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Entrec downgraded to sell amid weak macro, limited upside

Published: 15:31 11 Mar 2015 EDT

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Entrec Corp (TSE:ENT) shares were falling Wednesday after analysts at Dundee Capital downgraded the company to a "sell" rating from "buy", slashing its price target as a result of a challenging macro situation, a high amount of debt and limited upside.

"The glaring problem is debt (too much of it)...We are also concerned that Entrec's ability to replenish the Alcan smelter work in BC will be challenging in this environment, creating another revenue uncertainty," wrote analyst Maxim Sytchev in a research note released to clients late Tuesday.

"Site C, LNG are all great in principle but the type of services the company provides are geared towards later stages of project development."

Entrec transports oversized cargo for customers in the oil and gas, mining, construction, petrochemical and power generation industries, with oil sands being the largest component at 60 percent.

The company also lowered its guidance for 2015, following another reduction in January, and now expects revenue to total $200 million for the year, down from its previous $200 to $240 million range. Consensus expectations were for $206 million in revenue.

Capex for 2015 was unchanged, and is expected to be $21 million, with $11 million allocated to growth capital and the remainder on maintenance spending.

Dundee noted that management said on a conference call the visibility for the remainder of 2015 is "very limited and (schedule slippage on projects is abound)," given both utilization and pricing pressure.

The brokerage downgraded Entrec to sell from buy, and cut its target price dramatically to 40 Canadian cents from C$1.00 previously.

Sytchev said he also sees limited upside "even in a take-out scenario". Entrec shares were trading at 45 Canadian cents on Wednesday, down 6.3 percent.

For the fourth quarter, Entrec reported revenue of $58.5 million, topping Street estimates of $54.7 million, while EBITDA was in line with forecasts at $11.1 million. The company's revenues increased 10.7 percent year-over-year largely due to growth in maintenance, repair and operation (MRO) activity in the oil sands industry, and increased crane and transportation services demand in the Bakken.

Dundee said that fourth quarter figures are "largely a legacy of a different WTI environment."

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