential that isn’t necessarily constrained within the confines of a given cycle. For instance, one drillers’ growing market share implies another’s decline. In CES’s case, we envision the potential for structural growth through the cycles into new verticals that may or may not be as constrained by the cyclicality of the industry. So even though the cycle will have a profound impact on CES’s performance, our view is that it should emerge from each cycle with a higher baseline of revenue potential than it entered.
Exhibit 3: Dividend Discount and Discounted Cash Flow Models Summaries
Note: “Free Cash Flow” in the context of our DCF analysis means operating cash flow less total capital spending. This contrasts with our usual definition of free cash flow, which generally means operating cash flow less maintenance capital spending. Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Our DCF Analysis is Not Predicated on Substantial Growth Capital
Our multi-year discounted value analyses are predicated on a relatively modest $40 mln total annual capital spending (maintenance and growth). We did this in large part because CES’s returns on new capital investment have historically been sufficiently high that we could drive ever-higher DCF values simply by manipulating capital spending.
5-Year DCF Analysis Paramters Sensitivity Analysis (Impact on DCF)
2016 Year-End DCF Share Value - Dividend Discount Method $5.00 DCF Value is 12.9x 2015E EBITDA
2016 Year-End DCF Share Value - Disc Free Cash Flow Method $5.05 DCF Value is 18.1x 2016E EBITDA
Estimated Weighted Average Cost of Capital 10.5% 4% per 100 basis points
Terminal Year Value (2020) 9.0x EBITDA 10% per 1.0 point
Long-Run Free Cash Flow Yield 9% 8.5% per 100 basis points
Long-Run Average Cash Tax Rate 19% 1% per 500 basis points
Dividend Policy 50% of free cash flow long term 1% per 10 basis points
Capital Spending $40 mln annually long term 1% per 10% change
Capital Efficiency 3.5-year pre-tax cash payout 4% higher for 1-year shorter / 2% lower for 1-year longer
Working Capital Requirement 180% of EBITDA nmf
% of Present Value Residing in the Terminal Value 79%
Terminal Year Estimated Metrics (2020)
Terminal Year Share Price $5.70
Market Cap ($mln) 1,375
Net Debt ($mln) 226
Enterprise Value ($mln) 1,601
EBITDA ($mln) 178
Capital Spending ($mln) 40
Dividend $0.28
Canadian Energy Services & Technology Corp. Canada Research | Page 7 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Canadian Energy Services’ capex discipline has produced high returns
In particular, as we focus on the pre-downturn periods for CES, we find that CES historically managed 3-4 year payouts on invested capital. This relatively quick payout has translated into structurally high returns on equity as well. The downturn in crude pricing is having a negative impact here for sure, though we do anticipate a recovery beginning in earnest late in 2016. We dig into CES’s investments, returns, and how they’re achieved in some detail on pages 19 to 22 in this report and outline how CES effectively drives higher returns from its acquisitions than many might initially anticipate.
Exhibit 5: Capital Efficiency – Measuring CES’s EBITDA Yield on Invested Capital
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Annual maintenance capital requirements are approximately 2% to 5% of EBITDA
Another important consideration of value for CES is that economic depreciation isn’t a meaningful drag on asset productivity for CES. CES’s capital isn’t subject to obsolescence or declining marketability. Prior to the current downturn, CES had managed an eight-year run of double-digit return on invested capital and a 19% EBITDA yield on invested capital. It’s highly unlikely this could have been achieved if its longer-dated investments were growing less productive over time. CES’s business is largely inventory-based. Chemical and drilling fluid inventories usually run at about 50% to 60% of CES’s net PPE. This means that its capital is not susceptible to economic deterioration.
1Q102Q10
3Q10
4Q10
1Q11
2Q113Q11
4Q111Q12 2Q12
3Q12
4Q122Q13
1Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q141Q15
2Q15
3Q15
2Q16
4Q15
1Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
0
50
100
150
200
250
0 200 400 600 800 1,000
EBIT
DA
(T
TM, $
mln
s)
PP&E @ Cost + Goodwill ($mlns)
Reported & Estimated EBITDA3.5-Year Capex Payout Line
Exhibit 4: Historical Return on Equity
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
0%
5%
10%
15%
20%
25%
30%
Canada Research | Page 8 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
CES’s Policies on Funding Growth and Capital Allocation
This section describes how CES funds its dividend and capital expenditures and how these funding decisions change based on the type of expenditure – organic capex versus acquisitions.
Exhibit 6: Sources and Uses of Funds, Capital Policy Observations
Note: $000s of dollars expect ratios and per share figures. Debt/EBITDA ratios adjusted for RJL estimates of pro forma trailing EBITDA in acquisitions. Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Observation 1: CES tries to split its free cash flow roughly evenly between organic growth capex and its dividend.
Over the 5 years from 2010 to 2014, CES generated $366 mln of free cash flow and paid out $175 mln in dividends – a 48% effective payout. And over the same period, CES has tended to constrain organic capital spending to not exceed 50% of its free cash flow – it’s been 42% on average. In other words, CES has a demonstrative discipline of constraining its internal capital spending habits.
2015 has proven the exception to this rule however as CES committed to constructing its barite mill and expanding JACAM’s capacity late in 2014 and when cash flows were considerably higher than today.
Observation 2: CES finances its working capital with debt.
About 50% of CES’s non-cash working capital usually resides in receivables, 40% in inventories, and the balance in pre-paids and others. CES’s secured credit balance tends to rise and fall with working capital requirements.
Observation 3: CES finances acquisitions with a combination of debt, equity (both direct to the vendors and through public offerings), and deferred performance-based compensation.
The typical financing package for a CES acquisition has been 35% to 65% cash, 25% to 40% in CES shares, and at least 10% and as much as 40% in deferred or ‘performance’ compensation.
2010 2011 2012 2013 2014 2015E 2016E 2017E
Sources of Funds
Cash Flow 39,561 68,663 48,234 83,094 144,962 92,033 58,818 105,238
Debt Issued (Repaid) 33,166 47,670 (24,709) 243,904 62,173 (42,031) 2,196 10,000
Equity Issues 78,307 4,657 15,159 126,961 116,521 21,118 5,120 5,115
Total Sources 151,034 120,990 38,684 453,959 323,656 71,120 66,135 120,353
Uses of Funds: Investments
Working Capital Investment 55,090 70,956 (38,787) 63,941 98,942 (123,338) (12,962) 47,902
Organic Growth Capex 11,362 17,514 19,216 43,106 66,293 44,478 25,000 12,000
Maintenance Capex 2,346 2,375 854 4,119 8,606 5,000 5,000 8,000
Acquisitions 67,000 - 26,500 304,000 78,000 - - -
Total Investments 135,798 90,845 7,783 415,166 251,841 (73,861) 17,038 67,902
Use of Funds: Dividends
Free Cash Flow (CF from Ops less Maintenance Capital) 37,215 66,288 47,380 78,975 136,356 87,033 53,818 97,238
Dividends Paid 13,210 25,448 32,831 42,168 61,207 71,894 48,172 49,122
Exiting Dividend per Share $0.13 $0.18 $0.22 $0.26 $0.33 $0.33 $0.22 $0.22
Policy Observations: Debt
Total Debt 52,218 99,888 75,179 319,083 381,256 339,225 341,421 351,421
Funded Debt / EBITDA (Calendar-Year Peak) 0.3x 1.3x 1.2x 2.9x 2.4x 3.3x 4.4x 4.2x
Funded Debt / EBITDA (Exiting) 0.2x 1.3x 0.8x 2.5x 2.0x 3.3x 4.4x 2.7x
Policy Observations: Dividend
Dividend Payout of Cash Flow 33% 37% 68% 51% 42% 78% 82% 47%
Dividend Payout of Free Cash Flow 35% 38% 69% 53% 45% 83% 90% 51%
Exiting Dividend Payout of Free Cash Flow 58% 45% 79% 66% 52% 84% 90% 51%
Policy Observations: Capital Spending
Maint Capex % of Operating Cash Flow 6% 3% 2% 5% 6% 5% 9% 8%
Organic Growth Capex % of Free Cash Flow 31% 26% 41% 55% 49% 51% 46% 12%
Total Capex % of Operating Cash Flow 35% 29% 42% 57% 52% 54% 51% 19%
Canadian Energy Services & Technology Corp. Canada Research | Page 9 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Observation 4: Higher production orientation gave CES a higher tolerance for debt.
CES was more willing to finance the JACAM acquisition (2013) with debt than prior acquisitions – a function of its production / midstream revenue orientation, which lends to a more stable cash flow profile. CES purchased JACAM for US$240 mln, US$180 mln of which was primarily debt-financed. Prior to this acquisition, CES had maintained its funded debt/EBITDA ratio below 1.3x, but immediately post the JACAM acquisition, CES’s debt was closer to 2.9x trailing EBITDA (adjusted for JACAM’s pro forma contribution).
CES was on the path of lowering this debt ratio, and had reduced it to as low as 1.9x earlier in 2015 before the cyclical decline in EBITDA began to catch up with it. We expect CES is targeting a range between 1.5x and 2.0x going forward. However, with suppressed EBITDA and absent any further dividend reductions, we estimate CES’s debt will sit at 3.3x trailing EBITDA at 2015 year-end, 4.4x one year from now, and then resume its decline, exiting 2017 at 2.7x.
Outlook for the Dividend
CES cut its annualized dividend by 35% to 21.6-cents on Dec-10-2015. The cut effectively conserved about $24 mln of cash flow and was announced concurrently with its acquisition of Sialco Materials. We suspect the price tag on Sialco corresponded with this annualized savings.
CES has tended to adjust its dividend to match approx. 50% of annualized free cash flow.
CES doesn’t have a formalized dividend policy, but in effect CES has tended to increase its dividend whenever it looked as though the existing dividend might dip below a 50% approximate payout of annualized free cash flow (operating cash flow less maintenance capital expenditures). And because acquisitions provide an instant bump in cash flows, dividend increases have tended to coincide with acquisitions. For example, CES last increased its dividend in 3Q14, during the same quarter in which it closed on $78 mln of acquisitions (Rheotech, Canwell, and Southwest Treating). The higher dividend brought its annualized payout of 2015 free cash up to just over 50% of 2015 free cash flow.
CES decreased its dividend late in 2015 from 2.8-cents monthly to 1.8 cents monthly. This implied a reduced annual dividend obligation from $73 mln to $49 mln. We observe that CES’s 2015E payout of free cash flow will likely come in at just over 80% (RJL estimates) and prior to the cut, this year’s payout was heading north of 100% (depending on base assumptions – our forecast suggests it would have been about 135%). These payouts were clearly too high for CES’ board. Giving effect to the reduction and the Sialco acquisition, we estimate the 2016E payout ratio at 90% - still considerably above historical norms for CES. Which brings us to our next point…
A second dividend reduction in 2016 is not out of the question.
2016 has started weaker than many had expected. On this basis, we’d be very surprised if most boards weren’t re-evaluating budgets and dividend plans. Based on our calculations, we believe CES’s board could choose to reduce its dividend again. The degree of reduction is discretionary, though larger reductions improve its liquidity and flexibility vis-à-vis acquisition potential as (when) the market recovers. Returning the 2016 payout ratio toward CES’s historically normal range would imply an additional 30-40% reduction, based on our estimates.
Payouts drop again in 2017.
While we argue that CES’s $49 mln annualized dividend obligation is perhaps too high by 2016’s free cash flow standards, the same obligation is only 51% of our 2017 free cash flow estimate. This is back into CES’s historical dividend range. Our conclusion here is that while CES may elect to reduce its dividend in 2016, we forecast that it will have the latitude to increase it again as the sector improves in 2017, though again, that decision is also discretionary.
The current 1.8-cent monthly dividend implies a 90% payout of free cash flow – still very high by historical standards
Canada Research | Page 10 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 7: Dividend Payout of Free Cash Flow
Note: ‘Free Cash Flow’ equals cash flow from operations but before working capital changes less estimated maintenance capital. Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
The Businesses of Canadian Energy Services
The vast majority of CES’s business is delineated into one of two distinct product / service groups: Drilling Fluids and Specialty Chemicals. Both these groups deal in chemistries and product blends, but it’s most convenient for investors to think of the Drilling Fluids business as the cyclical aspect of CES’s business and the Specialty Chemicals business as the less cyclical production-oriented aspect of its business – each with its own unique set of drivers. This is somewhat of an overgeneralization as certain Specialty Chemicals products are used in drilling and well completions activities, but the vast majority of Specialty Chemicals product sales are production-oriented, and therefore much less cyclical.
Even though it would be convenient for investors if CES segmented its results along the Drilling Fluids / Specialty Chemicals product group lines, CES reports its segments by geography between Canada and the US. CES does this to obscure the margin differences between the two product groups, mostly because Specialty Chemicals margins are generally higher than Drilling Services.
We strongly expect that both the Drilling Fluids and the Specialty Chemicals businesses will grow meaningfully from current levels, though we expect the growth drivers are quite different for each. We see a cyclical recovery as the primary growth driver for Drilling Fluids but that relatively steady production and market share growth will drive the Specialty Chemicals business. Further, we note that many investors have expressed a strong preference for the latter over the former.
0%
50%
100%
150%
200%
250%
300%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2011 2013 2014 2015E 2016E 2017E
Pre-Dividend Cut Payout ($0.33 Annualized Div.)
Post-Dividend Cut Payout ($0.22 Annualized Div.)
We see a cyclical recovery as the primary growth driver for Drilling Fluids but that attacking new verticals and growing market share within them will drive the Specialty Chemicals business.
Canadian Energy Services & Technology Corp. Canada Research | Page 11 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 8: 2015 Estimated Drilling Fluids and Specialty Chemicals Revenues by Region
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Exhibit 9: 2016 Estimated Drilling Fluids and Specialty Chemicals Revenues by Region
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Canada Research | Page 12 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 10: 2017 Estimated Drilling Fluids and Specialty Chemicals Revenues by Region
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Drilling Fluids Competitive Setting and Dynamics
In 2014, drilling fluids was a US$15 bln global business and had been growing at about 13% annually for the previous 5 years. CES’s competitive theatres are the Canadian and US onshore markets. Our best estimates on these market sizes in 2014 were $850 mln to $950 mln for Canada and US$4.0 bln to $4.5 bln for the US onshore market. Normal EBITDA margins are typically in the 10% to 12% range, which implies that about $600 mln EBITDA is up for grabs in the Canada-US onshore market during a good year.
Excluding market share gains, drilling fluids revenues follow the rig count very closely (see Exhibit 11 below). For instance, the year-to-date rig count was down 48% by Q3 in Canada, and we estimate CES’s drilling fluids revenues were down 43%. In the US, the Q3 rig count is down 55% year-over-year, while we estimate CES’s drilling fluids revenue is down 49%. Costs in drilling fluids are mostly variable with product costs as the largest constituents (refined oil and chemicals).
Canadian Energy Services & Technology Corp. Canada Research | Page 13 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 11: North American Drilling Fluids Activity Tracks the Rig Count
Source: CAODC, Baker Hughes Inc., Canadian Energy Services & Technology Corp., Raymond James Ltd.
How the Industry Evolved to Where it is Today
The onshore Drilling Fluid (or “drilling mud”) market used to be much smaller and more fragmented than it is today. Prior to 10 years ago, most wells drilled in North America were tapping relatively permeable reservoirs with reasonably high formation pressures. This meant that water-based drilling fluids were suitable for most applications. “Mud companies”, as they were typically called would deliver pallets of dry chemicals and additives in bags to the drilling rigs, where it would mix its products into the rigs’ water-filled mud tanks. These chemicals and additives needed to be inventoried by the mud companies, so it was beneficial to have small warehousing locations close to the actual oilfields. This feature encouraged the regionalization of mud companies. Competitive pressures forced mud companies to innovate with new products and chemistries, but excellent on-site customer service and relationships were the keys to retaining business. We believe these historical regional roots have shaped and continue to influence the industry today.
Over the last 15 years, producers have gradually turned their sights to increasingly difficult reservoirs – first tight sands and then shales. These formations are quite sensitive to water due to their low permeability and clay content. In addition, these wells generate substantially higher returns with horizontal completions. However, horizontal completions mean the drilling fluid is exposed to the formation for longer periods of time, enabling more damage. The mainstream solution has been to use oil-based or “invert-emulsion” drilling fluids, which in turn had a transformative impact on the drilling fluids industry.
The requirements to hold substantial volumes of refined oil product in inventory and blend these fluids with increasingly complex chemistry in large facilities placed severe financial stresses on traditional smaller water-based mud companies. Access to capital and the requirement to keep-up with a demanding pace of innovation became significant hurdles for expansion. This dynamic catalyzed consolidation of some of the smaller regional service providers. And more recently, the access to broader suites of products and proprietary chemistries, and lower costs of capital has motivated consolidation of some significant regional players in Canada and the US.
What it Takes to Be Competitive in Drilling Fluids
First and foremost, we believe drilling fluids is still a highly service-oriented business. Supply-chain management, timeliness and accuracy are paramount. Unplanned events on drilling rigs often require on-the-fly changes in fluid additives, so local, well-supplied, regional presences are still key success factors. The key relationships and trust these local franchises create over time makes some of the more venerable regional players attractive acquisition targets (see more in the Acquisitions: Growth Through Leveraging Untapped Potential section).
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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2013 2014 2015E 2016E 2017E
Rig C
ou
nt
Rev
enu
e ($
mln
)
Canada
Drilling Fluids Revenues (RJ Est)
Rig Count
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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2013 2014 2015E 2016E 2017E
Rig C
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nt
Rev
enu
e (U
S$ m
ln)
USA
Drilling Fluids Revenues (RJ Est)
Rig Count
Canada Research | Page 14 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
In today’s setting, we believe that ongoing investment in research and development is a necessary factor for remaining competitive. All competitors of significance are constantly developing new proprietary fluid systems, so standing still isn’t an option. There are scale economies in technical development, so the industry has evolved to centralized R&D centers which service their regionally-oriented sales and marketing groups.
We think this central R&D / regional marketing dynamic creates the potential for disconnection between the customers’ specific field requirements and new product development. Examples might include slower product development cycles or off-the-shelf, one-size-fits-all fluid programs that imperfectly address field-specific problems. We also suspect the tendency is for this disconnection to become more acute as companies grow, thus creating niche opportunities for smaller, more nimble integrated service providers.
It’s clear to us that CES understands this and packs considerable R&D horsepower into its toolkit, but is still sufficiently small to react to the specific needs of its important customers. We believe CES has considerable running room over which it can maintain this balance.
Market Share Analysis
CES is one of two dominant competitors in Canada and is an increasingly notable competitor in the US onshore market. We estimate CES’s Drilling Fluids businesses currently enjoy about a 12% North American onshore market share: 34% in Canada and 10% in the US.
CES’s Canadian market share has been on a growing trend for several years, assisted by only a couple of acquisitions along the way. That said, with about 34% of the Canadian market, we shouldn’t expect much in the way of incremental market share growth from here.
CES’ US market share has also been on a growing trend, which until recently had been generated almost exclusively through acquisitions. This isn’t too surprising: we think it’s inherently difficult to grow market share while simultaneously digesting acquisitions, particularly in the hyper-competitive US market. However, CES’s last major US drilling fluids acquisition – Venture Mud One in the Permian Basin – was almost 2 ½ years ago. CES’s US market share was predictably static at between 8% and 9% over the following 3 to 4 quarters, but began growing noticeably late in 2014, albeit as the rig count declined. Some of this growth has no doubt been a function of virtuous geography; that is, CES is focused on resources plays that have been relatively less impacted by the downturn – the Permian in particular. But we also suspect that CES could be making marginal gains by leveraging its broader product offering through its acquired distribution channels.
For now, we expect stable market share from CES in the US at between 10% and 11%, while a growing rig count might imply modest differential rig count increases outside of the core plays where CES operates today.
Exhibit 12: CES’ North American Drilling Fluids Market Share Growth Profile
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
20%
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28%
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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015E 2016E 2017E
Mar
eket
Sh
are
(%)
Canada
Rheotech acquired
ProDrill acquired
1%
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3%
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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015E 2016E 2017E
Mar
ket
Shar
e (%
)
USA
Fluid Managementacquired
Mega Fluids acquired
Venture Mud acquired
Canadian Energy Services & Technology Corp. Canada Research | Page 15 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Schlumberger and Halliburton together command almost 60% of the global drilling fluids market, and closer to 68% giving effect to Baker Hughes’ potential contribution to Halliburton’s share. Newpark and CES vie for 4
th and 5
th spots on the global scale (or 3
rd and 4
th giving effect to the
HAL-BHI combination) with about 6% market shares each. Newpark is about 65% larger than CES in the US market, but CES is more than 3x larger than Newpark in Canada.
Exhibit 13: Drilling Fluids Market 2015 and CES’s Market Share
Source: Canadian Energy Services & Technology Corp., Spears & Associates, Inc., Raymond James Ltd.
Canadian Drilling Fluids Market
The Canadian market is concentrated in the hands of two competitors: CES with approximately 34% market share and Marquis Alliance (Secure Energy Services) with about 30%. We further estimate Newpark Resources has about 9% market share, giving these 3 providers close to 75% of the Canadian market. We are uncertain about Schlumberger’s and Halliburton’s respective market shares within the remaining 25%, nor are we sure about the respective market shares of the remaining private companies such as Blackstone Drilling Fluids, Mudco, or Prairie Mud.
The key, high-value markets in Canada are the horizontal wells within the Montney/Deep Basin, where drilling fluid systems can cost more than $200,000 per well, and the SAGD market, where exotic fluids are required to maintain circulation and wellbore stability – fluid costs can run even higher on a per day basis. Based on anecdotes, our observation is that CES and Marquis Alliance are the dominant competitors in both of these key markets.
US Drilling Fluids Market
Few companies disclose their US-specific drilling fluids revenues – not even CES does – making it difficult to quantify competitive positioning. We can say that CES had been supplying drilling fluids to roughly 10% of active onshore US rigs in 2Q and 3Q15 via its AES Drilling Fluids division. We estimate that CES’s 8% market share in 2014 generated US$400 mln revenue for CES and about US$40 mln EBITDA. Our best guess is that the US onshore market as a whole gave rise to about US$4.5 bln revenue and US$450 mln EBITDA for drilling fluids providers.
Schlumberger and Halliburton are the two largest competitors – Baker Hughes is likely 3rd
with Newpark and CES 4
th and 5
th, respectively.
Given that horizontal length is a key driver of demand we believe that the Eagle Ford, Permian, Marcellus, Utica and Bakken are key plays for many drilling fluids companies. Reservoir complexity – a nebulous term encompassing everything from permeability to reservoir temperature – is also a driver for drilling fluids revenues. Along these lines, we expect the deep and prolific Utica wells will be especially fluid-intensive.
Canada Research | Page 16 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 14: Major North American Drilling Fluids Competitors
Source: Canadian Energy Services & Technology Corp., Newpark Resources Inc., Secure Energy Services Inc., Spears & Associates, Raymond James Ltd.
CES as a Vertical Integrator
CES has continuously articulated the advantages that its Specialty Chemicals division offers to its Drilling Fluids businesses, particularly when it comes to designing, improving and ultimately manufacturing new chemistries and products. But a more immediate and tangible example of vertical integration can be found in CES’s new barite grinding facility in Corpus Christi, Texas. Barite is commonly used to add density (weight) to drilling fluids, thus maintaining well control.
This facility began milling crude barite in 4Q15. We anticipate that CES’s integration into this aspect of its supply chain will primarily result in reduced costs of sale on barite, improving its cost structure by about $4 to $5 mln annually, depending on throughput.
Crude barite from the mill is also marketed on the wholesale market under the trade name Superior Weighting Products. This should allow CES to realize higher throughput and ultimately higher cash flows in association with the mill.
Specialty Chemicals Competitive Setting and Dynamics
We peg CES’s addressable market in North American Oilfield Chemicals at approximately $8 bln in 2014 – and probably closer to $5.5 to $6 bln in 2016 given the reduced demand and lower pricing prevalent today. We define the addressable market as including production, stimulation, fracturing, midstream, and enhanced oil recovery chemical. In full disclosure, we have stitched these estimates together using data from various sources including The Freedonia Group, Inc., Spears & Associates, CES, and our own estimates of demand elasticity as it varies with capital spending and the rig count.
We expect EBITDA margins across the oilfield chemicals product lines are averaging 16% to 20% today – but data here is even less accessible. That said, we suspect that absent today’s pricing discounts, margins in 2014 should have been at least 500 basis points higher. This means that in 2014 there were about $1.7 to $2.0 bln EBITDA up for grabs in the North American oilfield chemicals market and that this has probably shrunk by 40% in today’s market.
Primarily Drilling Fluids
Competitor Parent Company Parent Industry
Competitive
Regions
Global Market
Share by Product
Line
Can & US Onshore
Market Share
Estimates
React Basic
Chemistry or
Blend
Canadian Engy Svc Canadian Energy Svcs (CEU-T) Oilfield Svcs Can / US Drilling Fluids: 5% Can: 34% | US: 10% React
Spec Chem: <1% Can: 5% | US: 2%
M-I Swaco Schlumberger (SLB-N) Diversified Oilfield Global / Drilling Fluids: 25% Blend
Can / US Spec Chem: 7%
Multi-Chem Halliburton (HAL-N) Diversified Oilfield Global / Drilling Fluids: 25% Blend
Can / US Spec Chem: 6%
Newpark Newpark Res (NR-N) Oilfield Service US / Global Drilling Fluids: 6% Can: 9% | US: 13% Blend
Qmax Solutions Qmax Solutions Oilfield Global / Can / US Drilling Fluids: 3% React
Marquis Alliance Secure (SES-T) Oilfield Svcs Can Primarily Drilling Fluids: 2% Can: 30% | US: na Blend
Some US Spec Chem: <1% Can: ~0% | US: na
Anchor Anchor Drilling Fluids USA Oilfield Svcs US Primarily Drilling Fluids: 5-8% Blend
Some Offshore Spec Chem: <1%
Most production chemical demand is in fact driven by water production rather than oil or gas production – many production challenges are caused by water.
Canadian Energy Services & Technology Corp. Canada Research | Page 17 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
What it Takes to be Competitive in Specialty Chemicals
CES’s Canadian and US Specialty Chemicals businesses – PureChem in Canada and JACAM in the US – have been growing noticeably since PureChem was conceived in 2011 and JACAM was purchased in 2013. By our estimates, JACAM in particular has grown more than 40% since 2Q14 and today is generating close to half of CES’s US revenues (RJL estimates).
In this section we outline 3 factors that correlate with market share and market share changes in the specialty chemicals industry. These are (1) the competitor’s primary industry, (2) the degree to which they react their own basic chemistry, and (3) the size of the overall organization.
Primary Industry: An Oilfield Services Company that Sells Chemistry or a Diversified Chemicals Company that Sells to the Oilfield?
The distinction is important. We think that a company’s primary industry influences its culture and approach to the customer base. Companies that service a wide variety of industries with chemical products, that might include home and personal care, municipal water treatment, healthcare, sanitation, or agriculture, might be disadvantaged to companies that ‘grew-up’ more exclusively in the oilpatch. Oil and gas producers require a timely combination of product and service delivery in often tricky environments. Producers also effect purchase decisions at a variety of points up the procurement hierarchy, which itself can present challenges to service providers. We feel this has the potential to be much more important for the Specialty Chemicals business than it is for Drilling Services, since just about every Drilling Services competitors is an oilfield services company first and foremost already.
Nalco-Champion has the highest specialty chemicals global market share at approximately 37%. Nalco-Champion is owned by Ecolab, which is a Minnesota-based, international diversified chemicals business. However, in 2011 it purchased Nalco Holdings and followed this up a year later with Champion Technologies – a Houston-based oilfield-focused specialty chemicals company. The aggregate market share of Nalco-Champion hasn’t changed materially from before the acquisitions, and we believe it’s these oilfield cultures within the Champion and Nalco acquisitions that have enabled continued success.
Baker Hughes is a diversified oilfield services provider with about 28% of the specialty chemicals market. Baker is a long incumbent in oilfield specialty chemicals and effectively doubled its presence in 1997 through the acquisition of Petrolite Corporation.
Basic Chemistry or Blender?
Again, we feel this is more important for specialty chemicals providers than it is for drilling fluids, though there might ultimately be some cost advantages for drilling fluids as well. Through JACAM, CES reacts its own basic chemistry in lieu of blending chemicals purchased from wholesalers. Reacting basic chemistry provides a cost advantage over purchasing blended product, but it also enables smaller competitors, like CES, to differentiate their service offerings to include more tailored, field-specific solutions, and equally as important – on a timely basis.
Exhibit 16: Specialty Chemicals Competitive Landscape; React Basic Chemistry or Blend
Chemical Production Capability
React Basic Chemistry Blend
Pri
mar
y In
du
stry
Oilfield Service
Nalco-Champion – 37% mkt share
Baker Hughes – 28% mkt share
CES – 3% mkt share (*RJL est)
Multi-Chem (HAL) – 6% mkt sh
M-I Swaco (SLB) – 7% mkt sh
Diversified Chemicals
WEC (Lubrizol) – 2% mkt share
Innospec – 1% mkt share
Flotek Ind – 3% mkt share
Source: Spears & Associates, Raymond James Ltd.
Exhibit 15: CES Specialty Chemicals Revenues (RJL est)
Source: Raymond James Ltd.
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S$ R
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PureChem (CAD$)
Jacam (US$)
Canada Research | Page 18 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Small Nimble Competitor or Large “Ministry of Specialty Chemicals”
Whatever advantages size has in most oilfield service industries, differential growth isn’t usually one of them. Within the Specialty Chemical vertical, smaller companies like CES and Flotek (despite its recent challenges) have grown considerably more rapidly than their larger counterparts, like Nalco Champion or Baker Hughes. In 2014, the pace of growth for smaller specialty chemicals companies was more than twice that of their larger counterparts. We suspect this is a function of a number of factors, including:
Larger companies have greater potential for disconnections between their centralized product development / R&D centers and their regional marketing groups. By contrast, it’s more likely that smaller service providers can provide more customized service, providing a tactical marketing advantage. Ultimately, this small company advantage erodes as the company grows, and the degree of tailored service becomes less practical.
By virtue of their scale and scope, larger service providers open up fewer new regions, fewer new plays and win over fewer new customers. Moreover, when they do, these new avenues for growth are small relative to their overall size.
Exhibit 17: Major North American Specialty Chemicals Competitors
Source: Canadian Energy Services & Technology Corp., Newpark Resources Inc., Secure Energy Services Inc., Spears & Associates, Raymond James Ltd.
Fracturing Chemicals – Another Avenue for Growth
We view the fracturing chemicals market as both sizeable and addressable by CES, and therefore worth paying attention to.
Large-scale producers have for years been looking for ways to drive down development costs. The more obvious methods have been to make development processes more efficient through means such pad drilling, batch drilling, better drilling fluid technology, etc. This has been some of the lowest hanging fruit in terms of cost reduction. But as the marginal returns to efficiency improvements diminish, some producers have been looking to enter the supply chain for ways to minimize dollars paid for various completion products. By and large this has meant proppant or frack sand for the time being.
More recently, the drive to reduce costs has moved to the fracturing chemicals supply chain. Fracturing companies traditionally mark-up the price on chemicals (though this is less true in today’s narrow margin environment), so some producers have been purchasing chemicals directly from suppliers.
We believe this opens the door for fracturing chemicals suppliers to redirect some of their marketing efforts to producers instead of fracturing companies. In many cases, this puts the
Primarily Specialty Chemicals
Competitor Parent Company Parent Industry
Competitive
Regions
Global Market
Share
React Basic
Chemistry or
Blend
Canadian Engy Svc Canadian Energy Svcs (CEU-T) Oilfield Svcs Can / US Drilling Fluids: 5% React
Spec Chem: <1%
Nalco Champion Ecolab (ECL-N) Diversified Chem Global / Can /US Spec Chem: 37% React
Baker Hughes Baker Hughes (BHI-N) Diversified Oilfield Global / Spec Chem: 28% React
Can / US Drilling Fluids: 9%
WEC Lubrizol (private) Diversified Chem Global / US Spec Chem: 2% React
Drilling Fluids: 2%
Flotek Flotek Industries (FTK-N) Diversified Oilfield US Primarily Spec Chem: 3% React
Clariant Clariant (CNF-SIX) Diversified Chem Global / US Spec Chem: ~1% React
Innopsec Innospec (IOSP-US) Diversified Chem US Primarily Spec Chem: 1% React
Canadian Energy Services & Technology Corp. Canada Research | Page 19 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
chemical supplier in direct competition with their fracturing company customers, which can put some of their sales at risk.
But CES is unencumbered in this regard. CES has not traditionally sold fracturing chemicals to pumpers, so it isn’t compromising customer relationships. As such, gains in the fracturing chemical market would be all incremental for CES.
While the ultimate customer is the producer, the marketing focus within the producer is different from CES’s traditional drilling engineer customers on the drilling fluids side, or production engineers on the production chemicals side. As such, CES needs to develop a marketing capability and strategy for reaching completions groups within the producers. We understand that CES is working on this today.
The size of the fracturing chemicals market obviously moves with the rig count, but we’d estimate the 2014 North American market was about US$3.6 bln and has since moved down to about US$2.5 bln in 2015 and will be closer to US$1.6 bln in 2016. Higher levels of capital spending in 2017 should push the size of the fracturing chemicals market back up to US$2.7 bln.
Exhibit 18: Estimated Fracturing Chemicals Market Size
Source: Baker Hughes Inc., CAODC, Spears & Associates, Raymond James Ltd.
Acquisitions: Growth Through Leveraging Untapped Potential
Approximately half of CES’s capital spending since 2010 has been directed to acquisitions. We anticipate acquisitions will remain a key element of its growth strategy going forward, making an understanding of its acquisition strategies important for investors.
We believe that CES has developed a set of disciplines in selecting potential acquisitions and a program for improving on these acquisitions once integration commences. The evidence is overwhelming that CES is highly effective at both: our analysis strongly suggests that CES has driven higher cash flow yields from its acquired assets than they were generating at the times of their acquisitions.
In Exhibit 19, we make the assumption that CES generally realizes a 25% EBITDA yield from its organic capital expenditures – this is the lowest data series (dark grey). To this we add the EBITDA that was being generated from acquisitions at the time of the acquisition. These figures can be imputed from press releases and is represented with the darker (blue) second series. The highest series (light grey) is the difference between CES’s actual reported EBITDA and what it would have generated had it not leveraged more EBITDA from its existing and/or acquired assets.
2014 2015 2016 2017
Canada (C$mln) 520 335 305 455
USA (US$mln) 3,120 2,255 1,365 2,395
North America (US$mln) 3,590 2,520 1,595 2,740
Analysis Parameters
Chemicals as % of Avg. Fracturing Cost 15% 15% 15% 15%
Canadian Rig Count 369 185 166 247
US Onshore Rig Count 1,804 947 594 1,048
CAD/USD 0.91 0.78 0.76 0.76
The evidence is strong that CES has developed a highly effective strategy of selecting and growing target companies.
Canada Research | Page 20 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Exhibit 19: Rough EBITDA Attribution Estimates: The Whole is Bigger than Sum of Parts
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
So, How does CES lever higher cash flow / EBITDA from its acquisitions?
As we understand CES’s strategy, for any acquisition to be considered, there needs to be clear potential to lever more cash flow / EBITDA from its assets. CES identifies 4 steps to generate EBITDA growth though acquired businesses.
Retain Key Employees through a Retention Fund Carved-Out from the Acquisition Price.
The first and likely the most important step is for CES to foster a transition in which it loses as little as possible. Our view is that buyers almost always lose something in an acquisition – often key personnel (and their customers), especially if they had been sought after by competitors.
Rather than implicitly assume that the key revenue-driving personnel and managers are effectively chattels of the acquired company, CES formally recognizes their importance to the organization. CES endeavors to retain key employees by ensuring they participate in the acquisition price by carving-out a retention fund from the price.
CES has repeatedly cited this practice as a key element for success in its acquisition strategy – and it is a prerequisite for CES to proceed with an acquisition. Importantly, the retention fund is carved-out of the purchase price by the vendor, not by CES. In practice, vendors have carved out anywhere from 5% to 20% of the total purchase price for its key employees.
Provide the Acquired Company with CES’s Scale and Cost Advantages.
CES is a large purchaser of most materials for drilling fluids – significantly larger than any company it acquires – and therefore enjoys greater economies and wholesale discounts. But CES is also likely to be more basic in several materials, including barite, which it mills itself, and in certain chemicals, many of which CES reacts itself. These two factors can drive up to 5% points of margin into a drilling fluids business (RJL estimate), which can translate roughly to a 20-25% lift in EBITDA contribution – usually within a year of the acquisition.
Use its Access to Capital and Lower Cost of Capital to Optimize the Acquired Business.
Access to low-cost capital is often an issue for growing private businesses. In drilling fluids and specialty chemicals businesses, it can mean sub-optimal inventory management and inadequate production capacity or infrastructure. CES usually provides some additional capital to acquirees and/or makes its existing distribution and warehousing infrastructure available – the impact of which is usually noticed within a year of the acquisition.
-$25
$0
$25
$50
$75
$100
$125
$150
$175
$2001
Q1
0
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
EBIT
DA
(Tr
ailin
g 4
Qu
arte
rs, $
mln
)
EBITDA Leveraged from Existing and Acquired Assets
Acquired EBITDA
EBITDA from Original Assets and Cummulative Organic Capex
Canadian Energy Services & Technology Corp. Canada Research | Page 21 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Make Available its Broad Product Lines to the Acquired Company’s Salesforce and Customers.
CES has developed a broad set of product lines, some of which have the potential to address drilling or production-related problems that were outside the scope of what the acquired company could address. CES works to broaden, and sometimes improve the product offerings through the acquired company’s customer base. CES’s experience is that it takes time for acquired companies’ salesforces to develop the product-knowledge and gain comfort with the new products, but the ultimate result is deeper penetration into the acquiree’s existing customers. This usually takes longer than a year to notice results.
CES has been Investing Roughly Evenly between Drilling Services and Specialty Chemicals
Approximately half of CES’s capital expenditures over the last 5 years have been on acquisitions: $501 mln worth spread over 10 transactions since 2010, making CES the most acquisitive Canadian oilfield company in at least 5 years.
Most of these acquisitions (5 of the 10) were for Drilling Fluids businesses – 3 in the US and 2 in Canada. The other five acquisitions, including its largest single acquisition (JACAM) were specialty chemicals businesses, 2 in the US and 3 in Canada. In dollar terms, most of the acquisition dollars were allocated to specialty chemicals businesses - $324 mln of the $501 mln total.
Fluid Management, Venture Mud and JACAM were Transformative Transactions
All acquisitions are anticipated to add cash flow and EBITDA immediately, and the price paid for the acquisition is typically characterized by its multiple of acquired EBITDA – though this price should not be confused with the ‘value’ of transaction.
CES’s acquisition approach means that it will anticipate levering incremental EBITDA through its acquisitions – some acquisitions have more potential for this than others and these represent higher-value transactions. All things equal, we should expect these ‘higher-value’ transactions to come at a higher price, and in general, we see this in Exhibit 20 - transactions that have more potential ‘strategic value’ have generally come at slightly higher multiples of EBITDA. We estimate the average acquisition multiples of ProDrill Fluid Technologies, Rheotech Drilling Fluids, Champion Drilling Fluids, and Southwest Treating was 6.3x EBITDA, whereas the average for Canwell Enviro-Industries, Clear Environmental Solutions, and Mega Fluids Mid-Continent was 5.7x.
However, some acquisitions open the door to avenues for growth that were previously unavailable to the company and some have the potential to usher fundamental changes across the company. We view the Jun-2010 purchase of Fluid Management II, the Mar-2013 purchase of JACAM Chemical Company, and the Jul-2013 purchase of Venture Mud One as transformative acquisitions.
A detailed discussion of each of CES’s acquisitions can be found in Appendix 2 of this report, though a brief summary of these transformative acquisitions is provided here:
Fluid Management II: Purchased in Jun-2010 for $67 mln (6.8x trailing EBITDA). Fluid Management opened the door for CES into the Marcellus and runs the only drilling fluid blending facility in Pennsylvania with a Department of Environmental Protection-approval for blending hydrocarbon-based fluids.
Venture Mud One: Venture Mud was purchased in Jul-2013 for $58 mln (approximately 4.7x trailing EBITDA). Venture Mud’s West Texas location provided the platform for CES’s growth into the Permian Basin, which in retrospect has been especially fortuitous.
JACAM Chemical Company: Purchased in Mar-2013 for $246 mln (9.5x trailing EBITDA). JACAM materially opened the door to supplying base chemistry and was a material entrant into the specialized chemicals business.
While we can’t yet substantiate it, we feel that Sialco deserves special mention since it could rank as a strategically very important acquisition. A portion of its business serves large US-based, consumer products customers, which could become another growth avenue for CES.
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Exhibit 20: Acquisition Size, Multiple, and Strategic Value
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
CES’s Typical Consideration Package is 35% to 65% Cash, Followed by 25% to 40% in CES Shares, and at Least 10% and as much as 40% in Deferred or ‘Performance’ Compensation
Regardless of how strategic or how large an acquisition might be, CES tends to finance anywhere from 35% to 65% of its acquisition with cash. The second largest component in CES’s typical consideration package has been direct treasury shares or ‘vendor stock’. CES has generally financed anywhere from 25% to 40% of its acquisitions via shares to the vendors. CES generally escrows these shares, releasing them gradually over 3 years. In our view, the relationship-intensive nature of the drilling fluids and specialty chemicals businesses means that it’s almost always imperative to retain founding or key management through an adequate transition period, which may extend for more than 2 or 3 years in some cases.
Clear
Champion
Fluid Management
Petrotreat
ProDrill
Mega
JACAM
Venture
Rheotech
Canwell
Southwest
Sialco
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
Mu
ltip
le o
f EB
ITD
A
Standard Strategic Value Transformative
Specialty Chemicals Acquisition
Drilling Fluids Acquisition
[Size of Bubble Represents Size of Acquisition]
Canadian Energy Services & Technology Corp. Canada Research | Page 23 of 48
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Appendix 1a: Drilling Fluids Products, Additives, and Functions
Drilling Fluids: Circulation Control & Drilling Efficiency
The primary roles of any drilling fluid system is to ensure that the fluids are continuously passed through the drill bit. This circulation (a) removes drill cuttings, thereby cleaning the leading edge of the wellbore, (b) conditions the wellbore, keeping it stable, (c) cools the drill bit which preserves its life, (d) lubricates the drill string, and (e) maintains sufficient weight on the producing formation to maintain control of the well (which prevents blowouts).
Problem Applicable to… CES Solutions / Products
Examples of Competing Products
Anti-Accretion
Source: www.drillingformulas.com Prevents the build-up of adhesive materials such as clays and heavy bitumen on downhole equipment and prevents bit balling which can substantially reduce rate of penetration.
SAGD drilling fluids
Shale formations
Clay formations
Bit-Encap
Tarbreak
Tarbreak II
MAX-GUARD™ (Baker Hughes)
Tech King (HiTech Fluid Systems)
Rheology Control (Deflocculants / Thinners / Dispersants
When clays, polymers or other particles cluster together it can cause the filter cake to become thicker and more permeable allowing for fluid/circulation losses. In general these chemicals are used to control the flow characteristics of the drilling fluid (rheology).
All types of drilling fluid systems.
EnerMod
THERMA-FLOW 500™ (Multi-Chem)
Flocculants / Viscosifier / Gelling Agents
Used to increase the viscosity of drilling fluids or aggregates particles to better remove cuttings. Gels and viscosifiers helps to ensure cuttings don’t fall to bottom of wellbore during periods of non-circulation.
All types of drilling fluid systems.
Drill-In 20 P
EZ Gel™ P
Lubrigel -L™
Alkapam (Marquis Alliance)
TAU-MOD™ (Multi-Chem)
Lubricants / Surfactants
Reduces friction in the drilling fluid system – increase fluid rates.
All types of drilling fluid systems.
Liquislide S
SILGLIDE™ (Marquis Alliance)
Amidex™ (Lubrizol)
Mixed Metal Hydroxide (MMH)
Poor wellbore integrity – where wells tend to ‘wash-out’ or circulation losses are endemic.
Formation-dependent
EnerSeal™ Rheovis (Francis Drilling Fluids)
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Drilling Fluids: Equipment Protection & Wellbore Integrity
As the drill string passes through different formations with differing properties such as PH, porosity, permeability, pressure and temperatures it is important that the drilling fluid is able to remain stable and protect both the wellbore and downhole equipment from damage such as erosion, corrosion and fluid loss.
Problem Applicable to… CES Solutions / Products Examples of Competing Products
Biocides Bacteria can degrade and erode
components of drilling fluids and cause corrosion of metal equipment.
Water based drilling fluids.
Myacide GA 25
X-Cide 207
Bleach 12%
BIOTREAT (Clariant)
Buffers Drilling muds will in most cases need to
have a PH higher than 7.0, this is usually done by adding caustic soda (NaOH). Buffers are used to stabilize the PH of drilling muds, especially in lower PH environments like ones where sour gas are present.
Water based drilling fluids.
EnerBuff
Corrosion Inhibitors / Oxygen Scavengers
Source: www.iStockphoto.com Sulphur, CO2, oxygen, chlorides (salts), are corrosive to metal surfaces.
Any drilling fluid system where water or brine is present.
EnerHib C
EnerScav C
CORINOX (Marquis Alliance)
BARACOR® (Multi-Chem)
Filtrate Reducers Drilling fluid lost into a formation through
a filter cake (a build-up of slurry on a medium such as a lost circulation material, designed to isolate and minimize fluid loss) is known as a filtrate. When there is excessive fluid loss (filtrate), shale formations can expand and potentially collapse and clay formations can expand and block hydrocarbon. Filtrate reducers are used to control fluid loss.
All types of drilling fluid systems.
EnerBind
Ener-G
Enertrol
EnerNite
HOSTADRILL® (Clariant)
SECURE-STAR™ (Marquis Alliance)
Lost Circulation Materials
Used to prevent drilling fluids from entering permeable formations downhole known as fluid loss or seepage. These are usually fibrous or granular materials, that act to plug or seal off formations or fissures where fluid loss, seepage and lost circulation can occur.
All types of drilling fluid systems.
CottonSeal™
Seal-AX™
PolarWhite ™
WhiteFury™
BaraShield™ (Multi-Chem)
CHEK-LOSS™ (Baker Hughes)
Shale Control When shale formations absorb water they
can expand and potentially collapse or slough into the wellbore causing sticking and/or packing off.
Wells that target or pass through shale formations.
Envirobond™ Plus
SHALE-BOND™ (Baker Hughes)
Canadian Energy Services & Technology Corp. Canada Research | Page 25 of 48
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Appendix 1b: Sample Specialty Chemicals Products, Additives, and Functions
Specialty Chemicals: Flow Assurance
Oil and gas production includes many unwanted byproducts that can hinder production often by restricting flow or reducing the effectiveness of equipment. Flow restrictors include wax, scale, or asphaltene deposition. Other issues include foam generation that can reduce the ability of separation equipment.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Scale Inhibitors / Removers
Scale can accumulate inside of pipes and fluid handling equipment significantly restricting flow.
Producing Wells
Injection Wells
Disposal Wells
Water Handling Equipment
Scale Inhibitors (OSI / WSI)
Scale Removers (OSR / WSR)
Combination Scale / Corrosion Inhibitors (OCS / WCS)
Accent™ Scale Inhibitors (Dow Oil & Gas)
SCALETREAT (Clariant)
TORRENT® ISI (Innospec)
Paraffin & Asphaltene Control / Inhibitors / Dispersants
Paraffin and Ashpaltene can accumulate inside of pipes and fluid handling equipment restricting flow.
Producing Wells
Flow Lines
Pipelines
Tank Bottoms
Paraffin & Asphaltene Dispersants
Paraffin Inhibitors
Paraffin Solvents
FlowZol® (Lubrizol)
WAXTREAT (Clariant)
TORRENT® IPD (Innospec)
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Specialty Chemicals: Equipment Integrity / Protection
Almost every piece of oilfield equipment that comes in contact with oil and gas is susceptible to corrosion or fouling. This includes drilling and completion equipment like drill pipe, bottom hole assemblies, and fracturing tools. It also includes production equipment like well tubulars, artificial lift, and separation equipment. Midstream assets like pipelines, plant equipment, and ultimately, downstream assets such as refineries.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Corrosion Control
Source: www.iStockphoto.com Sulphur, CO2, oxygen, chlorides (salts), are corrosive to metal surfaces.
Compressors
Oil Batteries
Well tubing
Flow lines
Separation equipment
SuperCoat
SuperCorr® , SuperCorr® X, SuperCorr® PT
Oil / Water Soluble Corrosion Inhibitors (OCI / WCI)
WOS (Water-based Oxygen Scavenger)
EnerCept® (Nalco)
CORRTREAT® (Clariant)
TORRENT® OCO (Innospec)
Biocides
Source: www.iStockphoto.com Bacteria-induced corrosion.
Fracking & Completions
Water injection
Cooling Systems
Produced water
Various
Acrocide™ (Multi-Chem)
BIOTREAT (Clariant)
TORRENT® IBI (Innospec)
H2S Scavengers
Source: www.iStockphoto.com
Ensuring Pipeline & Railcar specifications
Gas Sweeteners
H2S Scavenging Units
Petrosweet™(Baker Hughes)
SCAVTREAT® (Clariant)
Oxygen Scavengers Dissolved oxygen is corrosive in water
systems. Water handling
systems.
EnerBind
Ener-G
Enertrol
EnerNite
NaturaLine® (Multi-Chem)
Canadian Energy Services & Technology Corp. Canada Research | Page 27 of 48
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Specialty Chemicals: Production Optimization
Solutions for production optimization include chemistries that enhance recovery in the reservoir, improve the functioning of separation equipment or reduce operating costs. This is a broad area of oilfield chemistry that often involves integrated programs and processes involving several chemistries to resolve problems.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Anti-Foulants
Source: www.iStockphoto.com Asphaltene, iron sulfide, and other foulants collect on process equipment.
Process equipment
Compressors
Cooling systems
Water handling equipment
Iron Sulfide Dissolver
Water Clarifier
Solvents
Inhibitors
Dispersants
AcroClear® (Multi-Chem)
Demulsifiers
Source: www.iStockphoto.com Emulsions of oil in water or water in oil create operational problems for equipment and can block production around the wellbore. Water-in oil emulsions are often stubbornly stable but the salts they carry can be corrosive.
Producing wells
Flow lines
Pipelines
Tank bottoms
Water injection
Emulsion Breakers (OEB)
DISSOLVAN® (Clariant)
PHASETREAT® (Clariant)
TORRENT® IDI (Innospec)
Defoamers
Source: www.iStockphoto.com
Separation equipment
Pumps
Tanks
Other oil and water systems
Oil and Water-soluble Defoamers (ODF / WDF)
FOAMTREAT (Clariant)
Hydrate Inhibitors / Breakers
High pressures and low temperatures allow water and gas to combine into ice-like solids that can restrict flow or plug production entirely.
Artificial lift
Oil and Water-soluble Defoamers (ODF / WDF)
RELTREAT (Clariant)
Salt Inhibitors / Desalters
Salts in oil can impede oil-water separation and cause buildup.
Oil wells
Separation equipment
Refining
Desalt Liquid
Oil and Water-soluble Defoamers (ODF / WDF)
SCALETREAT (Clariant)
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Specialty Chemicals: Midstream and Downstream
Almost every piece of oilfield equipment that comes in contact with oil and gas is susceptible to corrosion or fouling. This includes drilling and completion equipment like drill pipe, bottom hole assemblies, and fracturing tools. It also includes production equipment like well tubulars, artificial lift, and separation equipment. Midstream assets like pipelines, plant equipment, and ultimately, downstream assets such as refineries.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Corrosion Control
Source: www.iStockphoto.com
Sulphur, CO2, oxygen, chlorides (salts), are corrosive to metal surfaces
Pipelines
Refineries
Compressors
Gas Plants
Oil Batteries
Flow lines
SuperCoat
SuperCorr® SuperCorr® X, SuperCorr® PT
Oil / Water Soluble Corrosion Inhibitors (OCI / WCI)
WOS (Water-based Oxygen Scavenger)
PRESERVAN® (Clariant)
H2S Scavengers
Source: www.iStockphoto.com
H2S content in produced fluids creates significant safety issues.
Ensuring Pipeline & Railcar specifications
Tankage
Gas Sweeteners
Oil-Soluble
Torrent® HSS (Innospec)
SCAVTREAT® (Clariant)
Anti-Foulants Iron Sulfide, Paraffin, Asphaltene can
precipitate out of fluids and its deposition reduces flow rates, creates choke points, and can cause equipment failure.
Valves, Flowlines, pipelines, precessing equipment, compressors.
Dispersants, solvents, inhibitors.
Various
Filtrate Reducers Drilling fluid lost into a formation through
a filter cake (a build-up of slurry on a medium such as a lost circulation material, designed to isolate and minimize fluid loss) is known as a filtrate. When there is excessive fluid loss (filtrate), shale formations can expand and potentially collapse and clay formations can expand and block hydrocarbon. Filtrate reducers are used to control fluid loss.
All types of drilling fluid systems.
EnerBind
Ener-G
Enertrol
EnerNite
HOSTADRILL® (Clariant)
SECURE-STAR™ (Marquis Alliance)
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Biocides
Source: www.iStockphoto.com Bacteria-induced corrosion.
Fracking & Completions
Water injection
Cooling Systems
Produced water
Various Various
Hydrate Inhibitors / Breakers
High pressures and low temperatures allow water and gas to combine into ice-like solids that can restrict flow or plug production entirely.
Artificial lift Oil and Water-soluble Defoamers (ODF / WDF)
Various
Oxygen Scavengers Dissolved oxygen is corrosive in water
systems. Water handling
systems WOS 1
Oxygen Scavenger
PRESERVAN® (Clariant)
SCAVTREAT® (Clariant)
Specialty Chemicals: Stimulation Chemicals
Stimulation chemicals are designed to improve effective permeability or conductivity in formations. Often, resolving one reservoir issue creates other issues as a byproduct. For example, acid treatments can create precipitates and sludge within a formation, hampering permeability.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Acids Limestone, dolomite, calcite cement, clay
all reduce permeability of source rock. Oil wells primarily. Various acid
packages
Acid-Solvent Coupler
Various
Surfactants & Non-Emulsifiers
Introducing fluids into a formation can create emulsions, which can disrupt permeability.
Poor oil or water conductivity in producing or injection wells
Sand management
Foam management
Well Fracturing
Water Floods
Producing Wells
Injection Wells
Disposal wells
Various
RockOn® (Mulit-Chem)
Amidex ™ (Lubrizol)
Solvents / Complexing Agents
Various solids and highly viscous products / byproducts of production need to be dissolved to remove them from the reservoir so as to prevent sludging.
Oil wells primarily
Injection wells
STIM-SOLV
STIM-FLO
Fe BAN
Various
Foamers Fluid buildup in the wells of lower
pressure reservoirs causes too much hydrostatic head (called “liquid loading”) and inhibits oil and gas production.
Artificial lift
Water soluble foamers (WF)
Wellboost™ (Clariant)
Chembetaine™ (Lubrizol)
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Specialty Chemicals: Fracturing Chemicals
Well fracturing requires a cocktail of chemistry to achieve often competing goals. The fracturing medium (water of refined oil product) needs to gelled to obtain a target viscosity, but the polymers need to be broken once the frack is complete so the fluid de-viscosifies and can be flowed back. Gelled fluids can damage a formation, water can carry unwanted microbes into the formation, the fluids can cause corrosion, scaling, and other downhole issues, all of which need to be addressed with chemistry.
Problem Applicable to…
JACAM Solutions / Products Examples of Competing Products
Gellants
Source: www.iStockphoto.com
Gellants are required to viscosify either water or refined oil for carrying the fracturing proppants. Many different degrees of viscosification are required from slick water gels (similar viscosity to paint) to very thick gels (similar viscosity to gelatin).
Water and oil-based fracturing treatments
Various Various
Cross-Linkers Required to make a thicker gel to carry
more proppant. Conventional water
and oil based fracturing treatments
Various Various
Breakers Gelled frack fluid reduces conductivity in
the producing formation (gel damage), the gel needs to be re-liquefied to flow back out of the well.
All fracturing treatments.
Various Various
Filtrate Reducers Friction through the length of the
wellbore and through the fractures reduces fracturing pressures and rate.
Slickwater fracturing.
Various
Various
Surfactants & Non-Emulsifiers
Prevent emulsions, create foams, assist with flowback.
Various Various Quatrex™ (Lubrizol)
Biocides
Source: www.iStockphoto.com Water used in fracturing treatments needs to be sterilized to eliminate bacteria-induced degradation of the gels.
All water-based fracks
Various Various
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Clay Control Clays will swell upon contact with water
(from fracturing) greatly reducing permeability in a reservoir.
Water-based fracks in formations where clay is present.
Various Quatrex™ (Lubrizol)
Buffers
pH control is essential to controlling the rate of gelation and break time.
Various
Various
Various
Scale Inhibitors
Water from various sources can deposit scale within the formation and on well tubulars / equipment.
Various
Various
SCALETREAT (Clariant)
JACAM’s solid chemistry – Smart Balls®
Solid delivery is designed to place chemistry in specific locations and deliver that chemistry over time. They can be designed to dissolve rapidly or more slowly, depending on the application. Smart Balls® can be weighted to fall through lighter-density hydrocarbons and stop in settled water, for instance. Smart Balls® can reduce total chemical load and often eliminate the need for chemical pumps or the requirement to shut-in production while traditional liquid chemical circulate.
Exhibit 21: JACAM’s Smart Balls® and System Saver® pellets
Source: Canadian Energy Services and Technology Corp.
Treatpoint
Treatpoint is a value-add web-based chemical-program monitoring platform that JACAM offers at no-charge to its customers. The program allows its customers to monitor the chemical treatments, costs, and analytics of ongoing chemical programs on a well-by-well basis and in aggregate for multiple wells on a high frequency basis (weekly or daily). The system allows completion and production engineers the ability to monitor their chemical programs securely from any computer with web-access.
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Appendix 2: Acquisitions
1. Impact Fluid Systems (Impact) & Canadian Fluid Systems (CFS)
In March-2006, CES completed its initial public offering and concurrently acquired Impact Fluid Systems and Canadian Fluid Systems for total consideration of $86.7 mln, comprised of $50.6 mln cash, 860,594 class A common shares and 2,151,486 class B subordinate shares, and $6.0 mln in convertible notes to account for working capital adjustments. The purchase price (excluding net working capital) represented 7.3x 2005 EBITDA. The majority of the proceeds from the IPO were used as consideration for these acquisitions. Through this acquisition CES gained direct access to the Canadian drilling fluids business, including substantial assets, clientele and technical expertise.
Through the acquisition of Canadian Fluid Systems, CES gained an established drilling fluid system provider with operations focused on Alberta and Southern Saskatchewan. Some notable assets included in the acquisition were Moose Mountain Mud; a division of Canadian Fluid Systems located in Carlyle, Saskatchewan that provides drilling fluid systems in the region, CFS’ proprietary Liquidrill water based drilling system and a client base of 91 oil and gas E&P companies.
Through the acquisition of Impact Fluid Systems, CES gained an established drilling fluid system provider for medium to deep vertical and directional oil and gas wells. Some notable assets included in the acquisition are Impact’s proprietary IFS-Invert invert-based drilling fluid system, Impact’s proprietary Envirobond wellbore stabilizing formula and a client base of 49 oil and gas E&P companies.
2. Clear Environmental Solutions Inc. (Clear)
On June 12, 2008, CES acquired Clear for total consideration of $11.3 mln ($13.3 mln including earn-out) including $7.4 mln of cash (raised through bought deal financing) and 380,488 class A common shares. Subsequent to the acquisition and based on the performance of Clear, CES paid $2.0 mln as part of a one-time earn-out provision; the $2.0 mln was paid with $0.2 mln of cash and the issuance of 223,054 class A common shares. We estimate the purchase price of Clear represents 5.0-6.0x 2008 EBITDA.
The Clear acquisition marked the inception of CES’ Clear Environmental business unit; Clear designs and implements drilling fluid waste removal and disposal programs, and conducts environmental consulting for oil and gas producers operating in the WCSB. Through this acquisition CES was able to provide a more fully integrated drilling fluid system service offering, CES also gained exposure to the shallow gas market and the expertise of Clear’s founders who joined CES to help grow the business.
3. Champion Drilling Fluids Inc. (Champion)
On November 30, 2009, CES and AES Drilling Fluids LLC (CES’ wholly owned subsidiary) closed the acquisition of Champion Drilling Fluids Inc.. Total consideration for Champion was $17.3 mln (US$16.4 mln) including $8.2 mln (US$7.8 mln) cash, $2.4 mln (US$2.3 mln) of deferred cash consideration and $6.6 mln (US$6.3 mln) of subordinate convertible debentures. The purchase price represents 2.7x 2007 EBITDA, 1.9x 2008 EBITDA and 6.0-7.0x 2009E EBITDA.
Through the Champion acquisition CES was able to grow its US drilling fluids business substantially from Champions headquarters in Norman, Oklahoma. CES utilized the Champion platform to grow in key US regions like the Rocky Mountain Region and the Marcellus play it also allowed CES to leverage its proprietary Canadian drilling fluids offerings in the US market with immediate exposure to over 20 existing Champion customers.
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4. Fluid Management II Ltd. (FMI)
On June 30 2010, CES closed the acquisition of FMI – a Houston, Texas based drilling fluids company, for total consideration of $67 mln (US$65 mln). Payment was comprised of an initial cash outlay of $40.6 mln (US$38.7 mln) (financed through a bought deal), $5.2 mln (US$5.0 mln) of deferred cash consideration as part of an earn-out provision, and the issuance of 1,289,370 common shares. The purchase price represented 6.8x TTM EBITDA.
The FMI acquisition was strategically aligned to pursue growth opportunities in the US drilling fluids business by expanding from the platform CES had been growing since the Champion acquisition and exploiting FMI’s customer base. As part of the acquisition, CES gained FMI’s Pennsylvania blending facility, the only drilling mud blending facility approved by the Department of Environmental Protection in Pennsylvania, CES leveraged this facility to gain market share in the Marcellus.
5. Petrotreat Inc. (Petrotreat)
On February 16, 2012, CES closed the acquisition of all of Petrotreat’s business assets – a Red Deer, Alberta based specialty chemicals business for total consideration of $3.2 mln. Payment was comprised of $1.3 mln cash and $1.9 mln in share consideration through the issuance of 147,826 common shares.
Petrotreat offers production chemical and well stimulation services in Alberta and Saskatchewan. The Petrotreat acquisition was used to bolster CES’ Canadian Specialty Chemicals platform, PureChem.
6. ProDrill Fluid Technologies (ProDrill)
On November 21, 2012 CES closed the acquisition of Tervita Corporation’s drilling fluid division, ProDrill Fluid Technologies for total consideration of $12.1 mln. Payment was in the form of $8.7 mln of cash and $3.3 mln of common shares (324,562 common shares). We estimate the purchase price at approximately 6.0x EBITDA.
7. Mega Fluids Mid-Continent, LLC (Mega)
On December 31, 2012, CES and AES (CES’s wholly owned US subsidiary) completed the acquisition of Mega, an Oklahoma based drilling fluids company focused on the Mid-continent region and the Mississippi Lime Oil play; at the time of the acquisition Mega was providing drilling fluids to 16 rigs. Total consideration for Mega was $11.2 mln (US$11.3 mln) of which $3.6 mln (US$3.7 mln) was cash, $4.0 mln (US$4.0 mln) was in share consideration through the issuance of 376,677 common shares, and $3.6 mln (US$3.6 mln) was deferred consideration. We estimate the purchase multiple at approximately 5.0x.
CES affected this acquisition in order to (1) increase AES’ scale and operational capabilities within the Mid-Continent region, and, (2) secure AES as a leading provider of drilling fluids for the Mississippi Lime Oil play.
8. JACAM Chemical Company Inc. (JACAM)
On March 1, 2013, CES acquired JACAM, a Sterling, Kansas based specialty chemical designer and producer for oil and gas production applications. Total consideration for JACAM was $246 mln (US$240 mln) consisting of $174 mln (US$170 mln) of cash (financed through an offering of unsecured notes), $61 mln (US$60 mln) of share
Canada Research | Page 34 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
issuance (5,454,545 common shares issued) and $10 mln (US$10 mln) of deferred cash consideration. The purchase price represents 9.5x TTM EBITDA of JACAM.
The JACAM acquisition presented many strategic rationales for CES including, 1) increasing the breadth of the company’s product offerings to include applications for all stages of the oilfield life cycle, 2) access to all of JACAM’s over 400 proprietary chemical offerings, 3) access to JACAM’s customer base (over 300 customers), 4) leveraging JACAM’s under-utilized state of the art manufacturing facility in Sterling, Kansas for growth and production of its current product line, 5) leveraging JACAM’s technical expertise in producing technically advanced chemical innovations, and 6) to compliment and further grow CES’s current specialty chemicals business, PureChem.
9. Venture Mud One, L.P. (Venture)
On July 15, 2013 CES completed the acquisition of Venture, a West Texas based drilling fluids company focused on the Permian Basin, Venture was subsequently rebranded as AES Drilling Fluids Permian. Total consideration for the acquisition was $58 mln (US$55.2 mln) consisting of $19.5 mln (US$18.5 mln) cash, $13.2 mln (US$12.7 mln) from the issuance of 838,076 common shares and $25.3 mln (US$24.5 mln) of deferred cash consideration. The purchase price represents 4.7x Venture’s 2012 EBITDA.
The acquisition of Venture served as a platform for CES to grow its drilling fluids business in the Permian basin, leveraging its current product offerings and capitalizing on vertical integration through its barite grinding facility (under construction at the time of acquisition).
10. Rheotech Drilling Fluids Inc. Drilling Fluids Assets (Rheotech)
On July 1, 2014 CES completed the acquisition of Rheotech’s drilling-fluids business assets. Rheotech is a private Canadian drilling fluids business that was formed in 1987. Rheotech operates in the WCSB and has a focus on SAGD and long-reach horizontal drilling. CES paid total consideration of $56.5 mln for Rheotech and Canwell (acquisition 11); $23.4 mln in cash upon closing, $16 mln in share consideration (1,456,422 common shares), and $15.9 mln in deferred cash consideration and $1.2 mln in working capital.
The Rheotech acquisition provided an increased footprint for CES’s Canadian drilling fluids business primarily in the oilsands and in the long-reach horizontal drilling market. At the time of the acquisition, Rheotech was providing drilling-fluids products and services to 22 active drilling rigs in the WCSB.
11. Canwell Enviro-Industries Ltd. Production & Specialty Chemicals Assets (Canwell)
On July 1, 2014 CES completed the acquisition of Canwell’s production & specialty chemicals business assets. Formed in 1985, Canwell is a private Canadian specialty chemicals business with a focus on H2S scavengers primarily for use in the oilsands. Canwell’s core H2S scavengers are known as Cansweet, and are produced in-house from its Nisku facility; All of Canwell’s products utilize its patented anti-crystallization additives which inhibit spent or reacted materials from solidifying. CES paid total consideration of $56.5 mln for Rheotech (acquisition 10) and Canwell; $23.4 mln in cash upon closing, $16 mln in share consideration (1,456,422 common shares), and $15.9 mln in deferred cash consideration and $1.2 mln in working capital.
The Canwell assets became part of CES’s PureChem division and were acquired as a strategic play to enter the SAGD production & specialty chemicals market. Through this acquisition, CES also increased its exposure to the conventional Canadian market for production and specialty chemicals, as well as adding another sales avenue for its JACAM chemicals offerings.
Canadian Energy Services & Technology Corp. Canada Research | Page 35 of 48
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12. Southwest Treating Products, LLC (Southwest)
On September 5, 2014 CES completed the acquisition of Southwest; a West Texas based production and specialty chemical business, established in 2006. CES integrated Southwest with its JACAM chemical business and now markets the business under the ‘JACAM Southwest’ brand. Total consideration for Southwest was $21.5 mln (US$19.7 mln), of which $8.7 mln (US$8.0 mln) was satisfied by the issuance of 868,455 common shares, $11.6 mln (US$10.7 mln) was paid in cash on the closing date , and $1.1 mln (US$1.0 mln) was deferred cash consideration.
The addition of Southwest increases CES’ footprint in the US production and specialty chemicals business and accelerates its growth into the Permian and Eagle Ford basins of Texas.
13. Sialco Materials Ltd. (Sialco)
CES acquired Sialco on December 10, 2015. The purchase price wasn’t disclosed at the time of the announcement, nor was the structure, but our expectation is that the price would have corresponded roughly with the magnitude of the concurrently-announced dividend cut – about $25 mln.
Sialco’s serves diversified industries, which we think signals something about CES’s long-term strategy. Sialco has provided chemistry for Canada’s fracturing industry; and during better times fracturing represented as much as half of Sialco’s EBITDA generation, primarily through surfactants – one of the higher margin group of fracturing chemicals – though today that has declined to very low profitability. But Sialco also provides chemicals to the pulp and paper industry – again largely through surfactants. Lastly, and perhaps most significantly, Sialco supplies certain chemicals to US-based consumer products companies – such as cosmetics. Given JACAM’s US manufacturing base and this new customer list, Sialco has the potential to catalyze into a transformative development for CES.
Canada Research | Page 36 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Appendix 3: Company Description and Corporate Timeline
Company Description
Canadian Energy Services & Technology Corp. (CES) is primarily an oilfield consumables producer focused on chemicals used in all stages of hydrocarbon production. CES utilizes its lab facilities to engineer and produce proprietary chemical formulations for use down-hole during drilling, completion, stimulation, production and for pipeline and midstream applications (Refer to Appendix 1 for an overview of CES’ products).
CES was founded in 2001 and is headquartered in Calgary, Alberta and operates its flagship lab in Sterling, Kansas. CES also operates lab facilities in Houston, Texas; Carlyle, Saskatchewan; Delta, BC; and Calgary, Alberta. CES’ main chemical manufacturing and reacting facility is located in Sterling, Kansas, the company also owns a chemical blending facility in Carlyle, Saskatchewan.
Canadian Segment Description
In 2014, CES generated 38% of its consolidated revenues from its Canadian operations, we expect this fell to 31% in 2015 but will rise to 37% in 2016 and 38% in 2017. In Canada, CES operates under five (5) trade names including, 1) Canadian Energy Services, 2) PureChem Services, 3) Clear Environmental Solutions, 4) EQUAL Transport, and 5) Sialco. Since its inception in 2001 CES has grown its Canadian market share of the drilling fluids business to 34%.
Canadian Energy Services this segment is focused on the production and sale of specialized drilling fluid and completion fluid systems in the WSCB.
EQUAL Transportation, from locations in Edson, Alberta and Carlyle, Saskatchewan EQUAL Transportation is CES’ Transportation division. This division provides internal and external services; internally the segment is responsible for transportation and storage of CES’ oilfield chemicals; externally the division provides transportation of produced oilfield fluids for oil and gas producers in the WCSB. This division was conceived in March of 2006 when CES became a publicly traded company on the TSX.
CLEAR Environmental Solutions provides disposal services for water-based drilling fluids produced from oil and gas drilling in the WCSB. The segment also offers site pre-assessments, water well testing, landspray while drilling, sump sampling, treatments, and drilling waste disposal. Clear was acquired in June 2008 for total consideration of $11.3 mln.
PureChem Services is CES’ Canadian division focused on the design, production and implementation of down hole chemicals for use in production, stimulation and fracturing. PureChem is based in Carlyle Saskatchewan and operates the company’s main Canadian lab and blending facility. PureChem began when the blending facility was commissioned in June of 2010 and became operational in 1Q11.
Sialco is CES’s newest addition. Historically, Sialco had been a major supplier of fracturing chemicals in Canada, though with the decline in drilling, pulp and paper and consumer products industries have been generating the bulk of Sialco’s cash flow. We expect fracturing will increase in importance again, once capital spending stages its cyclical recovery. In the interim, we envision Sialco’s industry exposure could open up new distribution channels for CES outside its traditional energy sphere.
US Segment Description
In 2014, CES generated 62% of its consolidated revenue from its US operations, we believe this rose to 69% in 2015; this is the company’s largest business segment and the one where it anticipates the most growth. In the US, CES operates under three (3) trade names including, 1) AES Drilling Fluids, 2) AES Drilling Fluids Permian, and 3) JACAM Chemicals. Since its entry to the US market in 2008, CES has grown its US market share of the drilling fluids business to 8%.
AES Drilling Fluids, from its head office located in Houston, Texas, AES is CES’ US drilling fluids business. AES operates through four (4) regional divisions 1) the Rocky Mountain division (Denver, Colorado office), 2) the Mid-Continent division (Edmond, Oklahoma Office), 3) the Northeast division (Canonsburg, Pennsylvania office), and 4) the Gulf Coast division (Houston, Texas office).
Canadian Energy Services & Technology Corp. Canada Research | Page 37 of 48
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AES was effectively formed when CES’ acquired AES Drilling Fluids, LLC on June 30, 2010 for total consideration of $65 mln; AES was CES’ first entry into the US market.
AES Drilling Fluids Permian this business unit was formed on May 29, 2013 and is located in Midland, Texas. The segment provides drilling and completion fluid systems to oil and gas producers and is focused on the Permian basin of West Texas.
JACAM Chemicals, from CES’ flagship lab facility in Sterling, Kansas, JACAM is CES’ US division focused on the design, manufacturing and implementation of specialty oilfield chemicals. JACAM was acquired in March of 2013 for total consideration of $240 mln. JACAM has four (4) wholly owned subsidiaries, 1) JACAM Chemicals 2013, LLC, 2) JACAM Manufacturing 2013, LLC, 3) JACAM Carriers 2013, LLC, and 4) JACAM Aviation 2013, LLC.
Company History
Canadian Energy Services & Technology Corporation became publicly listed on the TSX under the ticker CEU-TSX on March 2, 2006 through an IPO of 5,893,866 common shares that generated gross proceeds of $58,938,660 mln, the IPO was priced at $10.00 per share.
Since CES went public in 2006, management has successfully affected thirteen (13) acquisitions, experienced significant organic growth, increased its regional footprint to include US operations and expanded its offering to include specialized chemicals for all stages of oilfield development.
Exhibit 22: Corporate Timeline
Source: Canadian Energy Services & Technology Corp., Bloomberg, Raymond James Ltd.
Cash Dividend Declared: $0.08 annualized (paid monthly)
Dividend Increase: $0.11
Dividend Increase: $0.13
Dividend Increase: $0.16
Dividend Increase: $0.18
Dividend Increase: $0.20
Dividend Increase: $0.22
Dividend Increase: $0.24
Dividend Increase: $0.26
0.0
2.0
4.0
6.0
8.0
10.0
12.0
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
Mar
-06
Jul-
06
No
v-0
6
Mar
-07
Jul-
07
No
v-0
7
Mar
-08
Jul-
08
No
v-0
8
Mar
-09
Jul-
09
No
v-0
9
Mar
-10
Jul-
10
No
v-1
0
Mar
-11
Jul-
11
No
v-1
1
Mar
-12
Jul-
12
No
v-1
2
Mar
-13
Jul-
13
No
v-1
3
Mar
-14
Jul-
14
No
v-1
4
Mar
-15
Jul-
15
No
v-1
5
Volume (mln)Price (C$)
Dividend Increase $0.28
Dividend Increase $0.30
Dividend Increase $0.33
Acquired Impact Fluid Systems and Canadian Fluid Systems• Total consideration of
$81 mln including $50 mln cash plus issuance of 860k common shares & 2.15 mln Class B partnership units
Launch of EQUAL Transport• Launched in
second quarter of 2007
CEU Initial Public Offering• IPO: 5,893,866 Class A
shares at $10.00• Class B partnership
units, totalling 2.15 mln• Partnership units started
receiving a $0.0264 monthly distribution
Launched Clear Environmental Solutions with Acquisition• Total
consideration of $11.3 mln
• $7.4 mln cash• Issuance of
380k Class A shares at $10.25
CEU Enters U.S. Market with Acquisition• Through newly
formed subsidiary AES Drilling Fluids, purchased Oklahoma based Champion Drilling Fluids
• Total consideration of US$16 mln
Private Placement Financing• Total proceeds of
$10 mln• 3 mln Class A
Units at $3.33
Expands Presence in the U.S. with Another Acquisition• Through subsidiary
AES Drilling Fluids, purchased Fluids Management II for total consideration of US$65 mln
• Issued 2.9mm sub receipts at $18.50; total proceeds of $45 mln
• Issued 1.3 mln common shares
Private Placement Financing• Total proceeds of
$45 mln• 8.7 mln Common
Shares at $5.07
Multiple Acquisitions• Purchased ProDrill assets
from Tervita (Nov, 2012), and bought Mega Fluids (Jan, 2013)
• Total consideration of $23 mln
• Issued 380k shares
Acquisition of Jacam Chemical, and Note Offering• Total considertation of US
$240 mln, of which $60 mln was in 5.5 mln common shares
• Closed a $225 mln notes offering on April 17. Proceeds mainly used to repay bridge loan in Jacam acquisition
Venture Mud One Acquisition• Total
considertation of $55 mln for assets of Venture Mud One
• Issued 840k common shares
3 for 1 Stock Split
3 for 1 Stock Split
PureChem Services launched
Bought Deal Financing• Total
proceeds of $35 mln
• 2.11 mln common shares at $16.50
Bought Deal, Note Offering, and Bolt On Acquisitions• Total consideration in bought deal of
$70 mln; 2.15 mln shares• Added $75 mln unsecured notes to the
$225 mln already outstanding• Purchased drilling fluids provider
Rheotech, which was focused in SAGD and deep horizontal drilling
• Purchased Canwell as an addition to the PureChem division
Protreat Acquisition• Total consideration of $3.2
mln• Issued 145k shares
Commissioned Barite Grinding Facility in Corpus Christie, TX.
Acquired Sialco Materials and Reduced Dividend• Estimated purchase price of
~$25 mln• Reduced dividend by 35% to
$0.22
Canada Research | Page 38 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Appendix 4: Financial Statements
Exhibit 23: Corporate Segment Operational Summary
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Exhibit 24: Revenue, EBITDA, Earnings, Cash Flow
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
2013 2014 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E
Canada
Operating Days 38,137 45,377 8,903 2,537 6,050 5,341 22,831 5,568 2,112 6,050 7,172 20,902 30,897
Avg. Rigs Worked For 104 124 99 28 66 58 63 61 23 66 78 57 85
Est. Cdn. Market Share 31% 34% 34% 30% 36% 35% 34% 34% 32% 36% 35% 35% 34%
Revenue / Op. Day ($/day) 6,363 8,220 8,658 13,936 11,112 10,574 10,343 10,567 16,419 10,441 10,078 10,954 10,192
Canadian Revenue ($mln) 242.7 373.0 77.1 35.4 67.2 56.5 236.1 58.8 34.7 63.2 72.3 229.0 314.9
U.S.
Operating Days 44,494 55,641 11,646 7,890 8,025 7,068 34,629 5,803 5,277 5,572 6,648 23,301 39,507
Avg. Rigs Worked For 122 152 129 87 87 77 95 64 58 61 72 64 108
Est. U.S. Market Share 7% 8% 10% 10% 10% 11% 10% 11% 11% 11% 11% 11% 10%
Revenue / Op. Day ($/day) 9,443 10,778 13,454 16,195 15,019 16,572 15,078 18,022 18,499 16,500 15,095 16,931 12,760
U.S. Revenue ($mln) 420.1 599.7 156.7 127.8 120.5 117.1 522.1 104.6 97.6 91.9 100.4 394.5 504.1
2013 2014 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E
Total Revenue ($mln) 662.8 972.7 233.8 163.1 187.8 173.6 758.3 163.4 132.3 155.1 172.6 623.5 819.0
Canada 242.7 373.0 77.1 35.4 67.2 56.5 236.1 58.8 34.7 63.2 72.3 229.0 314.9
U.S. 420.1 599.7 156.7 127.8 120.5 117.1 522.1 104.6 97.6 91.9 100.4 394.5 504.1
Gross Margin ($mln) 189.9 289.1 64.9 43.8 49.3 43.9 201.9 42.8 32.2 41.9 47.2 164.2 235.2
% 29% 30% 28% 27% 26% 25% 27% 26% 24% 27% 27% 26% 29%
EBITDA ($mln) 110.4 178.6 39.4 20.1 23.9 20.5 104.0 20.3 12.4 20.2 24.0 76.8 131.2
EBITDA Margin (%) 17% 18% 17% 12% 13% 12% 14% 12% 9% 13% 14% 12% 16%
EBITDA (incl SBC) ($mln) 97.9 157.5 34.2 13.6 16.6 15.0 79.4 14.2 6.0 13.8 17.8 51.8 106.3
% 15% 16% 15% 8% 9% 9% 10% 9% 5% 9% 10% 8% 13%
EBIT (Operating Earnings) ($mln) 83.5 138.0 26.2 7.0 10.0 6.1 49.3 4.5 (2.9) 5.3 9.5 16.5 78.2
% 13% 14% 11% 4% 5% 4% 7% 3% -2% 3% 6% 3% 10%
Earnings ($mln) 49.8 88.8 19.1 2.4 8.0 0.6 30.1 (0.0) (5.2) 0.6 3.5 (1.1) 47.0
% 8% 9% 8% 2% 4% 0% 4% 0% -4% 0% 2% 0% 6%
Cash Flow ($mln) 83.1 145.0 34.8 15.9 25.4 16.0 92.0 15.7 7.9 15.7 19.4 58.8 105.2
% 13% 15% 15% 10% 14% 9% 12% 10% 6% 10% 11% 9% 13%
Canadian Energy Services & Technology Corp. Canada Research | Page 39 of 48
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Exhibit 25: Per Share, Valuation Metrics
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
Exhibit 26: Cash Flow, Capital Structure Summary
Source: Canadian Energy Services & Technology Corp., Raymond James Ltd.
2013 2014 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E
Per Share Metrics
EPS (fd) $0.19 $0.32 $0.06 ($0.01) $0.01 ($0.02) $0.04 ($0.02) ($0.05) ($0.02) ($0.01) ($0.10) $0.10
EPS (fd - before stock-based comp) $0.26 $0.42 $0.09 $0.02 $0.04 $0.01 $0.14 $0.00 ($0.02) $0.01 $0.02 $0.01 $0.20
CFPS (fd) $0.42 $0.67 $0.16 $0.07 $0.11 $0.07 $0.41 $0.07 $0.04 $0.07 $0.08 $0.26 $0.45
BVPS $1.79 $2.51 $2.78 $2.68 $2.86 $2.77 $2.77 $2.71 $2.62 $2.56 $2.52 $2.52 $2.48
Price Multiples
P/E 20.0 x 12.1 x nmf nmf 38.0 x
P/E (before stock based comp) 15.2 x 9.3 x 26.9 x nmf 18.9 x
P/CF 9.2 x 5.8 x 9.4 x 14.8 x 8.7 x
P/B 2.2 x 1.5 x 1.4 x 1.4 x 1.4 x 1.4 x 1.4 x 1.4 x 1.5 x 1.5 x 1.5 x 1.5 x 1.6 x
Enterprise Multiples
EV/EBITDA 9.0 x 6.4 x 11.2 x 15.2 x 9.2 x
EV/EBITDA (fd) 9.0 x 6.4 x 29.6 x 58.1 x 50.5 x
EV/EBIT (fd) 11.2 x 8.0 x 16.9 x 68.3 x 17.7 x
Dividends, Yield, Payout Ratios
Dividend per Share (annualized) $0.23 $0.30 $0.08 $0.08 $0.08 $0.08 $0.33 $0.05 $0.05 $0.05 $0.05 $0.22 $0.22
Yield 6.0% 7.9% 2.1% 2.1% 2.1% 2.1% 8.5% 1.4% 1.4% 1.4% 1.4% 5.6% 5.6%
Payout Ratio (Div / Cash Flow) 51% 42% 78% 82% 47%
Returns on Investment
ROE 16% 20% 5% 0% 8%
ROIC 12% 14% 5% 1% 7%
Shares Outstanding
Shares Out (basic, mln) 201.3 215.5 217.0 217.8 219.2 220.3 220.3 221.4 222.5 223.6 224.7 224.7 229.1
Shares Out (fd, mln) 213.5 226.0 227.6 234.9 235.4 236.5 236.5 237.6 238.7 239.8 241.0 241.0 245.5
Weighted Shares Out (basic, mln) 190.0 207.5 216.3 217.4 218.5 219.7 218.0 220.8 221.9 223.0 224.1 222.5 226.9
Weighted Shares Out (fd, mln) 201.4 219.2 226.8 231.2 235.1 236.0 232.3 237.1 238.2 239.3 240.4 238.7 243.2
Options Out / Basic Shares Out 6.0% 4.8% 4.9% 7.8% 7.4% 7.4% 7.4% 7.3% 7.3% 7.3% 7.3% 7.3% 7.2%
Option Rate (options granted / shares out) 3.1% 1.6% 4.8% 1.9% 2.0%
2013 2014 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E
Cash Sources and (Uses)
Cash Flow from Operations ($mln) 83.1 145.0 34.8 15.9 25.4 16.0 92.0 15.7 7.9 15.7 19.4 58.8 105.2
Net Working Capital Investment ($mln) (63.9) (98.9) 22.4 101.5 (16.4) 15.8 123.3 13.5 31.9 (11.8) (20.7) 13.0 (47.9)
Capital Spending (net, $mln) (234.0) (107.2) (11.7) (11.1) (21.3) (38.1) (82.3) (7.5) (7.5) (7.5) (7.5) (30.0) (20.0)
Dividends ($mln) (42.2) (61.2) (17.8) (17.9) (18.0) (18.2) (71.9) (12.0) (12.0) (12.1) (12.1) (48.2) (49.1)
Cash from Financing Activities ($mln) 217.6 66.2 (43.7) (55.8) (18.5) 4.7 (113.3) (23.5) (15.8) (10.8) 9.1 (40.9) (34.0)
Other (incl. Disc Ops) ($mln) (2.7) (5.0) (1.8) (0.7) (0.1) 0.0 (2.6) 0.0 0.0 0.0 0.0 0.0 0.0
Net Change in Cash ($mln) 0.0 0.0 0.0 49.7 (30.9) (1.5) 17.3 (1.7) 16.5 (14.3) 0.4 0.9 3.3
2013 2014 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E
Net Debt
Bank Debt ($mln) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Current Portion of Long Term Debt ($mln) 5.1 7.8 6.8 6.6 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2
Long Term Debt ($mln) 314.0 373.5 347.9 310.3 310.4 332.0 332.0 319.2 314.2 314.2 334.2 334.2 344.2
Convertible Debentures + Prefs ($mln) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Debt ($mln) 319.1 381.3 354.8 316.8 317.6 339.2 339.2 326.4 321.4 321.4 341.4 341.4 351.4
add: Taxes Payable (net, $mln) 0.4 0.1 0.6 0.5 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
less: Cash ($mln) 0.0 0.0 0.0 (49.3) (21.2) (19.7) (19.7) (18.0) (34.5) (20.2) (20.6) (20.6) (23.9)
equals: Net Debt ($mln) 319.5 381.4 355.4 268.0 297.1 320.3 320.3 309.2 287.6 301.9 321.5 321.5 328.2
Invested Capital
Common Shareholder Equity ($mln) 360.5 540.0 602.4 582.8 626.4 610.1 610.1 599.4 583.4 573.3 566.0 566.0 568.9
Gross Invested Capital ($mln) 679.6 921.3 957.2 899.6 944.0 949.3 949.3 925.8 904.8 894.7 907.4 907.4 920.3
Net Invested Capital ($mln) 679.6 921.3 957.2 850.3 922.8 929.6 929.6 907.8 870.3 874.5 886.8 886.8 896.4
Total Assets ($mln) 811.3 1,093.7 1,114.4 1,027.3 1,070.4 1,074.4 1,074.4 1,046.5 1,013.5 1,009.9 1,029.9 1,029.9 1,065.6
Working Capital
Working Capital ($mln) 197.4 307.1 305.9 255.6 261.1 243.7 243.7 228.5 213.2 210.6 231.7 231.7 282.9
Non-Cash Working Capital ($mln) 202.4 314.9 312.7 212.9 247.1 231.2 231.2 217.7 185.8 197.6 218.3 218.3 266.2
Capital Policy
Debt / (Debt + Equity) 47% 41% 37% 35% 34% 36% 36% 35% 36% 36% 38% 38% 38%
Net Debt / (Net Debt + Equity) 47% 41% 37% 32% 32% 34% 34% 34% 33% 34% 36% 36% 37%
Total Debt / Current EBITDA 2.9 x 2.1 x 3.4 x 3.0 x 3.1 x 3.3 x 3.3 x 4.2 x 4.2 x 4.2 x 4.4 x 4.4 x 2.7 x
Total Debt / Trailing EBITDA 2.9 x 2.1 x 2.0 x 1.9 x 2.4 x 3.3 x 3.3 x 3.8 x 4.2 x 4.4 x 4.4 x 4.4 x 2.7 x
Net Debt / Trailing EBITDA 2.9 x 2.1 x 2.0 x 1.6 x 2.3 x 3.1 x 3.1 x 3.6 x 3.7 x 4.1 x 4.2 x 4.2 x 2.5 x
Canada Research | Page 40 of 48 Canadian Energy Services & Technology Corp.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Appendix 5: Management & Board of Directors
Exhibit 27: Insiders and Major Shareholders
Note: As of January 14, 2016 Source: SEDI, Bloomberg, Canadian Energy Services, Raymond James Ltd.
Thomas Simons is the President, Chief Executive Officer and a Director of Canadian Energy Services & Technology Corp. Prior to his appointment he was the President and Chief Executive Officer and one of the principles of Impact until it was acquired by Canadian Energy Services in March of 2006. Before joining Impact, Mr. Simons held multiple roles within the oilfield services industry. Mr. Simons was a Technician with MI Drilling Fluids Ltd., after which he spent 5 years as a Technical Sales Manager for Newpark Canada and Protec Mud Services.
Craig Nieboer is the Chief Financial Officer at Canadian Energy Services & Technology Corp. He has held a number of senior financial/management positions at firms including Amerada Hess, BrazAlta Resources Corp., and Ivanhoe Energy Ltd. he is a also a Chartered Accountant.
Ken Zinger is the Chief Operating Officer of Canadian Energy Services & Technology Corp. Prior to joining Canadian Energy Services, Mr. Zinger was the President and one of the principles of Impact since its incorporation in 2001. Much like Mr. Simons, Mr. Zinger also worked in technical sales at Newpark Canada, and was a Drilling Fluids Technician at Protec Mud Services for a combined total of 7 years. Prior to this, he spent nine years working in the field in various drilling related capacities.
Kyle Kitagawa is a Director and Chairman of the Board of Directors at Canadian Energy Services & Technology Corp. He has been in this role since December 2005. He also serves as Chairman of Coral Hill Energy Ltd and is a Director of Zargon Oil & Gas Ltd. Since 2003, Mr. Kitagawa has been the Managing Director at North River Capital Corp. During his career, Mr. Kitagawa has held a variety of management positions, including VP and Managing Director of Enron North America Corp., and Chief Executive Officer and President of Enron Canada Corp. Mr. Kitagawa is also a Chartered Accountant.
Jason West is a Director and President of JACAM Chemical Company 2013, LLC. Mr. West joined Canadian Energy Services in March 2013 when Canadian Energy Services acquired JACAM. Prior to joining Canadian Energy Services, Mr. West held the position of President of JACAM Chemical Company LLC, since 2009 and the position of General Counsel from 2001-2009. Mr. West’s academic background focused on Biology and Law.
Dr. Gene Zaid is Chief Executive Officer and President of Technology of JACAM Chemical Company 2013, LLC. Dr. Zaid is the Founder of JACAM Chemical Company; he has amassed over 30 years of experience in the specialty chemicals business. Dr. Zaid is known to be an expert in the development of specialty chemicals and holds degrees in Business, Chemistry and Mathematics. JACAM recognizes Dr. Zaid as “the most significant force behind JACAM’s continued success.”
Shares Held
Shareholder Position Common
Thomas J. Simons Director, President and Chief Executive Officer 2,172,880
Craig F. Nieboer Chief Financial Officer 672,316
Kenneth E. Zinger Chief Operating Officer 1,290,271
Kenneth D. Zandee Vice President, Sales and Marketing 3,257,467
Kyle D. Kitagawa Director and Chairman of the Board 1,628,574
John M. Hooks Director and Chariman of the Compensation Committee 1,542,437
Philip J. Scherman Director and Chairman of Audit Committee 30,000
Rodney L. Carpenter Director and Chariman of the HSE Committee 74,385
Jason H. West Director and President of JACAM 303,332
D. Michael G. Stewart Director and Chairman of the Governance Committee 73,392
Colin D. Boyer Director 353,397
Burton J. Ahrens Director 206,127
James M. Pasieka Corporate Secretary 30,000
Gene H. Zaid President of Technology and Chief Executive Officer of JACAM 672,121
Total Management & Directors Ownerhsip 12,306,699
% of Total Shares Outstanding 5.6%
Canadian Energy Services & Technology Corp. Canada Research | Page 41 of 48
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Appendix 6: Credit Facilities
Senior Secured Facility
As at Sep-30-2015, CES had a zero outstanding balance on its senior facility. The syndicated senior facility allows it to borrow up to $200 mln, which may be increased to $300 mln, subject to certain terms and conditions. The facility matures on Sep-28-2018. Any drawn amount on the Senior Facility bears a floating rate of interest at the bank's prime rate or US base rate plus a margin that may be between 0.50% and 1.25%, or Bankers Acceptance or the LIBOR rate plus an applicable margin that may be between 1.50% and 2.25%. The applicable margin is based on a sliding scale of senior funded debt to EBITDA ratio. The standby fee on the Senior Facility ranges from 0.30% to 0.45%. The obligations under the Senior Facility are secured by all of the assets of the company and its subsidiaries.
Senior Unsecured Notes
The company also has $300 mln of 7.375% senior unsecured notes ("Senior Notes") due on April 17, 2020. The notes have an early redemption option, to redeem all or a portion of the notes at various redemption prices.
Financial Covenants
There are three (3) financial covenants imposed on CES in relation to the Senior Facility:
The ratio of Total Funded Debt / EBITDA on a rolling four-quarter basis may not exceed 4.50x. The ratio was 2.37x on Sep-30-2015.
The ratio of Senior Funded Debt / trailing EBITDA on a rolling four-quarter basis may not exceed 2.50x. The balance owing on Senior Notes is excluded from this calculation. The ratio was 0.11x on Sep-30-2015.
The quarterly ratio of EBITDA to interest expense, calculated on a rolling four quarter basis, must be more than 3.00x. This ratio tested at 5.55x on Sep-30-2015.
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Risks
i) The demand, pricing and terms for drilling fluid services is highly dependent on the level of industry activity for Canadian and U.S. oil and gas companies. The level of activity is influenced by several factors outside of Canadian Energy Services’ (CES) control, including but not necessarily limited to: commodity prices, the cost of bulk product and chemical inputs, the cost of exploring for and developing resources, and the ability of project oriented resource companies to raise equity capital or debt financing.
ii) The level of oilfield services activity provided to the oil and natural gas industry is affected by fluctuating oil and natural gas prices, which affects the exploration and development budgets of CES’s customers. CES is highly susceptible to the drilling cycles in Canada and the U.S.
iii) The Company’s success may also depend on the ability of CES’s customers to select and acquire suitable producing properties or undeveloped exploration prospects.
iv) The North American oilfield drilling fluid business is a competitive industry, and consists of both large independent operators as well as a broad range of smaller operators. This competitiveness could limit CES’s ability to further its growth and increase its market share. Further, new entrants and increased competition from existing competitors can have an adverse impact on the pricing and utilization of CES’s products and services.
v) Oilfield operations are inherently dangerous. CES’s equipment (tanks and trucks) can be damaged during operations.
vi) CES’s blending and manufacturing operations rely on a sufficient supply of raw materials from its suppliers. Should CES’s supply of these materials be ceased or interrupted the resulting delays in the provisions of services could have a materially adverse impact on its operations.
vii) Attracting and retaining a sufficient number of well-qualified personnel is consistently a challenge for the industry during periods of high activity levels.
Company Citations
Company Name Ticker Exchange Currency Closing Price RJ Rating RJ Entity
Baker Hughes, Inc. BHI NYSE US$ 44.85 1 RJ & Associates Halliburton HAL NYSE US$ 31.35 1 RJ & Associates Newpark Resources NR NYSE US$ 4.57 1 RJ & Associates Schlumberger Ltd. SLB NYSE US$ 68.81 3 RJ & Associates Secure Energy Services Inc. SES TSX C$ 7.15 1 RJ Ltd.
Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.
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RATINGS AND DEFINITIONS
Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and
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outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.
Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Argentina S.A. rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions: Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.
Suitability Ratings (SR)
Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.
Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program.
High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital.
High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal.
High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.
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RATING DISTRIBUTIONS
Coverage Universe Rating Distribution* Investment Banking Distribution
RJL RJA RJ Arg RJEE/RJFI RJL RJA RJ Arg RJEE/RJFI
Strong Buy and Outperform (Buy) 66% 56% 59% 48% 38% 21% 0% 0%
Market Perform (Hold) 33% 39% 41% 37% 15% 7% 0% 0%
Underperform (Sell) 1% 6% 0% 15% 0% 9% 0% 0%
* Columns may not add to 100% due to rounding.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months.
Company Name Disclosure
Canadian Energy Services & Technology Corp.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Canadian Energy Services & Technology Corp.
STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences.
Target Prices: The information below indicates our target price and rating changes for CEU stock over the past three years.
Valuation Methodology: We value Canadian Energy Services & Technology Corp. on a comparative basis to historical EV / EBITDA multiples and take into account its historic and anticipated return on invested capital, growth potential, financial leverage and market liquidity.
RISK FACTORS
General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen
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developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation.
Risks - Canadian Energy Services & Technology Corp. i) The demand, pricing and terms for drilling fluid services is highly dependent on the level of industry activity for Canadian and U.S. oil and gas companies. The level of activity is influenced by several factors outside of Canadian Energy Services’ (CES) control, including but not necessarily limited to: commodity prices, the cost of bulk product and chemical inputs, the cost of exploring for and developing resources, and the ability of project oriented resource companies to raise equity capital or debt financing. ii) The level of oilfield services activity provided to the oil and natural gas industry is affected by fluctuating oil and natural gas prices, which affects the exploration and development budgets of CES’s customers. CES is highly susceptible to the drilling cycles in Canada and the U.S. iii) The Company’s success may also depend on the ability of CES’s customers to select and acquire suitable producing properties or undeveloped exploration prospects. iv) The North American oilfield drilling fluid business is a competitive industry, and consists of both large independent operators as well as a broad range of smaller operators. This competitiveness could limit CES’s ability to further its growth and increase its market share. Further, new entrants and increased competition from existing competitors can have an adverse impact on the pricing and utilization of CES’s products and services. v) Oilfield operations are inherently dangerous. CES’s equipment (tanks and trucks) can be damaged during operations. vi) CES’s blending and manufacturing operations rely on a sufficient supply of raw materials from its suppliers. Should CES’s supply of these materials be ceased or interrupted the resulting delays in the provisions of services could have a materially adverse impact on its operations. vii) Attracting and retaining a sufficient number of well-qualified personnel is consistently a challenge for the industry during periods of high activity levels.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at www.raymondjames.ca/researchdisclosures.
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RAYMOND JAMES LTD. CANADIAN INSTITUTIONAL EQUITY TEAM WWW.RAYMONDJAMES.CA EQUITY RESEARCH HEAD OF EQUITY RESEARCH
DARYL SWETLISHOFF, CFA 604.659.8246
CONSUMER
CONSUMER & RETAIL KENRIC TYGHE, MBA 416.777.7188 KRISZTINA KATAI (ASSOCIATE) 416.777.7060
ENERGY
OIL & GAS ENERGY SERVICES, HEAD OF ENERGY RESEARCH ANDREW BRADFORD, CFA 403.509.0503 TIM MONACHELLO (ASSOCIATE) 403.509.0562
OIL & GAS PRODUCERS KURT MOLNAR 403.221.0414 GORDON STEPPAN, CFA (SR ASSOCIATE) 403.221.0411
OIL & GAS PRODUCERS JEREMY MCCREA, CFA 403.509.0518 MICHAEL SHAW, CFA (ASSOCIATE) 403.509.0534
SR. OIL & GAS PRODUCERS | ENERGY INFRASTRUCTURE CHRIS COX, CFA 403.509.0523 MICHAEL BARTH (ASSOCIATE) 403.509.0511
INDUSTRIAL & TRANSPORTATION
INDUSTRIAL | TRANSPORTATION, HEAD OF INDUSTRIAL RESEARCH BEN CHERNIAVSKY 604.659.8244 EDWARD GUDEWILL (ASSOCIATE) 604.659.8280
INFRASTRUCTURE & CONSTRUCTION FREDERIC BASTIEN, CFA 604.659.8232 SAMIR GHAFIR (ASSOCIATE) 604.659.8470
TRANSPORTATION | AGRIBUSINESS & FOOD PRODUCTS STEVE HANSEN, CMA, CFA 604.659.8208 DANIEL CHEW (ASSOCIATE) 604.659.8238
MINING
BASE & PRECIOUS METALS ALEX TERENTIEW, MBA, P.GEO 416.777.4912 JEAN-CHRISTOPHE PARISIEN-LA SALLE (ASSOCIATE) 416.777.7144
PRECIOUS METALS PHIL RUSSO 416.777.7084 KENT NEALE, CFA (ASSOCIATE) 416.777.7098
PRECIOUS METALS CHRIS THOMPSON, M.SC. (ENG), P.GEO 604.659.8439 BRIAN MARTIN, CFA (ASSOCIATE) 604.654.1236
URANIUM | JR EXPLORATION & DEVELOPMENT DAVID SADOWSKI 604.659.8255 MILTON-ANDRES BERNAL (ASSOCIATE) 604.659.8028
FINANCIAL SERVICES
DIVERSIFIED FINANCIALS MICHAEL OVERVELDE, CFA, CPA, CA 416.777.4943 BRENNA PHELAN, CFA, CPA, CA (ASSOCIATE) 416.777.7042
FOREST PRODUCTS
FOREST PRODUCTS DARYL SWETLISHOFF, CFA 604.659.8246 DAVID QUEZADA, CFA (ASSOCIATE ANALYST) 604.659.8257
REAL ESTATE
REAL ESTATE & REITS KEN AVALOS, MBA 727.567.1756 JOHANN RODRIGUES (ASSOCIATE ANALYST) 416.777.7189
TECHNOLOGY & COMMUNICATIONS
TECHNOLOGY, ALTERNATIVE ENERGY & CLEAN TECH STEVEN LI, CFA 416.777.4918 JONATHAN LO (ASSOCIATE) 416.777.6414
EQUITY RESEARCH PUBLISHING SENIOR SUPERVISORY ANALYST
HEATHER HERRON 403.509.0509 HEAD OF PUBLISHING | SUPERVISORY ANALYST
CYNTHIA LUI 604.659.8210
TYLER BOS (SUPERVISORY ANALYST | EDITOR) 416.777.4948 INDER GILL (RESEARCH EDITOR) 604.659.8202 KATE MAJOR (RESEARCH PRINCIPAL | EDITOR) 416.777.7173 ASHLEY RAMSAY (SUPERVISORY ANALYST |EDITOR) 604.659.8226
INSTITUTIONAL EQUITY SALES HEAD OF SALES
MIKE WESTCOTT 416.777.4935 GREG JACKSON (ECM, BUSINESS MANAGER) 416.777.7172 MICHELLE MARGUET ( ECM, INSTITUTIONAL MARKETING) 416.777.4951
TORONTO (CAN 1.888.601.6105 | USA 1.800.290.4847)
LAURA ARRELL (U.S. EQUITIES) 416.777.4920 SEAN BOYLE 416.777.4927 JEFF CARRUTHERS, CFA 416.777.4929 RICHARD EAKINS 416.777.4926 JONATHAN GREER 416.777.4930 DAVE MACLENNAN 416.777.4934 ROBERT MILLS, CFA 416.777.4945 BRADY PIMLOTT (ASSOCIATE) 416.777.4993 NICOLE SVEC-GRIFFIS, CFA (U.S. EQUITIES) 416.777.4942 NEIL WEBER 416.777.4931 ORNELLA BURNS (ASSISTANT) 416.777.4928 SATBIR CHATRATH (ASSISTANT) 416.777.4915
VANCOUVER (1.800.667.2899)
SCOT ATKINSON, CFA 604.659.8225 NICK POCRNIC 604.659.8230 TERRI MCEWAN (ASSISTANT) 604.659.8228
MONTREAL (514.350.4450 | 1.866.350.4455)
JOHN HART 514.350.4462 DAVID MAISLIN, CFA 514.350.4460 TANYA HATCHER (ASSISTANT) 514.350.4458
LONDON
ADAM WOOD 0.207.426.5612
INSTITUTIONAL EQUITY TRADING
CO-HEAD OF TRADING BOB MCDONALD, CFA 604.659.8222 ANDREW FOOTE, CFA 416.777.4924
TORONTO (CANADA 1.888.601.6105 | USA 1.800.290.4847) MARK ARMSTRONG 416.777.4981 PAM BANKS 416.777.4923 OLIVER HERBST 416.777.4947 ANDY HERRMANN 416.777.4937 ERIC MUNRO, CFA 416.777.4983 BOB STANDING 416.777.4921 PETER MASON (ASSISTANT) 416.777.7195
VANCOUVER (1.800.667.2899) NAV CHEEMA 604.659.8224 FRASER JEFFERSON 604.659.8218 DEREK ORAM 604.659.8223
MONTREAL (514.350.4450 | 1.866.350.4455) JOE CLEMENT 514.350.4470 PATRICK SANCHE 514.350.4465
INSTITUTIONAL EQUITY OFFICES
Calgary Suite 4250 525 8th Avenue SW Calgary, AB T2P 1G1 403.509.0500
Montreal Suite 3000 1800 McGill College Montreal, PQ H3A 3J6 514.350.4450 Toll Free: 1.866.350.4455
Vancouver Suite 2100 925 West Georgia Street Vancouver, BC V6C 3L2 604.659.8000 Toll Free: 1.800.667.2899
Toronto Suite 5400, Scotia Plaza 40 King Street West Toronto, ON M5H 3Y2 416.777.4900 Toll Free Canada: .888.601.6105 Toll Free USA: 1.800.290.4847
International Headquarters The Raymond James Financial Center 880 Carillon Parkway St.Petersburg, FL USA 33716 727.567.1000