Expro Group Exudes Robust Long-Term Fundamental Growth (Rating Upgrade)

seekingalpha10-03

XPRO is upgraded to a "Buy" due to increased investments in deepwater upstream projects and LNG developments, enhancing its well-flow management and well-intervention integrity product lines.The ...

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After Q2, increased investments in deepwater upstream projects in Saudi Arabia, UAE, China, Norway, and Guyana and LNG investments in various international locations can significantly increase XPRO’s value proposition. I expect its well-flow management and well-intervention integrity product lines to benefit from improved growth. Some concerns, however, remain over project backlog and revenues dropping in the near term due to projects moving to the operations & maintenance phase. Dwindling cash flow is another concern due to weak working capital management. Nonetheless, it has robust liquidity. Also, the stock appears to be reasonably valued with a positive bias. I see steady stock price appreciation over the next year. Given all the factors, I upgraded my rating from a “Hold” to a “Buy.” Why Do I Upgrade My Call? I rated XPRO a “hold” in my article on June 13. In Q1, I saw growth in well-flow management and well-intervention integrity product lines. I also noticed growth in its alternative energy initiatives. However, seasonality and budget constraints could pull returns from the stock downward. I wrote: In 2024, I expect XPRO's well-flow management and well-intervention integrity to drive growth. In alternative energy, the company's initiatives in the geothermal industry and CCUS (carbon capture and storage) in Europe and the Asia Pacific can diversify its revenue base. Also, the Coretrax acquisition, as I discussed in my previous article, can strengthen its foothold in the European, Sub-Saharan Africa, Middle East, and North Africa regions. While the momentum in global offshore FIDs and sanctioned project pipeline will likely continue, I expect the benefits to permeate through increased budgetary pricing in various markets and product lines. In particular, its good construction, well-flow management, and subsea good access businesses can outperform. However, investors should be aware of the checks over its topline growth in the near term and cash flow decline. Based on strong long-term fundamentals, I upgraded my call to a “buy.” Company Strategy And Outlook   XPRO's Presentation, September 2024 XPRO’s management expects a multiyear incremental energy production growth, mainly from natural gas demand. Offshore, it sees a multiyear pipeline of projects accounts for nearly 75% of total greenfield investments in 2024. Based on these drivers, XPRO looks to benefit from improved well construction, well flow management, and subsea well access businesses. International deepwater upstream investment is set to increase significantly. Saudi Arabia, UAE, China, Norway, Guyana, and Brazil will lead the charge. Significant investments have recently been made in LNG developments in Abu Dhabi, Kuwait, Oman, and Saudi Arabia. As a result, XPRO’s production optimization capabilities can expand into well flow management and well intervention integrity product lines in Asia Pacific and Latin America. Backlog And Projects In Q2, XPRO received $196 million of new contract awards, including subsea contracts in Africa and a sonar meters contract in the Middle East. By June 30, the company’s backlog reached $2.2 billion. However, this marked a 5% decline from Q1 due to the transition of a Congo project to the operations and maintenance phase and the conversion of a few large projects into revenue. Another key part of XPRO’s strategy is the acquisition of Coretrax (completed in May), a well-integrity and production optimization company. This acquisition can be earnings-accretive because Coretrax’s drilling, optimization, and well-integrity solutions can leverage XPRO’s global reach. Challenges Despite Strength The momentum in this long-cycle deepwater development should be sustained over several years ahead. In this environment, XPRO sees an uptick in budgetary pricing for projects in various markets and product lines. However, I see a few challenges, too. Over the short term, the TRS (Tubular Running Services) and tubular products can carry the momentum through Q3. The subsea well access projects (including the PRT offshore business acquisition) can see revenue falling in Q3 before it recovers in Q4. Revenue from the Congo project can also decline due to operations and maintenance. Forecast And Estimates Seeking Alpha Based on these drivers, XPRO revised its FY2024 forecast upwards compared to the previous estimates. It now expects revenues and adjusted EBITDA to increase by 14% and 46% in FY2024, respectively, compared to FY2023. The forecast includes an assumed $100 million of revenue and a positive adjusted EBITDA margin contribution from the Coretrax acquisition. However, in Q3, it expects revenues to decrease by 11% to $410 million-$430 million compared to Q2. Investors may note that the Q2 revenue benefited from a total of $60 million addition through the LNG expansion project in the Congo and the subsea projects. Also, during Q3, its LNG expansion project can shift from the plant delivery phase to a multiyear operation and maintenance phase. The company realized strong revenues from the Gulf of Mexico and offshore Angola projects in Q2, which is not expected to continue in Q3. Its adjusted EBITDA margin, on the other hand, can expand by 100 to 200 basis points compared to Q2. My Growth Estimates Over the past nine quarters, XPRO’s adjusted EBITDA increased by 230% on average. Although international activity can rise in 2024, lower backlog and operations and maintenance in the Congo project can reduce its topline in the near term. EBITDA, however, should ride on expanded capabilities and an uptick in budgetary pricing. At a conservative rate, I expect its adjusted EBITDA to increase by 20%-25% over the next four quarters. The Q2 Drivers XPRO's Filings From Q1 to Q2, XPRO's revenue increased by 22%, as discussed in the Q2 earnings released on July 25. Geographically, the Europe and ESSA region saw the sharpest rise (38%up), followed by the North and Latin America (or NLA) division (20% up) during this period. The sales rise in Asia Pacific (or APAC) was relatively modest (5% up), while the revenue growth from the Middle East (MENA) region was relatively sharp (14% up). Increased activity in well construction and subsea well access in the US, Guyana, and Trinidad resulted in sales growth in NLA. SeaCure technology commercialization and favorable activity mix led to EBITDA margin growth in this region. In ESSA, robust subsea well access activity, subsea contract award in Angola, and completion of well development campaign in Ghana caused revenue to spike in Q2. The Coretrax acquisition augmented the company’s sales in MENA in Q2. Also, a well-tested contract onshore in the Middle East helped the cause. In APAC, higher activity and lower LWI-related costs pushed its EBITDA margin higher in Q2. Cash Flows And Liquidity In 1H 2024, despite higher revenues, XPRO's cash flow from operations decreased by 64% from a year ago. A working capital deterioration led to the cash flow drop. Its free cash flow remained negative in 1H 2024 and deteriorated further from a year ago. I expect its cash flows to improve as its operating margin improves over the next year. As of June 30, XPRO had $271 million of liquidity and an insignificant level of debt. Relative Valuation And Target Price Author Created and Seeking Alpha XPRO's forward EV/EBITDA multiple (5.8x) versus the current EV/EBITDA multiple (8.7x) is expected to contract more steeply than its peers' average fall (NOV, RES, FTI), implying a higher EBITDA growth. Typically, this translates to a higher EV/EBITDA multiple. The stock's current multiple is higher than its peers' average. So, the stock is reasonably valued, with a positive bias, compared to its peers. Since my last publication in June, the stock has decreased by 20%. While I was cautious about the prospect and rated it a “Hold,” it performed more poorly than expected. If the stock trades at the industry average, it can decline by 13%. Given the reasonable relative valuation, I see the stock hovering close to its current price. As I discussed earlier in the article, I expect 20%—25% adjusted EBITDA growth in the next four quarters. Feeding these values in the EV calculation and assuming the current EV/EBITDA multiple holds, the stock can trade between $22.5 and $23.4, implying a ~34% upside in the next four quarters. Analyst Rating  Seeking Alpha Two Wall Street analysts rated XPRO a \"Buy\" in the past three months. None recommended a \"Sell,\" while three analysts rated it a \"Hold.\" The consensus target price is $26.3, with a 54% upside potential at the current price. In my view, the sell-side analysts have a slightly more optimistic return expectation from the stock that it warrants. Risks Factors OPEC was due to reverse its long-sustained production cuts from October, but it has decided to delay any production decreases. This can steady crude oil prices, especially when demand looks uncertain. However, discontinuing the current policy can lower prices and impede oilfield services growth. Similarly, the continued depression in natural gas prices has adversely affected OFS companies like XPRO because energy customers renegotiate prices. XPRO’s sales and profitability are affected by such events. What's The Take on XPRO? Seeking Alpha Rising natural gas demand and multiyear offshore development projects are the two primary pillars of XPRO’s growth potential. These factors will increase activity in the company’s well construction, well flow management, and subsea well access businesses. I also expect a modest increase in budgetary pricing in various markets and product lines. The company’s revenues and EBITDA margin will also get a boost from the contribution of the Coretrax acquisition in 2024.  XPRO faces a few challenges, too, in the near term. The absence of revenue growth from the Gulf of Mexico and offshore Angola projects and projects moving from delivery to operations & maintenance can cripple its topline in Q3. Also, negative free cash flow can raise investors’ concerns. So, the stock underperformed the VanEck Vectors Oil Services ETF (OIH) in the past year. With a strong balance sheet and a reasonably fair relative valuation, I think the stock can be a good addition to investors’ portfolios, given the long-term growth potential. So, I rate it a “Buy.”","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2472618125"}