Executive Summary / Key Takeaways

• Enerflex Ltd. (NYSE: EFXT) is demonstrating robust operational and financial performance, driven by its Energy Infrastructure (EI) and After-Market Services (AMS) segments, which consistently contribute the majority of its gross margin.
• The company's U.S. contract compression fleet is a significant growth engine, expanding rapidly and supported by strong market fundamentals, high utilization rates, and multi-year contracts, de-risking capital investments.
• Enerflex has significantly strengthened its balance sheet through aggressive debt reduction, achieving its target leverage range and enabling increased direct shareholder returns via a dividend hike and share repurchases.
• Strategic investments in technology, including produced water projects and electric drive applications, alongside a focus on operational efficiency and supply chain resilience, are enhancing its competitive moat and mitigating market risks.
• While Engineered Systems (ES) margins are expected to normalize due to product mix shifts, the long-term outlook remains attractive, underpinned by global natural gas demand, LNG export growth, and decarbonization initiatives.

A Foundation of Energy Infrastructure and Strategic Evolution

Enerflex Ltd., established in 1980, has evolved into a premier integrated global provider of energy infrastructure and energy transition solutions. The company's core business revolves around natural gas compression, processing, and power generation, complemented by comprehensive after-market services. A pivotal moment in its recent history was the acquisition of Exterran, which, following an intense integration period characterized by higher selling, general, and administrative (SG&A) expenses, has now positioned Enerflex with a more diversified and resilient business model. This strategic shift has seen its Energy Infrastructure (EI) and After-Market Services (AMS) segments become the bedrock of its profitability, consistently generating between 65% and 70% of gross margin before depreciation and amortization in 2024 and 2025.

The company's overarching strategy is clear: enhance the profitability of core operations, leverage its leading position in key operating countries to capitalize on expected increases in natural gas and produced water volumes, and maximize free cash flow to strengthen its financial position, provide direct shareholder returns, and invest in selective, customer-supported growth opportunities. This strategy is firmly rooted in the belief that global energy security and the increasing demand for low-emissions natural gas are strong, long-term drivers for its business.

Technological Edge and Operational Excellence

Enerflex's competitive advantage is significantly bolstered by its technological differentiators and operational execution. The company provides a comprehensive portfolio of solutions, including compression, processing, cryogenic, and treated water solutions, spanning all phases of a project's lifecycle. Its modular natural gas-handling and low-carbon solutions, engineered, designed, fabricated, and assembled for gas processing, compression systems, CCUS (Carbon Capture, Utilization, and Storage), water treatment, and electric power generation systems, offer tangible benefits to customers.

A key aspect of its technological and operational strength lies in its vertical integration, particularly within its U.S. contract compression business. This integration provides a competitive advantage in both time to market and cost compared to rivals relying on third-party manufacturing. For instance, the company's ability to quickly deploy new compression units under multi-year contracts, often exceeding four years in initial term, is a testament to this efficiency. Enerflex's produced water projects in Oman, one of which saw an expansion commissioned in early Q3 2025, highlight its capabilities in specialized environmental solutions. Furthermore, the company's acquisition of additional land adjacent to its U.S. manufacturing facility in Houston underscores its commitment to maintaining optionality for future growth in its Engineered Systems business, leveraging a constructive natural gas macro environment.

Robust Performance Across Key Segments

Enerflex operates through three primary business segments: Energy Infrastructure (EI), After-Market Services (AMS), and Engineered Systems (ES). Each plays a distinct role in the company's financial and operational profile.

The Energy Infrastructure segment continues to be a powerhouse, supported by approximately $1.5 billion of revenue under contract. The U.S. contract compression fleet, a critical asset, expanded from 428,000 horsepower at the end of 2024 to 456,000 horsepower by the end of Q2 2025, with plans to exceed 475,000 horsepower by year-end 2025. This growth is de-risked by multi-year contracts in core operating regions, focusing on larger horsepower natural gas and electric drive applications. Utilization rates in the U.S. contract compression business have remained above 90% for the past 14 quarters, with solid revenue per horsepower per month and profitability. The international EI business, encompassing approximately 1.1 million horsepower of operated compression and 23 Build, Own, Operate and Maintain (BOOM) projects in the Middle East and Latin America, is backed by approximately $1.3 billion of contracted revenue with an average contract term of about five years. This segment's gross margin before depreciation and amortization was $86 million in Q2 2025, consistent with Q1 2025, reflecting strong and stable performance.

After-Market Services (AMS) consistently delivers steady performance, benefiting from increased activity levels and customer maintenance programs. This segment contributed a gross margin before depreciation and amortization of 23% in Q2 2025, up from 19% in Q3 2024. Management anticipates these positive trends to persist throughout the remainder of 2025, reinforcing AMS as a core component of Enerflex's profitability.

The Engineered Systems (ES) business maintains a healthy backlog, consistently around $1.2 billion to $1.3 billion. Bookings in Q2 2025 were strong at $365 million, resulting in a book-to-bill ratio of 1.1x, indicating that new orders are keeping pace with revenue recognition. While ES gross margins in Q4 2024 benefited from a favorable product mix and strong execution, they are expected to normalize towards historical averages in 2025. This normalization is primarily due to a shift in product mix towards more compression-based work, which typically generates lower margins than gas processing projects, and the lingering effects of weaker domestic natural gas prices in 2024. Despite this, near-term ES revenue is expected to remain steady, with a constructive medium-term outlook supported by anticipated growth in natural gas and produced water volumes, as well as decarbonization activities.

Financial Strength and Capital Discipline

Enerflex has made significant strides in strengthening its financial position. The company reported a new quarterly record for adjusted EBITDA of $130 million in Q2 2025. Consolidated revenues for Q2 2025 were $615 million, with a gross margin before depreciation and amortization of $175 million, or 29% of revenue. SG&A expenses decreased by $14 million year-over-year to $61 million in Q2 2025, driven by cost-saving initiatives, improved operational efficiencies, and the absence of one-time integration costs.

The company's deleveraging efforts have been particularly notable. Enerflex repaid $433 million of debt since the beginning of 2023, reducing its bank-adjusted net debt-to-EBITDA ratio to approximately 1.3x at the end of Q1 and Q2 2025, down from 2.2x in Q2 2024 and within its target range of 1.5x to 2.0x. This improved financial flexibility was further enhanced by the extension of its $800 million syndicated secured revolving credit facility (RCF) by three years to July 11, 2028.

Cash flow generation remains a priority. Cash provided by operating activities before changes in working capital (FFO) increased to $89 million in Q2 2025, reflecting higher adjusted EBITDA, lower net finance costs, and reduced current tax expense. While free cash flow was a use of $39 million in Q2 2025 due to increased growth capital spending and strategic inventory investments, the company expects working capital to normalize, aiming for a generally stable or neutral profile for the full year 2025.

Strategic Capital Allocation and Shareholder Returns

With its strengthened balance sheet, Enerflex has expanded its capital allocation priorities to include direct returns to shareholders. The Board approved a 50% increase to its quarterly dividend, raising it to CAD$0.0375 per share, payable in January 2025. Additionally, Enerflex initiated a Normal Course Issuer Bid (NCIB) on April 1, 2025, authorizing the repurchase of up to approximately 6.2 million shares through March 2026. In Q2 2025, the company returned $18 million to shareholders through dividends and share repurchases.

For 2025, total capital spending is targeted at approximately $120 million, including $60 million for growth initiatives and $60 million for maintenance and PPE expenditures. Growth investments will primarily focus on customer-supported opportunities in the U.S. contract compression business, where fundamentals remain strong. The company is also making strategic inventory investments to mitigate increasing lead times for equipment, particularly engines, and is proactively making commitments for 2026 capital expenditures to align with supply chain realities and customer planning cycles.

Competitive Landscape and Market Positioning

Enerflex operates in a competitive environment, but its strategic positioning and operational strengths provide a distinct edge. In the U.S. contract compression market, Enerflex benefits from a favorable supply-demand balance, partly due to the discipline observed among the three largest competitors. The company's vertical integration provides a competitive advantage in time to market and cost compared to rivals that rely on third-party manufacturing. Its customer base is largely composed of larger operators and consolidators, particularly in the Permian Basin, who are focused on the medium to longer-term outlook for LNG export and overall gas demand.

Compared to larger, more diversified players like Baker Hughes (BKR) or SLB (SLB), Enerflex offers specialized expertise in customized compression and processing solutions, alongside robust after-market services. While these larger competitors may have greater scale and broader technological integration, Enerflex's focus on tailored solutions and direct customer engagement fosters strong loyalty and recurring revenue streams. Its rental model, for instance, provides customers with flexible access to equipment without large upfront investments, which can be a significant differentiator in volatile markets. Against Halliburton (HAL), Enerflex's emphasis on electric power generation and energy transition solutions aligns more closely with emerging clean energy demands, potentially offering a stronger value proposition in sustainable projects. However, Enerflex's smaller scale and more focused portfolio mean its financial performance can be more exposed to market volatility than that of its larger rivals.

The company's proactive approach to managing supply chain risks, particularly concerning tariffs, by implementing short pricing validities and quickly locking in project costs, demonstrates its operational agility. This "playbook," refined from previous tariff implementations, helps mitigate potential impacts on its Engineered Systems business.

Outlook and Risks

Enerflex's outlook for the remainder of 2025 is constructive. The EI and AMS segments are expected to continue driving profitability, supported by strong demand for natural gas infrastructure and ongoing customer maintenance programs. The U.S. contract compression fleet is projected to grow significantly, with additions weighted towards Q4 2025. While ES gross margins are anticipated to normalize, revenue from this segment is expected to remain steady, with the medium-term outlook bolstered by global natural gas and produced water volume growth, as well as decarbonization efforts. Management is committed to further reducing SG&A as full run-rate synergies from integration are realized in 2025 and 2026.

Key risks include geopolitical tensions, commodity price volatility, and the potential impact of tariffs. While Enerflex's diversified operations across the U.S., Canada, and Mexico offer some protection against tariffs, the company remains vigilant, particularly regarding potential "wait-and-see" attitudes from Canadian producers. Fluctuations in working capital, as seen in Q2 2025 due to strategic inventory builds and increased accounts receivable, also warrant monitoring, though the company expects normalization. The recent leadership transition, with Paul Mahoney appointed as the new President, CEO, and Director, effective September 29, 2025, marks a new chapter, and investors will be keen to observe the strategic direction under his leadership.

Conclusion

Enerflex Ltd. presents a compelling investment narrative, characterized by a strong core business, disciplined financial management, and strategic growth initiatives. The company's focus on its high-performing Energy Infrastructure and After-Market Services segments, coupled with the expansion of its U.S. contract compression fleet, provides a stable and growing revenue base. Its proactive approach to debt reduction and commitment to direct shareholder returns underscore a management team focused on value creation. While the Engineered Systems segment faces near-term margin normalization due to product mix, the long-term drivers of global energy demand, LNG export, and decarbonization position Enerflex favorably. The company's technological advantages, particularly its vertical integration and specialized solutions, combined with a robust risk management framework, enhance its competitive standing. Investors should recognize Enerflex's strategic evolution into a more resilient and profitable entity, poised to capitalize on fundamental energy trends while delivering consistent returns.