The stock market rally in 2023 was driven primarily by companies part of the tech sector. Alternatively, the energy sector trailed the broader markets by a wide margin due to lower oil prices and tepid consumer spending. Further, investors were worried about rising interest rates impacting the profit margins of capital-intensive energy stocks.
These macro headwinds meant shares of Enerflex (TSX:EFX) are now down 67% from all-time highs, valuing the company at a market cap of $863 million. The drawdown in the energy stock has increased the dividend yield to 1.44%, given it pays investors an annual dividend of $0.10 per share.
Let’s see why I’m bullish on Enerflex stock right now.
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An overview of Enerflex
Enerflex is a Canada-based energy infrastructure company. It also offers energy transition solutions to natural gas markets in the Americas. Enerflex provides natural gas compression infrastructure, power generation, and processing infrastructure under contract to oil and natural gas producers.
The Enerflex business model aligns with its natural gas solutions as economies are moving away from carbon-intensive fossil fuels towards clean energy, allowing the company to expand its product lines profitably.
How did Enerflex perform in Q3 of 2023?
Enerflex generated revenue of US$778 million in the third quarter (Q3), driven by strong performance from recurring businesses and the North American Engineered Systems product line. It reported gross revenue of US$146 million, indicating a margin of 18.8%, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at US$122 million in Q3.
Enerflex repaid US$41 million of long-term debt, strengthening its balance sheet amid a challenging macro backdrop. Its operating cash flow stood at US$71 million, and Enerflex invested US$26 million in capital expenditures in the quarter. So, it ended Q2 with a free cash flow of US$45 million.
Given a quarterly dividend payout of $0.025 per share, Enerflex ended Q3 with a payout ratio of less than 10%.
Enerflex recorded strong bookings of US$560 million for its Engineered Systems business in Q3, while this figure is much higher at US$1.4 billion in the last three quarters. The backlog in this business segment has risen to US$1.6 billion, providing investors with revenue visibility in 2024.
What’s next for Enerflex stock?
Enerflex expects its results in 2024 will be underpinned by the highly contracted energy infrastructure product line. Additionally, the recurring nature of the high-margin After-market Services business should complement the Engineered Systems product line, the key revenue driver for Enerflex.
Enerflex emphasized it will focus on reducing balance sheet debt and net financing costs in 2024. So, the company has lowered its capital expenditure guidance for 2024 to US$110 million, down from its previous outlook, which ranged between US$120 million and US$140 million.
Enerflex ended 2023 with a net debt balance of less than US$900 million, indicating gross debt repayments totalled US$120 million in Q4.
Analysts expect Enerflex to improve adjusted earnings to $0.62 per share in 2024 compared to a loss of $1.04 per share in 2022. Priced at 11.2 times forward earnings, Enerflex stock is quite cheap and trades at a discount of 50% to consensus price target estimates.
