Enterprise Group: A Rare Growth Setup at Just 8x EBITDA
High rewards, long term risks.
Enterprise Group supplies services and infrastructure to companies involved in the Canadian NG market, which is forecasted to grow exponentially, benefiting from lower costs and recently discovered large reserves. The company is aggressively expanding its fleet, which now offers the full range of rental services that oil and gas companies need in their operations, especially gas turbines to generate electricity, where they are projecting payback periods of less than two years. The company has many factors working in its favor with its new Enterprise segment, which will likely drive most of its growth. It is a Lollapalooza that will drive growth, and it looks like management is catching up to the trend.
Enterprise Group has been a huge success over the last six years, being a ten-bagger even with the recent drawdown. I took a look at the company some time ago, but it did not seem as interesting; I had some concerns about the capital allocation strategy of the management team and thought the valuation was a little bit high. Now, with fundamentals greatly improved and the stock price almost 50% down from its highs, it is a good time for a deep dive into the company.
Based on our forecasts, the company is set to greatly benefit from the Canadian LNG gold rush, being a dominant player in its niche market and holding the exclusivity of a great NG turbine product that is in low supply, specifically designed to work perfectly in environments like Canada, where natural gas was previously in a downturn.
Index:
Industry growth and boom and bust cycles
Business model
Competitive advantages
Intraciclicality of the business
Recent divestures
Capital allocation
Thesis
Risks
Conclusion
1. Industry growth and boom and bust cycles:
First of all, I think it is quite important to understand the Canadian oil and gas industry, as the future growth of the company depends on it. Analysts are pointing to a huge uptick in demand, volumes, and new projects, so let’s review the data to see whether or not this holds true and which variables might affect the company’s earnings going forward.
All of this excitement is due to the fact that recently the province of Alberta has dramatically revised its proven gas reserves, increasing estimates by 6x from 24 TCF to 144 TCF. This is massive. We have to take into account that 98% of Canada’s gas is produced in Alberta and British Columbia, so these are huge news for the country, which is now among the top ten in natural gas reserves worldwide.
This increase in reserves, together with the huge recent investments in LNG in the country ,such as the first 30 billion CAD LNG plant that recently started operating, and the cost advantages Canada offers for liquefaction, shipping, and fiscal benefits, makes the country really attractive for new investments in the development of gas production facilities.
This is great for Enterprise, as the company’s business will be driven by the increase in new wells placed into production. We are going to look at data from the Alberta Energy Regulator on expected growth for new wells. The last update to this data was made in June 2024, so it does not yet reflect the uptick in new investments that will come from the 6x increase in Alberta’s reserves.
First, let’s take a look at historical data from 2004 to 2023.
Well production was booming in the early 2000s, and so was Enterprise, which almost 10x'ed since they started trading in 2004 until the peaks of 2006. However, the stock then plummeted 90% with the huge decline in new wells. Between the lows of 2011 and the highs of 2014, the company almost did another 10x, which was again followed by another 90% drawdown. After that second drawdown, driven by a huge drop in gas prices, the company was able to remain profitable and made two divestitures in 2016 and 2018 that allowed them to go debt-free.
Now, as the sector is recovering and excitement is building up again, the stock has done another 10x. Will this time be different? Let’s look at the industry, and then we will look at the company itself.
The forecast for the next 10 years shows slight and slow growth.
New wells are expected to slowly increase over the next decade with average growth rates of 2.4%. However, this could completely change with the new discovery, which might significantly increase investment appetite. What I feel much more confident about after looking at this data is that it is unlikely that the company will go through another bust cycle. New well drilling is now much more stable, and the fundamentals of the industry are much stronger, with less reliance on price movements thanks to the LNG plants.
2. Business model:
The company provides and rents specialized equipment for oil and gas companies in Canada. It operates through four business segments that together provide everything an oil and gas company might need to prepare, drill, and complete any natural gas well or project. This gives them an advantage, as offering a bundle of services allows for cost synergies and better pricing and service to clients. From what I am seeing, this does not look like a game of pricing pressure, as the company maintains good margins.
The types of operations the company services run 24/7. They require huge amounts of electricity, as well as office equipment, bedroom accommodations, medic shacks in case of injury, and heating equipment. All of this equipment must be mobile, and it must work perfectly, as time is incredibly valuable in these operations.
The company operates through four business segments, with each one providing a service that their clients demand, creating a horizontally integrated model offering everything an oil and gas operation needs on-site.
September 2012, acquisition of Artic Therm International Ltd. (ATI), founded in 1998, for expansion into providing flameless heat technology to the construction and oil and gas industries in Western Canada, with heaters ranging from 375,000 to 3,300,000 BTUs.
January 3, 2014, acquisition of Hart Oilfield Rentals Ltd. (Hart) for 22.6 million CAD, providing oilfield infrastructure site services and rentals in the Western Canadian Sedimentary Basin, with a rental fleet of modular designs supporting drilling and completion operations from Drayton Valley, Whitecourt, and Grande Prairie.
October 1, 2014, acquisition of Westar Oilfield Rentals Inc. (Westar) for 13.5 million, expanding into Fort St. John, British Columbia, to create revenue and cost synergies with Hart; later, on October 1, 2020, Westar acquired Johnston Power Sourcing Inc. (JPSI), which was amalgamated into Westar on January 1, 2021.
April 2022, launch of Evolution Power Projects, Inc. (EPP), providing low emission, mobile power systems and surface infrastructure to the Energy, Resource, and Industrial sectors, offering real-time emission metrics to support client ESG objectives. This acquisition significantly changed the company’s future, as it finally allowed them to offer the full range of products their clients needed through one entity.
According to management, margins are pretty similar across all segments, except for Evolution, where they can charge a premium due to the huge cost savings they deliver to clients and the exclusivity they hold over the product.
One key factor to understand is that much of the company’s new growth is being driven by strict Canadian standards that demand reduced carbon emissions from oil and gas companies. As a result, producers are seeking techniques and procedures to help them lower their carbon footprint, which can be difficult and costly given the high energy requirements of drilling operations. Generators are essential, and they can be either gas or diesel powered. Diesel tends to be cheaper, but gas-powered systems help meet environmental standards.
Clients also have to choose between using combustion engines or turbines to produce energy. The biggest difference, and the reason Enterprise works with turbines, is that combustion engines require maintenance every 600 hours, while turbines need maintenance only after 10,000 hours.
This is where the company enters, offering turbines that provide a highly attractive solution and helping Enterprise win more business and increase its market share.
Emission reductions are also impressive:
As shown in the corporate presentation, these turbines are able to run using the gas produced by the client on-site. This is another competitive advantage because this gas is usually not very refined, and most engines cannot work properly with it. However, Enterprise’s turbines are capable of doing so.
Overall, the company offers a very compelling solution to its customers, specifically through its engines. Management is also considering moving into adjacent industries like mining, which will need to meet similar environmental requirements.
Sales:
Sales of the Evolution segment have been exploding recently. Interestingly, much of this growth has come through client inbounds and word of mouth, without much in-house sales effort. A recent operational change has been the company's new focus on sales, hiring a Senior VP of Sales with the goal of directly engaging with C-suite executives and engineering departments to sell their solution. This strategy should further boost growth and the deployment of their turbines.
3. Competitive advantages:
Enterprise operates in a highly fragmented market. With its recent acquisition of Evolution, the company has strengthened its value proposition by offering a full range of services, positioning itself as a one-stop shop for ancillary oil and gas equipment needs. Historically, Enterprise was highly reliable in the services it provided, but it did not offer the full stack. Now, with Evolution, it can supply all critical equipment, eliminating the need for oil and gas companies to manage multiple subcontractors. This integrated offering not only simplifies operations for clients but also improves margins and enhances the company’s ability to deploy dedicated sales teams to drive further contract wins.
An important development is Enterprise's exclusive arrangement with the manufacturer of Flex Turbines. These turbines are the best available technology, helping oil and gas companies lower operating costs and reduce greenhouse gas emissions. This exclusivity creates a strong competitive moat, as most competitors cannot offer this equipment, limiting their ability to match Enterprise’s offering.
In oil and gas operations, ancillary equipment such as heating, lighting, and power systems is mission-critical. Failures can result in major production losses because oil and gas wells cannot simply be turned off and on without consequence. Given the critical nature of this equipment, oil and gas companies prioritize reliability over cost when selecting suppliers. The relative cost of renting this equipment is insignificant compared to the potential operational losses caused by failures. As a result, the service is "sticky," with high switching costs due to the operational risks of changing suppliers.
While I believe the business has strong moats regarding its full offering, I think that in terms of Evolution, the business that most of the future growth depends on, their main advantage is their first-mover advantage. They have sufficient scale to protect their supply and deploy the product quickly across a large number of clients. However, as with many first movers in history, this advantage could fade. With projected payback periods of less than two years for these engines, many competitors might eventually appear, and oil and gas companies may start purchasing these engines independently. In that case, Enterprise could end up without a moat. Only time will tell.
Agreement with FLEX: