Trading up
Secure Waste's surprising capital allocation journey
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After a painful half-decade, Secure capitulated, exiting nearly all of its oilfield services businesses in 2019 for pennies on the dollar. Two years later, in 2021, Secure merged with Tervita in an all stock deal, forming the largest waste business serving the Canadian oil and gas industry. The combined entity was forced to divest 29 former Tervita locations, eventually selling them to Waste Connections for $1.1B in March 2024. That’s the business we know today. Secure is the dominant provider of waste management services to energy businesses operating in Western Canada. That’s the business. What about the stock? The combination of a dominant competitive position, buybacks and a low multiple, I estimate that Secure trades for about 11.6 times its 2025 free cash flow, are what’s most exciting about the stock. In the last 2.5 years, Secure has spent over one billion dollars buying back their own stock, reducing shares outstanding by 30% in the process. In the second quarter of 2024, Secure spent $430mm repurchasing 38mm shares, reducing shares outstanding by 12.5% in one quarter. In the four quarters since then, The Company has spent a bit more than $300mm to repurchase 24mm shares, reducing shares outstanding by another 10%. The Company has suggested they will continue to repurchase shares. But buyback math is not an investment thesis.
I’m long Secure’s stock, SES.TO, for a number of reasons; (1) Secure is the dominant provider of a critical service, waste management, to energy businesses operating in the Western Canadian Sedimentary Basin. Following The Company’s 2021 merger with Tervita, The Canadian Competition Commission brought a case against the combined entity that fleshed out how competitively advantaged Secure’s position is. We will both unpack the Competition Tribunal ruling as well as analyze the Canadian oil and gas industry. (2) Secure’s leadership; The Company’s Vice-Chairman, Rene Amirault, who founded Secure and served as CEO until 2024, CEO Allan Gransch, and COO Corey Higham all have been with Secure since its founding in 2007 and are heavily invested. This is a trio I can bet alongside with confidence. (3) Consistent leadership through volatile oil prices over the last decade provide a backdrop to be able to grade Secure’s capital allocation choices. In addition to buybacks, The Company invests both organically and inorganically, to the benefit of shareholders. Lastly, (4) Secure has an opportunity to monetize its Midstream segment and has room for a multiple re-rate, both of which add some positive skew.
I work through all that in this write-up. I begin with a quick overview of Secure today, as I suspect many readers are not familiar. I then rewind and start with Secure’s 2019 assets sales. Next, I discuss Secure’s 2021 merger with Tervita with a focus on the Competition Tribunal hearing. From there, I review Secure’s capital allocation decisions. After that, I highlight two additional opportunities for the stock and then end with closing thoughts; risks, return algorithm, portfolio considerations and more.
Overview. Secure today
Selling low. 2019 asset sales
Focusing. 2021 Tervita merger
Selling high. 2024 Waste Connections sale
Capital allocation review. Investments, buybacks and debt refinancing
Capital allocation opportunity. GFL and other midstream transactions
A critical industry. The case for Canadian oil and gas
Closing thoughts. Risks, return, portfolio considerations and a shoutout
Let’s begin with a quote from the March 23rd, 2023 decision by the Canadian Competition Tribunal in the case of Canada’s Commission of Competition vs. Secure Energy Services, in regards to their acquisition of Tervita Corporation:
The Tribunal agrees with the Commissioner that Secure’s acquisition of Tervita…has substantially lessened competition in 136 of the 143 markets in which this effect has been alleged. To the extent that these markets represent close to half of the 271 areas of competitive overlap between Secure and Tervita…it is difficult to conceive of a more anti-competitive merger.