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Canyon is upgrading eleven 2,500 hp pumps (27,500 hp) or 11% of its existing pressure pumping capacity to become 3,000 hp pumps. This new pump design is expected to lower Canyon’s cost structure due to greater durability and lower labour requirements. We believe a significant portion of Canyon’s fleet is capable of undergoing these upgrades. This would improve Canyon’s gross margins, but quantitatively addressing this is challenging at this juncture. We have only made modest changes to our estimates with this update. Amongst the FCC OFS covered companies, Canyon has been one of the most proactive in addressing ways to structurally change its cost structure through this downturn.
Canyon Services Group
Canyon reported 2Q16 EBITDAS of -$14 mm, marginally below our forecasted loss of -$12 mm. The quarter was negatively impacted by a bad debt expense of $4 mm which was tied to a company that has now filed for CCAA. Management suggested that 6,500 wells completed in Canada would utilize all of the 2.0 mm hp available in Western Canada. We would agree with the assessment based on our sensitivity modelling of HP demand. There are a number of bottlenecks that may limit pressure pumping capacity additions which includes increased capital spending to reactivate equipment and attracting people.
Canyon reported 1Q16 revenue of $71 mm, below our estimate of $78 mm. Adjusted EBITDAS was a loss of $2.0 mm, roughly in line with our loss of $3 mm
Impact: We expect the stock to trade in line with the market as results were largely in line.
Canyon has closed its bought deal financing which involved the issuance of 15.8 mm shares at an offer price of $4.00/share for gross proceeds of $63.3 mm. We expect the proceeds will be used to reduce indebtedness. Previously, we had estimated Canyon’s 2016e and 2017e net debt positions at $93 mm and $92 mm, respectively, which has now been lowered to $33 mm and $33 mm. We still expect the Company will violate its covenants in 4Q16e. We have lowered our 2016 estimates to reflect industry activity in 1Q16e that has trailed our expectations to date. Our 2016e EBITDAS now stands at a loss of $6 mm, compared to the prior loss of $4 mm.
Canyon reported 4Q15 EBITDAS of $8 mm, ahead of our es mate of $6 mm due to higher pressure pumping revenue. The Company has amended its credit facilities and we believe it has ample room to do so again if required. This is an event we expect to occur. Canyon has eliminated its dividend, which results in a reduction of annual cash outflows by $8 mm. We have lowered our 2016e EBITDAS to a loss of $4 mm, from positive a $9 mm. In 2017e, we are now forecas ng EBITDAS of $28 mm (prior: $50 mm).
Impact: Expect stock to trade higher on EBITDAS beat
Canyon has announced a complementary fluid hauling acquisition for $9.5 mm. The P/Book multiple for this transaction was 0.8x and we estimate payback will be less than four years. We estimate EBITDAS contribution of $2.5 mm to $3.0 mm in 2016e, or payback of 3 to 4 years. Our estimates have only undergone moderate changes.
We have only made modest changes to our 2015 estimates, with the signifi cant increase in EBITDAS (new: $27 mm, prior: $18 mm) resulting from the incorporation of 2Q15 results. In 2016e, our outlook and estimates are largely unchanged. We continue to rate the stock as an Outperform with a $9.00/share target price.
Canyon announced a 2Q15 EBITDAS loss of $10 mm, ahead of our estimated loss of $16 mm and a consensus loss of $14 mm. More importantly, Canyon noted that fracturing services pricing in Canada is now down 25% to 30% from 20% in its last release. The Company is combatting this price decline through further cost savings, including moving a portion of its field staff to a variable pay structure.
Canyon has announced an increase in its credit facility to $100 mm with a $50 mm accordion feature, from the previous facility of $80 mm with a $10 mm accordion. Recall, Canyon had $40 mm drawn on its credit facility at the end of 1Q15 and we are forecasting the Company to exit 2015e with net debt of $60 mm. The new facility has a term of three years, is extendible annually, and interest rates rise or fall based on financial ratios and metrics.
Canyon reported 1Q15 results which were in line with our expectations. We’ve made a number of changes to our model, which are detailed within this Facts. The result is our 2015e EBITDAS falling 39% to $24 mm and 2016e EBITDAS falling 27% to $61 mm.
Canyon reported 1Q15 results that were largely in line with our expectations. The Company has reduced its quarterly dividend to $0.075/share from $0.15/share. We do not expect the market to be surprised by this change given the 2015e payout ratio and implied yield prior to this announcement.
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