Enerflex Ltd

TSX:EFX

Earnings Call Analysis

Enerflex’s Steady Revenue Growth Amid Project Delays

In the first quarter of 2024, Enerflex's consolidated revenue rose to $638 million, driven by the Energy Infrastructure and After-Market Services business lines. Gross margin dipped to 19%, impacted by delays and additional costs in the EH Cryo project, which reduced EBITDA by $41 million. The company achieved a net debt reduction of $72 million. Despite a challenging geopolitical situation in Kurdistan halting the EH Cryo project, Enerflex expanded a water solutions project in Oman and aims to convert its $1.3 billion backlog into revenue within the next 12 months.

Enerflex's Steady Financial Growth

In the first quarter of 2024, Enerflex reported consolidated revenue of $638 million, reflecting both sequential and year-over-year growth. This increase was primarily driven by the success of the Energy Infrastructure (EI) product line and the transition of the treated water solutions project from an operating lease to a finance lease. However, the company experienced a decline in gross margin, which came in at $119 million or 19% of revenue, down from 26% in the same quarter the previous year. This decrease was impacted by delays and increased costs in the EH Cryo project, which alone accounted for a reduction of $41 million in adjusted EBITDA.

Key Performance Challenges and Opportunities

Although there were hurdles in the form of delays associated with the EH Cryo project, which is 85% complete, Enerflex remains optimistic about its core operations. The project, currently under a suspension due to security concerns stemming from a drone attack, has led to an imminent loss recognized in the profit and loss statement. The project’s total remaining cost to completion is now estimated at $105 million, while the net receivable asset from unbilled contract revenue stands at $147 million. This shows that despite setbacks, Enerflex is maintaining a robust position due to its significant backlog and diverse revenue streams.

Strong Backlog and Forward Guidance

By the end of Q1, Enerflex's Engineered Systems backlog reached an impressive $1.3 billion, setting a new quarterly record. Most remarkably, the company's book-to-bill ratio exceeded 1x, indicating strong incoming orders. Within the Engineered Systems segment, the outlook for revenue growth is promising as management expects a large portion of this backlog to convert into revenue within the next 12 months. Furthermore, Enerflex anticipates that 55% to 65% of gross margin before depreciation and amortization will derive from its EI and After-market Services product lines for the entirety of 2024.

Focus on Financial Discipline and Debt Management

Enerflex is strongly committed to enhancing financial flexibility and disciplined capital management. In Q1 2024, the company repaid an additional $72 million of debt, cumulatively reducing its debt by $193 million since the start of 2023. The leverage ratio improved to 2.2x, reflecting the effectiveness of their debt-reduction strategy. In terms of future expenditures, Enerflex is guiding for capital expenditures ranging between $90 million to $110 million, prioritizing maintenance and growth investments while attempting to optimize their debt structure.

Ongoing Demand in Energy Infrastructure

Despite current challenges, Enerflex's Energy Infrastructure and After-market Services lines continue to perform robustly, driven by strong demand for natural gas and ongoing global energy security trends. The expansion of contracts in Oman is expected to double revenue from a critical treated water project over an extended contract term of four years. This strategic move aligns with Enerflex's vision of boosting operational returns while maintaining low-risk exposure in core operating countries.

Dividend Stability and Shareholder Returns

Enerflex's Board of Directors has declared a sustainable quarterly dividend of CAD 0.025 per share, payable to shareholders on July 11, 2024, reaffirming the company’s commitment to return capital to shareholders. This dividend declaration comes amidst the company's ongoing focus on generating free cash flow, which stood at $78 million in Q1 2024, a reduction from $140 million in the previous quarter but a significant improvement when compared to a cash outflow of $3 million a year prior.

Risk Management and Strategic Positioning

Enerflex is actively engaged in monitoring external risks, especially regarding the geopolitical environment affecting the EH Cryo project. Management emphasized that they will proceed cautiously until safety is ascertained in the region. Furthermore, Enerflex’s diversified operations and historical experience in stable regions mitigate these risks. They reiterated their commitment to focusing on secure, low-risk investments, enhancing profitability, and prioritizing cash flow in maintaining resilient operations across various markets.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Enerflex First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

It is now my pleasure to introduce the Vice President, Corporate Development and Investor Relations, Jeff Fetterly.

[Jeffrey Fetterly, executive]

Thank you, Andrew, and good morning, everyone. Welcome to our first quarter of 2024 earnings call. With me today are Marc Rossiter, President and CEO; Preet Dhindsa, SVP and CFO; and Ben Park, Vice President, Corporate Controller.

During today's call, our prepared remarks will focus on 3 key areas: first, the strong operational performance of the business during Q1 and our outlook for the balance of 2024. Second, an update on the modularized cryogenic natural gas processing facility in the Middle East that Enerflex has been constructing for a client partner; and third, our progress on near- and long-term strategic priorities.

Before I turn it over to Marc, 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, and 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 profiles.

Effective January 1, 2024, the company changed its presentation currency from Canadian dollars to U.S. dollars to provide more relevant reporting of Enerflex's financial position. As a result, all amounts discussed on this call are in U.S. dollars, unless otherwise stated. As part of our prepared remarks, we will also be referring to slides in our investor presentation, which is available on our website under the Investor Relations section.

I'll now turn it over to Marc Rossiter, Enerflex's President and CEO.

[Marc Rossiter, executive]

Thanks, Jeff, and thank you all for joining us on this conference call. Yesterday, Enerflex reported its first quarter 2024 results, which reflect solid operating results across our geographies and business lines. The Energy Infrastructure and After-market Service business lines continue to generate stable, sustainable returns. These businesses are the foundation of Enerflex's financial performance generating approximately 73% of our gross margin before depreciation and amortization over the past 12 months, and we believe underwrite the majority of the company's current debt.

Turning to the specifics of our business. I'll begin with our Energy Infrastructure business line, which includes 2 main parts: contract compression operations in the United States; and two, compression, processing and treated water assets located in the Middle East and Latin America.

Performance of our U.S. contract compression business continues to be very solid with a fleet size of approximately 424,000 horsepower and utilization that has exceeded 90% for 2 consecutive years. The business generates approximately 16% of our gross margin before depreciation and amortization over the past 12 months.

The fundamentals for contract compression in the United States remain very strong, led by increasing natural gas production in the Permian Basin and we have been focused on adding electric drive units to support larger client partners in their decarbonization efforts. Further details of our U.S. contract compression business is included on Slide 7 of our investor presentation.

Our international energy infrastructure business operates in 7 countries and includes nearly 1.5 million horsepower of compression over 25 natural gas processing plants and 2 treated water facilities. We have approximately $1.5 billion of go-forward revenue and payments under contract with a weighted average contract term exceeding 5 years and extending out to 2023. Slide 8 of our investor presentation provides more detail around our international energy infrastructure business.

During Q1 '24, Enerflex expanded the scope and extended the term of an existing Build-Own-Operate-Maintain contract in the Eastern Hemisphere. The contract supports the expansion of the company's treated water solutions business, increases Enerflex's presence in a core operating country of Oman and is expected to double Enerflex's revenue from the project and improve the company's returns during its additional 4-year term.

As prescribed by International Finance Reporting Standards, the contract is now being accounted for as a finance lease.

Turning to the After-market Services business. This segment is benefiting from increased activity levels, inflationary price adjustments and continued strong demand for spare parts. We expect these trends to continue throughout 2024. Our Engineered Systems product line recorded strong bookings and is steadily executing through its backlog.

Our book-to-bill ratio was above 1x during the quarter as we received several large orders, resulting in our order backlog increasing to $1.3 billion at the end of Q1, a new quarterly record for Enerflex. We are especially pleased with the success of our cryogenic natural gas processing business line with Enerflex receiving orders for 6 large-scale facilities during 2023 and 2 additional facilities thus far in 2024. This demand is a reflection of our expanded product on stemming from the external transaction.

While we are relatively -- while we are actively monitoring the near-term impact of weak natural gas prices on customer demand, notably in North America, order activity in Engineered Systems continues to benefit from activity in oil-producing regions and with customers who maintain a positive medium-term view of U.S. natural gas fundamentals. As previously mentioned, the fundamentals for contract compression in the U.S. remained strong, led by increasing natural gas production in the Permian Basin.

Now I'd like to provide an update on a modularized cryogenic natural gas processing facility in the Middle East, which we will refer to as the EH Cryo Project. As at March 31, 2024, construction of the EH Cryo project was approximately 85% complete. However, construction has progressed at a slower pace than expected, and the expected cost to complete have increased.

As a result, gross margin and adjusted dollar reduced by $41 million based on the company's estimate of the remaining spend to complete the project of approximately $105 million. However, subsequent to Q1 '24, in response to a drone attack that resulted in fatalities at an operational facility in proximity to the EH Cryo project, Enerflex has provided its client partner with notice of force majeure suspended activity at the project site and demobilized our personnel.

We extend our deepest condolences to the families of the people killed and those that have been affected by this attack. While no Enerflex personnel were injured and there is no physical damage to company's assets, work at the site is suspended as Enerflex evaluates the situation in collaboration with our client partner and assesses next steps.

As we look to the remainder of the year, we will continue to focus on enhancing our financial flexibility and strengthening the balance sheet. We were pleased to have repaid an additional $72 million of debt during Q1, bringing the total debt reduction since the beginning of 2023 to $193 million.

Our leverage ratio was reduced to 2.2x at the end of March. In 2024, we will continue to prioritize generating free cash flow, repaying debt, improving our leverage ratio, and lowering our overall net finance costs.

Before the call over to Preet, I want to emphasize that the underlying macro drivers of our business are strong with the ongoing focus on global energy security and the growing need for low emissions natural gas, resulting in strong demand for Enerflex's Energy Infrastructure and energy transition solutions. Against this backdrop, our business lines continue to deliver solid performance, and we are focused on enhancing the profitability of our core operations and Enerflex's ability to focus on growth and return of capital to shareholders.

With that, I'll turn it over to Preet to speak to the financial highlights of the quarter and provide an update on Enerflex's outlook for 2024.

[Preet Dhindsa, executive]

Thanks, Marc. Good morning, everyone. During the first quarter, consolidated revenue of $638 million increased both sequentially and year-over-year. Higher revenue is mainly attributable to the EI product line and converge of the treated water solutions project Marc referenced earlier, from an operating lease to a finance lease.

Gross margin before depreciation and amortization this quarter of $119 million or 19% compared to $156 million or 26% of revenue in Q1 '23, and $159 million or 28% of revenue during Q4 2023. Adjusted EBITDA was $69 million compared to $90 million in Q1 '23 and $91 million during Q4 '23.

Delays and increased cost in the completion of the EH Cryo project reduced gross margin adjusted EBITDA by $41 million during the first quarter. This project is recognized as a sale within the Engineered Systems product line as construction proceeds and is presented as an unbilled contract revenue asset on Enerflex's consolidated statements of financial position.

The net unbilled contract revenue asset recognized for the EH Cryo project at the end of Q1 '24 is $147 million and remaining revenue to be recognized is approximately 7% of the company's Engineered Systems backlog. There can be no assurance that the security situation will improve and while work is suspended, Enerflex will not incur any material construction expenditures to complete the EH Cryo project.

Excluding the impact of the EH Cryo project, gross margin before D&A for our Engineered Systems business was 19% compared to 16% in the first quarter of 2023. Energy Infrastructure gross margin before D&A of $80 million was relatively consistent with recent quarters, and reflective of the strong contract position that supports our assets. Our After-market Services gross margin before depreciation and amortization was 22% in the quarter, benefiting from increased activity levels, inflationary price adjustments and continued strong demand for spare parts.

Enerflex's SG&A of $78 million was steady year-over-year but declined sequentially as a result of lower transaction, restructuring and integration costs. Foreign exchange losses and losses from associated instruments were down significantly from Q4 '23, reflective of cash management strategies and lower cash balances remaining in Argentina. Cash provided by operating activities was $101 million in Q1 '24, which included a working capital recovery of $83 million.

In the fourth quarter, we generated $158 million of cash from operations, including $110 million from the recovery of working capital. We are pleased with our ongoing global efforts to efficiently manage working capital, although we do not expect the magnitude of the recovery realized over the past 2 quarters will be repeated.

During the first quarter, Enerflex generated $78 million of free cash flow compared to $140 million in Q4 '23 and a use of cash of $3 million in the comparable quarter of 2023. We invested $17 million in the business during the first quarter, including $8 million of growth investments and returned $2 million to shareholders through dividends.

We reduced net debt by $72 million during the quarter, exiting a $743 million and reduced our bank adjusted net debt-to-EBITDA ratio of 2.2x. The company maintained strong liquidity with access to $548 million under its credit facility end of Q1, and we continue to look at opportunities to extend our maturities and optimize our debt stack.

As Marc mentioned, Enerflex will continue to focus on debt reduction and lowering net finance costs in 2024, which will improve our ability to deliver on further growth and shareholder returns over the medium and long term.

Let me shift to our outlook where visibility for the majority of the company's operations is strong. We continue to expect the Energy Infrastructure and After-market Services product lines will account for 55% to 65% of gross margin before D&A during 2024.

The majority of the record Engineered Systems backlog of $1.3 billion at March 31, '24, is expected to convert into revenue over the next 12 months. Enerflex continues to target a disciplined capital program in 2024 with total expenditures of $90 million to $110 million. This includes a total of approximately $70 million of maintenance and PP&E capital expenditures.

Investments to expand the energy infrastructure business are discretionary and will be allocated to customer support opportunities that are expected to generate attractive returns and create value for Enerflex shareholders.

Enerflex is committed to paying a sustainable quarterly dividend to shareholders. The Board of Directors declared a quarterly dividend of CAD 0.025 per share payable on July 11, 2024, to shareholders of record on May 23, 2024.

Finally, on April 29, we announced that Mexico court ruled in favor of Enerflex relating to a long-standing dispute of an employee severance pay following termination of employment in 2015. The matter has now been returned to the labor board to issue a new judgment in accordance with the court's ruling, which supports Enerflex's view that ultimate resolution of this matter by the labor board will be immaterial.

I'll conclude by saying that with the support of Enerflex' strong global leadership team and talented employees we are improving the profitability and resiliency of our global business with an objective to sustainable free cash flow.

With that, I'll turn the call back over to Marc for closing remarks.

[Marc Rossiter, executive]

Thanks, Preet. Enerflex' first quarter operational results highlight our continued ability to successfully execute our strategy across 3 core businesses around the world. Our commitment to our key priorities remains steadfast. We are focused on ensuring the safety and security of our personnel while we work to further enhance profitability of core operations, simplify our operational and geographic footprint, maximize cash flow generation to strengthen our financial position, realize the benefits and synergies from the Exterran acquisition and continue to offer best-in-class natural gas treated water and energy transition solutions to our customers.

I look forward to building on our progress to-date to create significant value across geographies, customers and product lines.

I will now hand the call back to the operator for questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Aaron MacNeil, TD Cowen.

[Aaron MacNeil, analyst]

Marc, if I remember correctly, the Kurdistan project was sanctioned by Exterran prior to the acquisition. So I guess, if appropriate, can you sort of walk us through how this project is different from other cryogenic projects that you'd perform internationally? And I guess, what can we expect from Enerflex on a go-forward basis for the product line?

[Marc Rossiter, executive]

Thanks, Aaron, for that question. In the prepared remarks, we mentioned that we booked 6 cryo projects in 2023 and 2 additional ones in Q1. Not a single one of those bookings include any construction risk or operations outside of Enerflex manufacturing facilities.

[Aaron MacNeil, analyst]

Makes sense. I can appreciate that there's only so much you can say about the project and you won't weigh in on what you think might happen. But without giving the likelihood of any given outcome, can you sort of help us understand what the potential range of outcomes for the project could be and how they might impact the company?

[Marc Rossiter, executive]

I'll talk operationally and then I'll ask Preet to go over some of the numbers that we provided in the press release. We're in force majeure the most important thing for Enerflex is safeguarding our people and our assets. And until we're satisfied that the security situation is appropriate, we will not be reanimating the site. And it's extremely difficult to try to predict if and when that will ever happen. So as such, we did our best in the press release to provide information as at the end of March to give investors some idea of what the range of outcome could be. Preet, do you want to go over some of those numbers?

[Preet Dhindsa, executive]

Sure. I mean, as at March 31, 2024, I mean we've seen a loss in the P&L of $41 million based on an updated cost to complete of $105 million. It's important to know that $105 million as we are paused, waiting for next steps for a client partner. We're not spending that $105 million on any construction-related activities.

And; also it's 85% complete. We've done good quality work. No disputes with our client on this -- on the work done to date, and that underpins $147 million net receivable on our balance sheet. Hard to surmise how this moves forward but as we noted, the security situation in the region, we'll watch how this unfolds over time, but we're carefully considering with our advisers and our client, how we move forward in the best interest of our employees and Enerflex overall.

[Operator]

And our next question comes from the line of Tim Monachello with ATB Capital Markets.

[Tim Monachello, analyst]

Just following up on Aaron's question there. What type of contract clauses you have in that Kurdistan project that might give you some protections around force majeure or give you some security around getting paid on the $147 million of unbilled contract asset.

[Marc Rossiter, executive]

Yes. Thanks, Tim. Good question. At this point in time, we're not in a position to go over the details of our contract with our customer. We are in force majeure, which is a defined thing within the contract. And while we're in force majeure, we're going to be considering all the different steps we can take to protect the interest of Enerflex's people, Enerflex's shareholders going forward.

But to give you much detail beyond that, I think it's premature to do so. But it's got 100% of management's attention. And despite it having our attention, it's not going to distract us from focusing on our long-term strategic priorities of reducing debt, increasing free cash flow, prioritizing our infrastructure investments. That's what we're working on. Now we're going to be very proactive on this particular situation to make sure we're very best to protect Enerflex' people and our financial interest long term.

[Tim Monachello, analyst]

Given that this event only happened a couple of weeks ago, I'm sure it's still fresh with you guys. But it doesn't sound like there's any real visibility to when safe operations could commence again and given the dynamic nature of the region, I don't know if that visibility has been improving anytime soon. Do you have a time line for when you expect to make a decision or a strategy on how to move forward with this?

[Marc Rossiter, executive]

Yes. We -- Tim, good observation, it is very difficult to predict if and when the security situation will rise Enerflex standards. We're working very quickly and decisively, like we have been so far within the 2 weeks since the incident to protect our people and our interest. So it's -- like I said, it's got full attention of management, it's not going to distract us from operating the balance of our assets, but we're going to move quickly and decisively to make sure we make the best next steps with our client partner.

[Tim Monachello, analyst]

Okay. Yes, unfortunately, it happened is kind of distracting from some of the positive things in the quarter, one of which was water solutions project extension. Can you talk about the time line on that, when you expect to have it deployed and any capital requirements that you're expecting to incur related to that extension in '24?

[Marc Rossiter, executive]

Yes. Sure, Tim. Thank you. And to the listeners, we executed 2 significant treated water solutions projects in Oman in 2022 and early 2023. One of those facilities, the one that was -- in fact we received the order to expand was commissioned in November '22. It immediately met all the performance targets exceeded our OpEx estimates. And within a few months, the customer engaged us on an expansion of that facility and we got that order in the first quarter.

That project is slated to be -- the expansion work is slated to be up and running mid-2025. And we negotiated a relatively creative expansion contract with our customer, where they're contributing a significant portion of the growth CapEx. That's allowing us to further a lot of activities this year to get the contract executed, but also staying within our CapEx guidance provided in January.

Upon completion in mid-'25, the overall plant will be extended on a take-or-pay basis for an additional 4 years, bringing the overall contract to just under 8 years total from when it was built, so it's right on strategy for us. It's one of our best operating countries. It's one of our best customers. It's - we were able to find a way to do this big expansion in a way that was capital efficient for Enerflex.

And for people that are interested in this sort of thing, when we're done, that particular facility will treat just under 900,000 barrels a day of gross liquids. So a meaningful impact on the oil production in Oman, which is one of our best countries.

[Operator]

Our next question comes from the line of Cole Pereira with Stifel.

[Cole Pereira, analyst]

Also thinking about the Kurdistan facility prior to the drone attack, were some of those cost inflation issues specific to that asset in that region only? Or could they theoretically occur at future projects as well? And how do you think about managing those risks?

[Marc Rossiter, executive]

Cole, within the Engineered Systems product line, other than Peru, we've got immaterial amounts of construction risk in our Engineered Systems backlog. That's probably the most important message to get across to shareholders. Enerflex's priorities is our Energy Infrastructure and recurring revenues.

We're not interested long term in adding unnecessary execution risk within our ES portfolio of businesses. And that's led to our backlog that we've built up over the last 2 years of having an immaterial amount of construction risk. So to answer your question, there are no other engineered systems projects that we believe carry any level of construction risk going forward that investors and shareholders need to know about.

And further, this is our only operating project in that region of Iraq. We don't have any other projects in the area and everything else we execute in the Middle East outside of Oman and Bahrain are supply of equipment that come out of our Houston, Tulsa and Calgary shops.

[Cole Pereira, analyst]

Got it. And then kind of just going back to what you just said, would it be fair to say from a security risk stand point that this asset is kind of differentiated as well that you don't think any other of your Middle East assets could have a similar event occurred, acknowledging that it's a fluid region?

[Marc Rossiter, executive]

Yes. The -- we have -- our infrastructure is primarily in Oman and Bahrain. And those are 2 countries that we have decades of experience and decades of successful experience from a safety, security and client-relationship point of view. So it is safe to say that this particular project is the only one that is in that region that has this particular level of geopolitical or security risk.

We've shaped our backlog in Engineered Systems to specifically derisk it from these type of things and in our Energy Infrastructure business line, we are only going to invest investors and shareholders' capital in countries that we feel very, very safe about getting the 10-year take-or-pays that we have under contract, and that's all backed by, again, decades of experience in those countries.

[Operator]

[Operator Instructions] Our next question comes from the line of Keith MacKey with RBC Capital Markets.

[Keith MacKey, analyst]

Marc, I just wanted to continue on that line of questioning relative to risks. Notwithstanding this project, more broadly, can you just give us a bit more context on how you think that the overall free cash flow profile of the business is matched with the underlying risk profile of the business.

Certainly, investors and the Street are looking for a lot more free cash flow to be generated by the business. And I think maybe some additional context of how risky is it going to be to get that cash flow, would be very helpful to frame out a little bit more. It sounds like this Peru project is more of a onetime thing. But can you just kind of run through some of the inputs to both the free cash flow and the risk side that might help get people a little bit more comfortable with where things are at.

[Marc Rossiter, executive]

Yes. Sure, Keith. Thanks for that question. There's 2 main business lines that are going to generate free cash flow for our investors. The first one is our global EI business. And like I mentioned in the prepared remarks, 16% of the company's gross margin comes from our U.S. contract compression fleet, which we think is a very low-risk asset base, and it's been performing very well over the last 2 years. So that's the first part.

The second part of our EI business is the 1.5 million horsepower compression, the 25 gas plants and treated water facilities that today under contract of $1.5 billion in revenue under contract. And those are in, I would say, 5 core countries, where we have decades of experience and that we feel very comfortable about the security situation and the overall operational risk. We feel that they're very much in the risk appetite of Enerflex and our shareholders.

The Engineered Systems product line is the next big generator of cash. We've added to the backlog this quarter, and that backlog is the vast majority of that backlog is products that we will build within the 4-wall confines of our shops in Tulsa and Houston and Calgary.

So from a risk point of view, I think shareholders consider the vast majority of our free cash generation will come from these long-term 10-year take-or-pays in our core international jurisdictions, the U.S. contract compression fleet in the systems business that's executed in North America and our shops.

In our investor -- our new investor presentation on Slide 11, it gives a lot more detail around the tenure of our contracts, the margin of the contracts and our key counterparties. I think that slide should give investors a lot of confidence. And I think what can really give investors confidence is when you look at what we've done, the decisions we've made in the last couple of years, we prioritized shop-based engineered systems contracts with no construction risk.

We prioritized capital investments in the United States and in Oman, 2 countries where we've got decades of experience, generating very good risk adjusted return. So I would say judges for what we've done in the last couple of years and what we've done is 100% oriented towards building a steady suite of assets and orders that provides very good risk-adjusted returns to our shareholders.

[Keith MacKey, analyst]

Okay. Got it. And just following up on the Engineered Systems business and bookings. There is a building expectation of increased natural gas demand in the United States low current prices, notwithstanding? Can you just talk about the potential opportunity for you there if we do see incremental demand from whether it be LNG exports or other local uses of natural gas. Can you just talk about the opportunity there and whether you're seeing any of that yet beyond what the strong bookings you're seeing today?

[Marc Rossiter, executive]

So Keith, our Engineered Systems business is largely a North American story. And we feel really good about natural gas fundamentals long term in North America, basically underpinned by LNG exports, both in Canada and in the Gulf Coast of the United States. One of our -- 2 of our big key basins is the Montney Shale in the Permian Basin. Both of those basins will really benefit from increased LNG export. And so we're happy with our position. We're a market leader in both of those markets.

We've got good Engineered Systems business. In the United States, we've got an excellent contract compression business which provides steady revenue. And in both markets, we've got, I would say, market-leading service businesses. So we -- I think that the North American natural gas macro is one of the -- is probably -- it's 1 of the top 2 key macro themes for Enerflex over the next 3 to 5 years.

[Keith MacKey, analyst]

Okay. And one more, if I could squeeze it in. The force majeure on the project, was that strictly due to the security risk? Or is there anything else in there that caused you to declare the force majeure?

[Preet Dhindsa, executive]

The security situation as a result of the drone attack.

[Operator]

[Operator Instructions] And our next question comes from the line of Jamie Kubik with CIBC.

[James Kubik, analyst]

Just wanting to dig a little bit deeper on the Kurdistan cryo project. Can you talk a little bit more on the details of the source of the cost overruns and delays in that project. And also, I'm just curious as to what the trigger was to record the entire charge this quarter versus in previous quarters or in future quarters given the project is suspended.

[Marc Rossiter, executive]

Jamie, thanks for the question. So on the delay side in Q1, we reassessed some of the activities, largely subcontractor related. We're 85% done. We're in the last 15% of construction and certain delays are -- we're trying to manage effectively, but we did realize those delays resulted in increased cost estimate Q1 after a fair bit of discussion with our folks on the ground.

We decided to increase our costs. And so the total increased cost to complete is now $105 million at the end of Q1 to completion and mainly due to subcontractor delays and issues on the -- at the site level. So that's the delays in cost.

And overall, what -- what we did, we took the imminent loss of $41 million at the end of the contract, when we increase the cost estimate, it produced a negative margin on the project. So we recognize that imminent loss to the end of the contract term. You'll see in the financials. We have an asset on our books of $166 million, and that's a receivable for the 85% of good quality work done.

And there's a provision of [ $19 million ]. The net asset is $147 million, underpinned by the work we've already created. So I don't expect any other construction-related expenditures, so the $105 million estimate cost to complete is parked for now as we are in force majeure assessing all options. But the time in Q1 was a result of upgraded estimate of costs and the imminent loss. And that was our rationale for it.

[James Kubik, analyst]

Okay. Understood. And then just maybe to ask a little bit more on that, just the full charge being recognized this quarter versus previous -- is this project assessed yearly? Is it quarterly, monthly in terms of its remaining costs. I'm just curious as to what drove all of it in Q1.

[Marc Rossiter, executive]

Yes. So we view this project. It's a significant project. We view it on a monthly basis as an executive team at corporate and at site level. And so -- and as at quarter end, year-end we had a point of view on the cost and then further delays in Q1, we decided to increase our cost estimate, which is why we did it in Q1.

And once again, the $105 million is parked. We do not expect to incur construction-related costs. So right now, we're in a holding pattern until we assess all options. And the data points you pointed out, we have not been this granular in the past, but $41 million imminent loss. We've got the $105 million we've pointed that we're not spending right now and the net receivable $147 million. Those are the facts today and then we'll just significantly focus on this over the next several weeks.

[Operator]

[Operator Instructions] Our next question comes from the line of Tim Monachello with ATB Capital Markets.

[Tim Monachello, analyst]

I just wanted to follow up and talk a little bit about the strong bookings in the quarter. Outside of booking that would have been related to the IFRS 16 accounted finance lease. [ There's been ] pretty strong bookings in North America. Are you seeing continued momentum into Q2? Or was there anything that was sort of lumpy in nature in Q1 that will repeat?

[Marc Rossiter, executive]

On Q1, the conversion of that water project to an IFRS lease accounting had an impact on the bookings Also, we had 2 nice cryo plant orders out of our business in Broken Arrow. And I think that the -- it's difficult to say right now what we're going to expect from Q2. But to a certain degree, we are seeing the very beginnings of some impacts of the lower gas price in some areas in the United States. Like I said earlier, Montney, Permian, liquids-rich plays activity is largely driven by oil. But I do think after almost 2 years of really busy activity on the Engineered System front in North America, we could see that slow down a little bit. It's tough to say with exact certainty on that front.

[Tim Monachello, analyst]

Okay. So I guess when you put everything together that happened in this quarter, how do you view your targets for deleveraging for 2024 versus where you would have thought you would be at the end of 2023?

[Marc Rossiter, executive]

Yes, Jim, as you noticed, we did pay down $72 million in debt, free cash flow is good. Working capital was constructive. So these are our continued priorities, leverage at 2.2x. And as I noted, the $105 million cost -- estimated cost to complete, we're not spending that. So overall, we are looking carefully at how we continue to deleverage. This Cryo project that we're immensely focused on, is not taking us off of our priorities.

In the coming months, we will set a leverage target that we've been talking about that for a while. And we're still trending in a positive direction. So we're confident where we're trending towards, and our priorities have not changed.

[Operator]

Thank you. I'll now hand the call back over to President and CEO, Marc Rossiter for any closing remarks.

[Marc Rossiter, executive]

Thank you, operator. Since there are no further questions, we'd like to thank everybody for joining today's call. We look forward to providing you with our Q2 result in August.

[Operator]

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.