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. On December 2nd, 2022, after market close G2S2 Capital Inc filed a form 45-102F1 indicating their intentions to sell up to 1,378,600 common shares in CFW.

Upon early conversion of the outstanding 10% convertible notes G2S2 owns ($23,302,000), G2S2 will own 28,178,030 common shares of CFW. The intended sale of 1,378,600 shares represents ~4.8% of G2S2’s total position in CFW common shares.

This sale aligns with our original thesis that the largest holders of convertible debt positions would be unlikely to liquidate their full equity upon receipt. The shares G2S2 intends to sell represent 8.4 Days of average trading volume.                                                                                

Based on our initial thesis, we would expect CFW to currently be trading at $7.19 based on the fluctuations of the “OSX” oil and gas services sector index as a proxy for price. The early conversion program will expire on December 15th, 2022 at 5:00pm MST (7:00PM EST)

Valuation:

CFW currently trades at 2.6x 2023E EBITDA compared to its peers at 3.4x 2023E EBITDA. Consensus 2023E EBITDA is $358.3M and remains unchanged since our last note. We believe the additional shares coming to market through the early incentive program have been anticipated by the market and we continue to think the entire oil services market is undervalued, with CFW as a 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.