The Year of Cash Harvesting: Highlighting Key Investment Themes.

Waqar Sayed, MBA and Tim Monachello, CFA

We project the sector moving into a cash harvesting phase, with EBITDA and FCF increasing by 36% and 143%, respectively, in 2023e. Key stock themes that worked in 2022 – (1) improving company profiles (capital structure, asset quality), (2) upgrades to business outlooks, (3) shareholder capital returns, and (4) laggard-to-leader trade – should also work in 2023. But given the prevailing macro headwinds, our top stock picks generally avoid the riskiest securities. 

The Macro Backdrop
Recession fears dominate headlines, and oil prices are gyrating between $70/bbl and low-$80s/bbl. Given underinvestment in oil and gas production capacity since 2014, we see a multi-year investment upcycle unfolding, as long-cycle projects in the Middle East and offshore make a comeback. For 2023, we expect global upstream spending to increase by mid-to-high-teen percentage y/y. In this report, we introduce 2025 estimates and raise price targets for most stocks.      

FCF Sharply Inflecting for the Sector 
2023 should be a year of cash harvesting in the Energy Services sector. We expect all companies under coverage to generate FCF as capital spending growth slows down and less cash is consumed in working capital build. We forecast our coverage’s aggregate EBITDA increasing by 36% y/y in 2023 while capital spending rises only 19%, leading to a 143% increase in FCF. This should lead to higher capital returns to shareholders, which should be a stock catalyst.