Calfrac Well Services Ltd. announced 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 outstanding notes are currently convertible at a conversion price of $1.3325 per common share. The program will commence this morning at 9:00am and expire on December 15th, 2022, at 5:00pm.

Participants of the program that convert their notes during the early conversion period will receive a payment from the company equal to 50% of each holder’s respective forgone interest entitlement. Noteholders that participate in the program will also receive a payment as required by the Note indenture equal to the accrued and unpaid interest on the Notes Converted by the Noteholder to, but excluding, the date of conversion.

As of today 91%, ($43.3M) of the aggregate note holders have executed conversion commitment letters with CFW.

Additionally, CFW updated guidance citing positive momentum generated during Q3. CFW’s management is now expecting Q4 revenue to range between $460M - $480M, and adjusted EBITDA to range between $80M - $90M. Adjusted EBITDA margins are expected to range between 17% - 19%.

Our thoughts: Since the initial $60M 1.5 Lien was issued to G2S2, MATCO, and eligible holders of senior unsecured debt there is a risk the equity they receive from the program will be sold upon receipt; the issuance of the 10% senior secured convertibles took place in concert with the restructuring in 2020. As a result, we do see the risk of an influx of equity sellers from the program.

Q4/22 into 2023: As a result of the increasing energy prices, capital expenditure on energy assets and guidance boost we see continued strength into 2023.

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. 

Valuation

Calfrac currently trades at 2.9x 2023E EBITDA compared to its peers at 3.6x 2023E EBITDA. Consensus 2023E EBITDA has increased to $358.3M since our last note. We continue to think the entire oil services market is undervalued, and CFW remains a key standout. If CFW were to trade back to a mid-cycle multiple of 6-7x EBITDA, the stock would be worth over $20.00/share.