Enerflex - Q4 2025

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Enerflex Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Fetterly, Vice President, Corporate Development and Capital Markets. Please go ahead.

Jeff Fetterly (VP of Corporate Development and Investor Relations)

Thank you, Jill. Good morning, everyone. With me today are Paul Mahoney, President and CEO, Preet Dhindsa, CFO, and Ben Park, Enerflex's Controller. During today's call, our prepared remarks will focus on three key areas. One, the continued strong performance of Enerflex's business. Two, our outlook, priorities, and capital spending guidance for 2026. Three, an update on operational and strategic initiatives, including a definitive agreement to divest the majority of our operations in the APAC region. Before I turn it over to Paul, I'll remind everyone that today's discussion will include non-IFRS and other financial measures, as well as forward-looking statements regarding Enerflex's expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties. The stated expectations could differ materially from actual results or performance.

For more information, refer to the advisory statements within our news release, MD&A, and other regulatory filings, all available on our website and under our SEDAR and EDGAR plus profiles. As part of our prepared remarks, we will be referring to slides in our investor presentation, which is available through a link on this webcast and on our website under the Investor Relations section. I'll now turn it over to Paul.

Paul Mahoney (President and CEO)

Thanks, Jeff. Thank you all for joining us on this morning's call. We are pleased to report another strong quarter that caps off an excellent year for Enerflex. The strength of our financial and operating results is a testament to the resilience, commitment, and deep knowledge of our global team. Today, we will share more about the consistency of Enerflex's results, our growing and relentless focus on execution, and the strategic opportunities within a constructive natural gas market. Together, we believe these fundamentals position Enerflex for long-term value creation. Results during the fourth quarter reflect solid performance across our geographies and business lines, as well as our ongoing efforts to optimize and streamline our business. The energy infrastructure and aftermarket services business lines continue to be the foundation of our results, contributing 65% of gross margin before depreciation and amortization in 2025.

The Engineered Systems business line continued to demonstrate strong project execution, and visibility for this business line remains solid, supported by a $1.1 billion backlog at the end of Q4 and healthy bidding prospects. Firstly, I would like to touch on our announcement related to Enerflex's operations in the Asia Pacific region. Enerflex has entered into a definitive agreement to divest the majority of its operations in the APAC region to the INNIO Group. This business operates principally in Australia, Indonesia, and Thailand, and is primarily focused on the AMS product line. Completion of the transaction is subject to standard closing conditions and regulatory approvals and is expected to close in the second half of 2026.

Following close, Enerflex will continue to deliver engineered system solutions in APAC, including natural gas compression, processing, and electric power generation through local sales teams with equipment manufactured from the company's three facilities in North America. I would like to thank our strong team in the APAC region for their commitment to Enerflex and their contributions as we built a leading AMS business in the APAC region. This accretive divestiture underscores Enerflex's commitment to simplifying and optimizing our operations while sharpening our focus on our core regions of North America, Latin America, and the Middle East. Enerflex and INNIO share a long-standing global relationship, including Enerflex's role as a channel partner across our core regions. We look forward to building on this partnership. Moving to other strategic and operational highlights that Enerflex achieved in the quarter.

The company continues to expand and deepen relationships with upstream and midstream client partners across the U.S. through strategic collaboration and long-term partnership development. During Q4, this momentum contributed to Enerflex securing multiple orders for large-scale compression, natural gas processing, retrofits, and power generation equipment. Activity continues to be centered in the Permian, where increasing gas and NGL ratios are supportive of demand for Enerflex's solutions. We are also seeing a broadening of opportunities, including in the Haynesville, where natural gas supply growth is expected to be connected with LNG export capacity expansion. In the fourth quarter, Enerflex established a long-term framework agreement for compression solutions with a large, diversified, integrated midstream client partner in the United States. Enerflex's U.S. contract compression business continues to perform well, led by increasing natural gas production in the Permian.

Utilization remained stable at 94% during Q4 across a fleet size of approximately 483,000 horsepower. Enerflex increased its marketed fleet by 13% over the course of 2025. We expect approved growth capital expenditures will deliver growth at a similar pace or greater during 2026. Enerflex is also securing long lead time components to further support growth in 2027. Enerflex continues to develop opportunities in the electric power generation part of our business, including projects associated with AI and data centers. In early 2026, Enerflex received an order to supply power generation units for a large data center project in the U.S., with delivery scheduled into 2027.

Two, we've completed a front-end engineering and design study for a client partner related to a large data center power generation project in the U.S., advancing the opportunity toward potential future execution. Three, executed contracts to supply power generation equipment to two client partners in the North American market. Enerflex continues to evaluate over 1.5 GW of opportunities across our Engineered Systems business line. Now, a few comments on each of our business lines. Engineered Systems backlog as at December 31, 2025, of $1.1 billion, provides strong visibility into future revenue generation and business activity levels. Bookings of $377 million during Q4, compared to $301 million in Q4 of 2024, and $339 million in Q3 of 2025, as well as a trailing eight-quarter average of $336 million.

ES book-to-bill ratio was 1.1x during Q4, 1 time on a trailing eight-quarter average, highlighting that the company is consistently replenishing its backlog in line with project execution. The outlook for ES products and services continues to be attractive, driven by expected increases in natural gas, associated liquids, and electric power generation across Enerflex's core operating countries. Turning to aftermarket services, this business line continued to benefit from strong activity levels and increased customer maintenance spending. We are particularly encouraged by the performance of our AMS business in countries where we also operate energy infrastructure assets, highlighting the strength of our integrated offering and competitive positioning in key markets. The energy infrastructure business continues to deliver solid performance, underpinned by approximately $1.3 billion of contracted revenue.

Within this segment, our U.S. contract compression fleet remains a core component of our asset base. The underlying fundamentals for that business continue to be constructive. You can find additional detail on operational KPIs for this segment on slides 15 and 16 of our investor presentation. Turning to our international energy infrastructure operation, which are outlined on slides 17 and 18, we currently operate 1.1 million horsepower of compression and have 24 build, own, operate, and maintain, or BOOM, projects across Bahrain, Oman, and Latin America. This portfolio is supported by a strong contract position with a weighted average remaining term of approximately five years, providing durable and predictable cash flow that we expect will continue to support Enerflex's financial performance in the years ahead. I'd like to take a moment to touch on our strategic priorities.

Since joining Enerflex at the end of September, I've had the opportunity to spend time across our global operations and interact extensively across all levels of the organization. Concurrent with this, we have been engaging with internal and external partners in a broader assessment of Enerflex's strategy, capabilities, and market opportunities. We expect to provide further insights into our strategic priorities, including capital allocation expectations, in the coming months. At a high level, Enerflex's strategy will be anchored by a continued focus on Enerflex's strengths and areas of excellence. Two, alignment with the values that have guided the company for decades. Three, emphasis on discipline, providing meaningful direct shareholder returns, and making investments that support long-term shareholder value creation. During 2026, the company's priorities are focused on leveraging our leading position in core operating countries to capitalize on expected increases in demand for Enerflex's solutions.

enhancing the profitability of our core operations and maximizing free cash flow, positioning the company to invest in customer-supported growth opportunities and provide meaningful direct shareholder returns. With that, I'll turn it over to Preet to speak to the financial side and capital allocation moving forward.

Preet Dhindsa (SVP & CFO)

Thanks, Paul. Good morning, everyone. I'll start with highlights from the fourth quarter. We generated revenue of $627 million in the fourth quarter, compared to $561 million in Q4 2024 and $777 million in Q3 2025. Higher revenue compared with prior year reflects strong execution and a high level of operational activity in the Engineered Systems product line. The sequential decline relates primarily to commencement of the Block 60 BSAT C expansion facility and the pull forward of certain projects into the third quarter. Gross margin before depreciation and amortization was $177 million, or 28% of revenue, compared to $174 million, or 31% of revenue in Q4 2024, and $206 million, or 27% of revenue during Q3 2025.

The EI and AMS product lines generated 67% of consolidated gross margin before depreciation and amortization during Q4 2025. Energy infrastructure performance continued to be strong, with gross margin before D&A of $89 million, compared to $86 million in Q4 2024 and $95 million in Q3 2025. Aftermarket services gross margin before D&A was 22% in the quarter, benefiting from strong customer maintenance programs. SG&A was $83 million for the three months ended December 31, 2025, down $9 million from the prior year period, driven by cost savings initiatives, improved operational efficiencies, and lower depreciation and amortization. On a sequential basis, SG&A increased from $71 million due to higher stock-based compensation and third-party expenses. Adjusted EBITDA of $123 million compares to $121 million in Q4 2024 and $145 million during Q3 2025.

The sequential decrease in Adjusted EBITDA was primarily related to the pull forward of certain ES projects into Q3 2025 and higher core SG&A in the fourth quarter. Return on capital employed was 16.9% in Q4 2025, an increase compared to 10.3% in Q4 2024, and consistent with the record level during Q3 2025. Higher ROCE compared to Q4 2024 is a function of the increase in trailing 12-month EBIT and lower average capital employed, primarily due to a decline in net debt. Cash provided by operating activities before changes in working capital, or FFO, of $60 million, compared to $74 million in Q4 2024 and $115 million in Q3 2025. FFO for the fourth quarter included $26 million of tax expense related to the refinancing of our high-yield notes.

Free cash flow increased to a record $141 million in Q4 2025, compared to $76 million during Q4 2024 and $43 million in Q3 2025. Free cash flow included working capital recovery of $119 million, which benefited from collection and execution of projects in the ES business line. Net loss of $57 million, or $0.47 per share in Q4 2025, compared to earnings of $15 million or $0.12 per share in Q4 2024, and earnings of $37 million or $0.30 per share in Q3 2025. Including Q4 2025, with $81 million of expenses related to redemption of the 2027 senior secured notes. On a normalized basis, net income was $24 million or $0.20 per share in the fourth quarter.

The early redemption of Enerflex's 9% senior secured notes due 2027, results in debt redemption cost of $42 million, comprised of the redemption premium paid and derecognition of the unamortized original issue discount and deferred transaction costs. The company incurred withholding taxes of $26 million, for a total one-time cost of $68 million. The embedded derivative associated with the redemption options in the 2027 notes of $13 million was also fully derecognized during Q4 2025. While these costs impacted results in the fourth quarter, the redemption will reduce future financing and tax costs and improve capital structure. The company refinanced $563 million in 9% senior secured notes, due 2027, with $400 million of 6.875% senior unsecured notes, due 2031, along with availability under the company's secured revolving credit facility.

The refinancing is expected to reduce annual interest costs and enhance the company's tax efficiency. Now we'll touch on our strong financial position. Enerflex exited Q4 2025 with net debt of $501 million, which included $81 million of cash and cash equivalents, a reduction of $115 million compared to Q4 2024, and $83 million compared to the third quarter of 2025. Cash increased by $17 million on a quarter-over-quarter basis due to strong collections late in the fourth quarter, but we remain focused on optimizing cash balances held on a global basis. Enerflex's bank-adjusted net debt to EBITDA ratio is approximately 1x at the end of Q4 2025, down from 1.5x at the end of Q4 2024, and 1.2x at the end of Q3 2025. Now let me shift to capital allocation.

During Q4 2025, we invested $34 million in the business, comprised of $14 million for growth capital, primarily allocated to expand the company's contract compression fleet in the U.S., and $20 million for maintenance and PP&E. Capital expenditures for 2025 are $115 million, consistent with our previous guidance of $120 million. The company repurchased 102,800 common shares at an average price of CAD 15.10 per share during Q4 2025, and a total of approximately 2.8 million common shares at an average price of CAD 11.08 since its normal course issuer bid commenced on April 1 to December 31, 2025.

Under the NCIB, which expires March 31, 2026, the company is authorized to acquire up to a maximum of approximately 6.2 million common shares or 5% of its public float, as at the application date for cancellation. During 2025, Enerflex returned $40 million to shareholders through dividends of $17 million and share repurchases of $23 million. Now turning to 2026. Enerflex is targeting organic capital expenditures of $175 million-$195 million. This includes growth capital of $90 million-$100 million, maintenance capital of $70 million-$80 million, and PP&E and infrastructure investments of approximately $15 million to support the company's ES business and activity in adjacent markets, including power generation.

Organic growth capital spending will continue to focus on customer-supported opportunities and primarily allocated to expand the company's contract compression fleet in the U.S. Although not contemplated in the company's 2026 capital spending plan, Enerflex continues to evaluate opportunities to organically expand its business in the Middle East. Now, direct shareholder returns. Going forward, capital allocation decisions will be based on delivering value to Enerflex shareholders and measured against Enerflex's ability to maintain balance sheet strength. In addition to disciplined growth capital spending, share repurchases, and dividends, Enerflex will also consider further debt reduction to strengthen its balance sheet and lower net finance costs. We remain focused on enhancing profitability of our core operations, growing our business in a disciplined and structured way, and ensuring Enerflex generates sustained, attractive returns for shareholders.

I want to thank Enerflex employees for their efforts in continuing to deliver strong operational and financial results. With that, I'll turn the call back over to Paul for closing remarks.

Paul Mahoney (President and CEO)

Thanks, Preet. Over the course of 2025, we continued to advance our business, strengthened our financial position, and took meaningful steps to enhance long-term shareholder value. While there remains important work ahead to fully realize our ambitions, I'm encouraged by the momentum across our global operations and confident in our ability to build on this foundation. Once again, we believe the consistency of Enerflex's results are growing and relentless focus on execution and strategic opportunities within a constructive natural gas market, position Enerflex for long-term value creation. We are excited about the path ahead for Enerflex and look forward to providing more detail in the coming months around Enerflex's strategy, capabilities, and market opportunities.

Before I hand the call back over to the operator, I, too, want to thank the 4,400 employees around the world for their commitment, resilience, and focus on customers day in and day out. We will now hand the call back to the operator for questions.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Aaron MacNeil with TD Cowen. Please go ahead. Your line is open.

Aaron MacNeil (Director of Institutional Equity Research)

Hey, morning, all. Yesterday, a large contract compression company in the U.S. noted that lead times on large engines has extended to 110-120 weeks. I'm just hoping that you can speak to sort of the amount of the Engineered Systems backlog, potential orders, including power generation beyond the backlog, and the sort of energy infrastructure, organic growth that would have sort of an associated engine today. Ultimately, do you see this as a constraint that would reduce your ability to execute on the business? Maybe more directly as it relates to the, you know, 1.5 GW of opportunities, like, can you practically or like, how much of it, I guess, could you practically execute on in the near term in light of those constraints?

Paul Mahoney (President and CEO)

Yeah. Hi, Aaron. Great, great questions. First, I would say the element of availability of engines and things is not a new phenomenon. This is something that we've been strategizing, grappling with for a bit now. I would say our 2026 is secure. We are currently positioning for 2027, given the light of the delivery constraints. To answer the question relating to power generation, we did in Q4, if you remember, and even Q3, is a small element of putting a more of a speculative position to secure engines. Such that we could deliver on our commitments in 2026.

Aaron MacNeil (Director of Institutional Equity Research)

Gotcha. Okay. Maybe keeping with the lead times, you know, again, I know you said you had 26 sort of locked in, but if lead times are effectively two years, is it fair to assume that you sort of now have, you know, a multi-year growth outlook for the contract compression business specifically? Like, I'm thinking about, you know, you upticked the capital spend for next year or for, I guess, for this year. Like, should we expect sort of that cadence to continue into 2027? Do you have visibility to that today, and do you have customers sort of lined up ready to take that equipment today?

Paul Mahoney (President and CEO)

Yeah, no, great question. You know, as we've stated, our CapEx position in 2026, that demonstrates our commitment to further growth, similar to what you've seen in 2025. We do have customer-specific positions with that. I know there's some discussion around Permian Basin and what have you. When it comes to gas processing, production of gas, and the outlook of gas, yeah, I think, I think the statement that you've made around two years of confidence on growth is accurate.

Aaron MacNeil (Director of Institutional Equity Research)

Thanks, everyone. I'll turn it back.

Operator (participant)

Thank you. Before our next question, as a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. One moment. Our next question comes from the line of Tim Monachello with ATB Cormark Capital Markets. Please go ahead.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Hey, good morning, everyone. Thanks for taking my questions. Just a quick one to follow up on Aaron's question. Do you think that lead time that you stated, 110-120 weeks, is accurate across your product line that you're seeing? Or is there some variability in lead times based on, I guess, the size of engines that you're looking at and end markets?

Paul Mahoney (President and CEO)

Yeah. Hi, good morning, Tim. You know, the stated 120 weeks is for a portion of the product line, I think is the first thing to realize, and it does come in the higher horsepower ranges. I think it also, which provides a little bit of potential opportunity, expansion in operations in the key equipment manufacturers has been going on, and it's pretty fervent. Right now, a large horsepower, 120 weeks, is the current lead time. As we go out here over the next so many months, we should see some impact due to CapEx with the equipment manufacturers, number one.

Two, that there, again, it's not the entire portfolio, it's a select piece of the portfolio that's actually 120 weeks.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Got it. Then having 2026 sort of secured, would you say, I don't know, the majority or almost all of the new orders that you receive today won't be delivered in 2026? Do you still have capacity to book and turn work in 2026?

Paul Mahoney (President and CEO)

Well, if you're referring to data center or power gen-related items, yeah, most of that would be 2027 and beyond. You know, do we find opportunities here or there for book-to-bill business to pursue? That certainly is a plan, and that certainly is something that we do. When it comes to the data center world, that would be more of 2027 and on in terms of deliveries.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

I meant more for the compression and processing piece.

Paul Mahoney (President and CEO)

In terms of?

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Like, if you get an order for compression tomorrow, do you have enough, I guess, orders with your channel partners for engines and components that you could deliver an order in 26? Or is that sort of the outlook for 26 in terms of that backlog for baked and dry already?

Jeff Fetterly (VP of Corporate Development and Investor Relations)

Yeah, Tim, it's Jeff. As Paul referenced in the remarks a minute ago, we've secured capacity to support our activity levels in 26, and that includes a book and build that Paul referenced. We also have a view for where activity and opportunities sit for 26, going into 27 as well.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Okay. Apologies for asking the question twice here. Preet mentioned potential growth opportunities in the Middle East. I wonder if you can elaborate on what those opportunities look like, and how you would pursue those opportunities relative to, you know, your cost of capital and relative to, you know, your growth opportunities in North America?

Preet Dhindsa (SVP & CFO)

Yeah, Tim, I mean, as we mentioned, the growth capital noted in our outlook is largely earmarked for the U.S. contract compression fleet, call it 60%-65% greater than prior year. Currently, in the growth capital, we don't have anything directly allocated to, call it, Oman, Bahrain, the countries you're currently in, good GCC countries, but we still are active in that market. We've got a team on the ground based out of Abu Dhabi, who are quite well-versed in that region. Those projects, as you probably mentioned earlier, don't come around every year, and if they do, when they do hit, they usually straddle a couple of year-ends. We're active in the market.

There are often good quality assets, the BOOM assets, whether finance or operating leases, we see on our balance sheet, great counterparties, good economics, take or pay, without direct volumetric or commodity price risk. We like the asset class, but right now, we just put a marker out there that nothing in our current growth capital guidance speaks to those potential projects, but we are active exploring good markets in those good countries.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Around capital allocation, appreciate your prepared remarks there, Preet. Just curious, in terms of the NCIB that you have outstanding for the year, do you expect to exhaust that NCIB, or how should we be thinking about your share purchase activity at 2026?

Preet Dhindsa (SVP & CFO)

Tim, I mean, all the capital allocation levers that we've spoken about in the past are relevant. Growth capital, we've put markers out there now. Dividend, as you know, we've increased as at Q3 last couple of years. We've been active in the NCIB since inception, April 1 last year. Purchased just under 5%, that'd be half of 5% of the authorized float that we had. What I would say is that we'll be a little more prescriptive on capital allocation in the coming months once the strategy work is done. Right now, the NCIB is open till the end of March, and we'll make a call accordingly at that time.

Tim Monachello (Managing Director, Institutional Equity Research, Energy and Industrial Services and Technology)

Okay, great. I appreciate it. I'll jump back in the queue.

Operator (participant)

One moment. Our next question comes from the line of John Gibson with BMO Capital Markets. Go ahead, your line is open.

John Gibson (Director of Equity Research)

Morning, all. First, just wondering if you could maybe expand on the customers associated with these power gen contracts, either with the order you've signed or future orders you're working on. Is there any counterparty risk, or are they all pretty high quality?

Paul Mahoney (President and CEO)

Yeah, John, great question. You know, in this market space, I think I used the word embryonic, last quarter. Having a really strong, disciplined approach, on counterparties, on terms, on different conditions and whatnot is extremely important. I would say, that's prime for us is counterparty risk, counterparty stability. Right now, in the recent win, very, very strong counterparty. In the projects that we're pursuing here in the near term, very, very strong counterparty. Well-developed relationships, well-developed understanding, across the value stream, whether they're developers, real estate developers, power developers, and then the hyperscalers. That's been a key piece of our strategy and why we've kind of metered and been conservative, if you will, in our approach.

John Gibson (Director of Equity Research)

Great. Last one for me, just given the recent disposition, is your business kind of where it's at, you know, in terms of kind of where you want it overall, or are there any other geographies or areas you're continuing to evaluate here?

Paul Mahoney (President and CEO)

Yeah, maybe I'll just give an overview, and Preet, you can jump in here. Early on, we've deployed more of a residual cash earnings type of North Star metric, and we've looked at all geographies, all business line, all countries, and certainly, continue to stay focused on that, and that's around creating shareholder value. We continue to look at it, and I would say that's just a part of our normal discipline, operating discipline, but I wouldn't go beyond that. Preet?

Preet Dhindsa (SVP & CFO)

The only thing I'd add is that at deal close three years ago, we were in 27 countries. Most recently and currently, we're in 17. We'll monetize Asia Pacific, get down to likely 14 or so, and then we've got seven core, Canada, US, Oman, Bahrain, Brazil, Argentina, Mexico. To say there's probably a few other non-core geographies we can get out of and, you know, free up some capital, working capital, close some bank accounts, improve our tax compliance and tax compliance positions in these countries. Just overall, simplify and optimize, but there's probably a few more non-core countries to look at.

John Gibson (Director of Equity Research)

Thanks a lot. Appreciate the responses. Congrats on a great year here. Thanks.

Paul Mahoney (President and CEO)

Thank you.

Preet Dhindsa (SVP & CFO)

Thank you.

Operator (participant)

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Paul Mahoney for closing remarks.

Paul Mahoney (President and CEO)

Thank you. Well, thank you for joining today's call. We look forward to sharing our first quarter financial and operation results in early May.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.