Secure Energy Services is a Financially Strong Company With Solid Potential

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Written By Kevin MacDonald

Secure Energy Services recently concluded a large transaction, selling its waste management facilities for C$1.15 billion to a Waste Connections subsidiary. This move eliminated its net debt entirely and kickstarted a substantial share buyback program, amounting to approximately C$560 million so far.

The company now anticipates maintaining a debt ratio of around 0.6-0.75 times EBITDA, significantly bolstering its financial position.

Financial Performance and Cash Flow Strength

Credits: DepositPhotos

Following the asset sale, Secure Energy Services showcased robust financial health. In the first quarter of 2024, the company reported total revenue of C$2.85 billion, yielding a gross margin of C$116 million and an operating profit of C$72 million.

Although this represents a slight decrease from the previous year’s figures, the sale contributed a gain of C$520 million, influencing the overall financial landscape positively.

Cash Flow Analysis

Excluding the one-time gain from the asset sale, Secure Energy Services demonstrated a solid operating cash flow of C$101 million after adjusting for lease payments.

With minimal total capex of C$19 million, the underlying free cash flow reached approximately C$82 million. Sustaining capex remained low at C$8 million, resulting in a sustaining free cash flow estimate of approximately C$93 million.

Future Outlook and Investment Considerations

Looking ahead, Secure Energy Services forecasts a full-year EBITDA between C$450 million and C$465 million, with depreciation and amortization expenses likely around C$175-180 million.

Factoring in interest expenses and recent share buybacks, the company anticipates a pre-tax income of approximately C$260 million and a net profit of C$187 million, equating to an underlying EPS exceeding C$0.80 per share.

Sustaining capex and lease payments are expected to total C$85 million, further supporting a sustaining free cash flow projection of about C$1.20 per share, comfortably covering the current quarterly dividend of C$0.10 per share.

Strengthened Balance Sheet and Shareholder Benefits

Post-sale, Secure Energy Services fortified its balance sheet substantially. Cash reserves soared to C$296 million, while gross debt plummeted to C$294 million, resulting in a net cash position.

The company promptly utilized these funds for aggressive share buybacks, including a recent C$250 million substantial issuer bid, effectively reducing its outstanding shares to nearly 238 million.

Investment Thesis

The divestiture of waste management assets proved strategic for Secure Energy Services, swiftly converting its net debt into a net cash position.

Shareholders reaped immediate benefits through substantial share repurchases, enhancing shareholder value. With a projected sustaining free cash flow of approximately C$1.20 per share, implying a 10% free cash flow yield, the stock remains attractively priced in relation to its operational strengths and financial health.

Strategic Decision and Shareholder Impact

Secure Energy Services’ decision to sell its waste management facilities for C$1.15 billion to a Waste Connections subsidiary marks a pivotal strategic move aimed at enhancing shareholder value and financial stability.

The transaction, completed in early 2024, not only wiped out the company’s net debt but also positioned it with a substantial cash reserve to pursue growth initiatives and return capital to shareholders through buybacks.

The sale, which closed on February 1st, injected a significant cash influx into Secure Energy Services, fundamentally transforming its balance sheet.

Previously burdened by approximately C$966 million in gross debt, the company swiftly restructured its financial position post-sale.

Financial Performance and Market Response

Following the sale, Secure Energy Services reported a surge in profitability and cash flow metrics. The company’s first-quarter revenue stood at C$2.85 billion, with a gross margin of C$116 million and an operating profit of C$72 million.

While these figures represented a slight year-over-year decline in operational metrics, the sale’s gain of C$520 million significantly augmented the company’s financial performance. This windfall contributed to a robust operating cash flow of C$101 million, excluding lease payments, and an underlying free cash flow of approximately C$82 million after deducting minimal capex expenditures of C$19 million.

The completion of a substantial share buyback program, totaling C$560 million to date, further underscored management’s commitment to enhancing shareholder returns and capital efficiency.

Future Outlook and Growth Prospects

Looking ahead, Secure Energy Services remains well-positioned to capitalize on emerging opportunities in the energy services sector. With a projected full-year EBITDA in the range of C$450-465 million and manageable interest expenses following the issuance of a C$300 million debenture, the company anticipates a robust financial performance for fiscal year 2024.

Continued focus on operational efficiency and prudent capital allocation is expected to sustain a healthy free cash flow yield, reinforcing its attractiveness as an investment opportunity.

Strategic Divestiture of Waste Management

Credits: DepositPhotos

Secure Energy Services’ strategic divestiture of waste management assets and subsequent financial restructuring have positioned it as a formidable player in the energy services industry.

The company’s enhanced liquidity, strengthened balance sheet, and commitment to shareholder value through share buybacks underscore its resilience and growth potential.

With a compelling free cash flow yield of approximately 10% and a track record of operational excellence, Secure Energy Services presents a compelling investment opportunity for investors seeking exposure to a financially strong and growth-oriented company.


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