Ave Maria Focused Fund's Chadd Garcia on misreading waste-focused $SES.TO as energy services

Episode Summary

Executive Summary: The episode argues that Secure Energy (SES) is misunderstood as an energy-services company when it increasingly resembles a high-quality waste and infrastructure business with durable regional monopolies in Western Canada. Chad Garcia highlights valuation gap, strong free cash flow, disciplined capital allocation, tuck-in M&A, and optionality from a possible re-rating, while flagging regulatory, operational, and safety risks.

Main Topics: Secure Energy’s business transformation (Priority: 5/5): Chad explains how Secure evolved from a cyclical oilfield services business into a recurring-revenue waste, water-processing, pipeline, and recycling platform with more stable economics. Valuation mismatch and market misclassification (Priority: 5/5): A major thesis is that the market still prices Secure like an energy-services name, while comparable waste companies trade at much higher EBITDA multiples. Competition Bureau divestiture and strategic repositioning (Priority: 4/5): The podcast covers Secure’s 2021 Travita acquisition, the Canadian Competition Bureau challenge, and the forced sale of a portion of assets to Waste Connections, which helped crystallize the business quality. Capital allocation and shareholder returns (Priority: 5/5): The discussion emphasizes buybacks, dividends, internal funding of growth capex, and the possibility of additional repurchases or leverage expansion if the rerating does not occur. Organic growth and tuck-in M&A (Priority: 4/5): Garcia argues the core business can compound through modest volume growth, price increases, growth capex, and small acquisitions, especially in fragmented metals recycling. Competitive moats and long-duration inventory (Priority: 4/5): The water-processing and landfill-linked business benefits from local monopoly economics, difficult permitting, and long reserve life in Western Canada. Risks and downside scenarios (Priority: 3/5): Potential risks include environmental/safety incidents, regulatory pressure, weaker drilling activity, and execution risk if management cannot deploy capital fast enough.

Key Arguments: Secure is misclassified by the market as an energy-services company even though most of its economics now resemble a waste/infrastructure business. Waste businesses command much higher valuation multiples than energy-services businesses, suggesting SES deserves a rerating. The Travita deal created dominant regional water-processing assets; the forced divestiture to Waste Connections effectively validated the asset quality. Management has shown strong capital allocation skill by buying the asset at a distressed price, selling a portion at a higher value, and retaining a controlling share of the market. Secure can fund dividends, buybacks, and organic growth internally while remaining underlevered relative to target. Organic growth comes from rising water volumes, pricing power, and growth capex, with additional upside from small tuck-in acquisitions. The metals recycling business is more fragmented and ripe for consolidation because scale and logistics are becoming more important. Long-term drilling and water production in Western Canada appear sustainable given large inventory and underinvestment in certain plays. If the market does not rerate the stock, management could choose to lever up and buy back more shares. Main risks are operational incidents, environmental issues, and policy pressure against oil and gas in Canada.

Data Points: Founded: 2007 - Secure Energy Services was founded in 2007. Public listing: 2010 - The company went public in 2010. Energy-services mix at one point: About 50% of EBITDA - Prior to the 2015 downturn, about half of EBITDA came from cyclical energy-services activity. Market cap/valuation mismatch: ~9x EBITDA - Chad says Secure is trading around 9x EBITDA despite being more like a waste company. Energy-services comp multiple: 3x-5x EBITDA - Traditional energy-services companies generally trade in this range. Waste comp multiple: 14x-18x EBITDA - Clean Harbors and Waste Connections were cited as higher-multiple comparables. Travita acquisition ownership: 90% of wastewater processing capacity - After acquiring Travita, Secure controlled nearly all of the independent wastewater-processing capacity in Western Canada. Forced divestiture: 20% of the 90% stake - Secure had to sell part of the acquired capacity to satisfy the Competition Bureau. Residual market control: 70% - After the divestiture, Secure retained 70% of the capacity. Acquisition price: $1.4 billion - Secure bought the asset for $1.4 billion coming out of COVID. Sale price: $1.15 billion - The divested portion was sold for $1.15 billion later. EBITDA from owned asset period: $350-$400 million - Chad said the asset generated this EBITDA while Secure owned it. Leverage: 0.9x EBITDA - The company was described as nearly de-levered after the divestiture proceeds and buybacks. Share repurchases: 19% of market cap bought back in 2024 - Management had already repurchased nearly one-fifth of the market cap this year, with more expected in Q4. Additional expected buybacks: ~2% in Q4 - Chad expects another small amount to be repurchased by year-end. Organic volume growth: ~3% - Combining water growth and solids mix, he estimated volumes grow around 3% annually. Price growth: ~5% - Management believes pricing can add about 5% annually. Organic earnings growth: ~13% - 3% volume plus 5% pricing plus growth capex was cited as implying roughly 13% organic growth. Total earnings growth including tuck-ins: ~15% - After tuck-in M&A, Chad estimates earnings growth can reach about 15%. Growth capex: ~$100 million per year - Secure can invest this amount over several years into growth projects. Cash-on-cash returns: 20%-25% - He estimated pipeline projects return about 20% and waste projects about 25%. Dividend yield: Above 3% - The company pays a dividend that Chad described as above 3%. Free cash flow yield: 7.5% - Chad cited a 7.5% free cash flow yield. Target leverage range: 2.0x-2.5x EBITDA - Management indicated a leverage target above current levels. Potential future buyback capacity: 15%-20% in six months - Chad suggested the company could potentially buy back another large chunk if it chose to lever up. Western Canada oil inventory: 45-50 years - Prairie Sky’s view on remaining inventory was used to argue terminal value is not an immediate concern. Metals inventory turns improvement: 1.2x to 12x - Chad said inventory turns improved dramatically after better management and integration.

Pivotal Quotes: "Waste businesses trade at, if you look at Clean Harbors... 14 times EBITDA... Waste Connections... 18 times EBITDA." — Chad Garcia: Used to contrast valuation multiples for waste versus energy-services businesses. "They sold it for $1.15 billion a couple years later, and then they kept 70% of the assets. So, you know, nice trade." — Chad Garcia: On the Travita/Waste Connections transaction and management’s capital allocation. "My next step would be to lever up to two and a half times and go back, go buy 15% of the company back." — Chad Garcia: On what management should do if the stock remains undervalued.

Implications: If the thesis is right, SES could rerate materially as investors classify it as a waste/infrastructure compounder rather than an energy-services cyclical. That would support continued buybacks, higher multiples, and strategic optionality.