Calfrac Well Services Ltd. announced (22/11/22) a conversion incentive program designed to encourage early conversion of CFW’s outstanding $47.4M 10% 1.5 Lien Senior Secured Convertible PIK Notes. The net effect on the cap table will be to increase the number of shares outstanding with an attendant decrease in outstanding debt. Concurrently CFW updated with upwards revision its year-end financial guidance. We believe the liquidity pressure of 35.6M new shares (representing ~42% of basic shares outstanding) coming to market in mid-December will have a modestly negative effect on share price and accordingly open a buying opportunity. Relative performance: The OSX closed at $83.0627 on November 21st immediately prior to CFW’s ($7.15) announcement. CFW’s current (‘22) and forward EBITDA multiple immediately prior to the conversion incentive announcement of November 22nd were 4.0x and 2.9x respectively. At those multiples, the upward estimate revisions imply a share value of $7.74.

CFW vs. PHLX Oil Service Sector Index (OSX:NSD): As a general rule, we see the share price of CFW following the overall trend of the PHLX Oil Service Sector Index. The OSX index includes companies whos’ primary business is in the oil services sector and falls under ICB code 0573.

Upward Q4/22 earnings guidance: Simultaneous to the announcement of the early conversion inventive program CFW upped their guidance for Q4/22. Q4/22 EBITDA is guided to finish between $80M - $90M with EBITDA margins of between 17% - 19%; putting FY22 EBITDA on track for between $232M - $242M. As a result, we have updated our FY/23 EBITDA expectations to $357M from $331M. We see a flowthrough to FY/23 due to the sector wide performance during H2/22. There is a continued upward pressure on energy prices and supplies headed into FY/23 and we expect these pressures to sustain rather than subside.

We see a greater propensity for fracking capital expenditure as energy prices continue to evolve into a political football. Although fracking remains a hotly debated topic in the chambers of policy, the geopolitical shocks from the Russian invasion of Ukraine paired with rebounding economies heading into 2023 provide a strong opportunity for CFW heading into 2023.