Natural gas prices not helping this energy stock

EFX - Enerflex Ltd

Enerflex is an integrated global energy services company engaging in the engineering and manufacture of equipment, systems and turnkey facilities used to process and move natural gas. It also provides aftermarket support for the same.

Enerflex operates through dominant fabrication facilities located near key export terminals and an extensive service branch network. The company has a presence in more than 50 locations in 16 countries in North America, Latin America, Australia, Asia, MEA, and Europe. Enerflex operates three business segments, the USA (which is its largest market driving almost 60% of revenues), Rest of World (~25%), and Canada (~15%). Each of these segments has three main product lines, Engineered Systems, Service, and Rentals. Engineered systems forms the major chunk of revenues at 70%, while services and rentals constitute the balance 30%.

Enerflex supplies natural gas compression, gas processing, refrigeration systems, electric power equipment, aftermarket support, and equipment rental solutions. Enerflex’s own infrastructure transforms over 2.5 bcf of natural gas per day globally.

Investment Data

Revenue Growth & Market Exposure

Enerflex earns revenues from rendering aftermarket services, parts distribution and rentals. It caters to a varied customer base ranging from local operators to national producers and large global companies. As a leading provider of full cycle energy solutions globally, Enerflex has a large presence in dynamic energy producing markets worldwide. The company enters into a variety of contracts ranging from pure fabrication to integrated solutions and build-own-operate-maintain (BOOM) projects.

Enerflex’s revenues are highly diversified by geography and product lines. The company has been diversifying its product offerings for Engineered Systems and is focusing on growing its recurring revenue stream driven by increased demand for both service and rental product offerings. Enerflex is targeting to grow its recurring revenue through organic investment and strategic M&A activities and has invested over C$1 billion in the past seven years. The company recently bagged four 10-year BOOM contracts, which will contribute to further increasing its recurring revenue.

Nearing four decades of existence, Enerflex is known for delivering high-quality, long-life operating systems. The company provides an array of complementary products and solutions in the natural gas and oil infrastructure. It has become the preferred choice for customers who are looking at optimizing their energy production from oil and natural gas fields around the world.

The company has a solid track record of providing reliable products and successfully completing projects. It recently undertook the expansion of its Houston facility adding 100,000 sq. ft. to address the growing demand. Enerflex is expecting to drive revenues on the back of growth in the US and ROW.

Dividends

Enerflex is a financially strong, dividend-paying company. The company sports a current dividend yield of 2.3% and has a reasonable dividend payout ratio of 36%. It has grown its dividend at 6.5% CAGR annually over the last five years.

Enerflex last raised its dividend by 10.5%. The company has increased its dividend by over 75% since 2011. It has never cut its dividend, even during the commodity pricing downturn and has a strong track record of growing cash flows in the past. A strong balance sheet further fuels future organic as well as dividend growth.

Enerflex’s extensive service infrastructure located in lucrative gas-producing areas, and geographic and product line diversification has reduced its earnings volatility in global gas markets.

According to the US EIA, natural gas is expected to account for over 25% of global fuel sources by 2050 and Enerflex is strategically positioned to benefit from this growth trend. The company is in a good position to benefit from its leading position in the US, as it is the largest gas market in the world. Increasing natural gas production in North America will lead to a growing demand for natural gas infrastructure. Enerflex’s strong backlog and growing bookings also grant it enough visibility for future revenue and should support dividend growth.

Competition

Enerflex operates in highly competitive markets both domestically and abroad. Low barriers to entry in the natural gas compression services and fabrication business have led to the emergence of new entrants into these divisions. Enerflex competes with large, multinational companies in the engineered systems division. It competes with the likes of Secure Energy Services, Shawcor Ltd., Mullen Group, CES Energy Solutions, and Pason Systems. Enerflex’s strategic geographical presence positions it well to capture projects in growing natural gas markets.

Bottom Line

Enerflex is a provider of turnkey integrated solutions spanning the entire project lifecycle from concept through overhaul. A focused business model, a sound track record of growth and strong presence in growing energy markets form a deep moat around its business. The company should benefit from the increasing demand for natural gas to meet the world’s energy needs. Increasing focus on recurring revenues, and strong bookings and backlog growth should help Enerflex sustain its dividend paying streak in the future.

When compared against the S&P500 and the TSX Composite, it’s not an appealing stock. It’s rather erratic in movement considering the economy has been growing and doing well. Furthermore, natural gas prices are still very low making it challenging to increase profit margins. You can almost see a correlation between the stock price and the natural gas prices. In short, you are guessing at the natural gas prices as opposed to establish forecasting on the business capabilities.

EFX vs Indexes

Natutal Gas Prices
Source: https://markets.businessinsider.com/commodities/natural-gas-price

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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