In a Jan. 27 research note, analyst Elias Foscolos reported that iA Securities upgraded its rating on Pason Systems Inc. (PSI:TSX) to Buy from Hold "as upside has improved and U.S. drilling likely bottomed."
Foscolos previewed Q4/19 for the Calgary-based the oil and gas services company that provides "specialized data management systems for drilling rigs."
He wrote that iA Securities expects Pason Systems' Q4/19 revenue to be down 11% quarter over quarter (QOQ) due to an 11% drop in rig counts to an average of 798 in the U.S. during that period. However, stability in Canada and a projected increase internationally should somewhat offset the lower revenue. The $30 million of EBITDA that iA Securities projects for Pason in Q4/19 is in line with consensus' estimate.
Foscolos noted that drilling in the U.S. has reached a nadir, and independent companies are feeling the brunt of it more than the majors. "As U.S. net oil production changes approach zero, a level of drilling will be reached where majors are at least drilling enough to replace aging production," he added.
The analyst highlighted that Pason warrants a higher valuation than its peers due to its "premium fundamentals," which include about $150 million of net cash, a capex-light business, robust cash flow and a mid-double digit return on equity.
Looking forward, iA Securities projected lowered EBITDA in Q4/19 and 2020, respectively, of 6% QOQ and 5% year over year. "Despite these headwinds, we project ~$20M in quarterly run-rate funds flow from operations (FFO), and the Company has a clean balance sheet and other favorable fundamentals relative to peers," the analyst wrote.
Accordingly, the financial firm maintained its CA$16.15 per share target price on Pason Systems, whose stock is currently trading at around CA$13.19 per share.
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Disclosures from iA Securities, Pason Systems Inc., Quarterly Preview, January 27, 2020
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