Enerflex Ltd

TSX:EFX

Earnings Call Analysis

Enerflex Q3 2023 Earnings Highlights

Enerflex reported robust Q3 2023 results, including a 60% gross margin from recurring sources and 43% from outside North America. The firm is near completing the Exterran integration, achieving $50 million in synergetic savings with an additional $10 million expected in 6 months. Sales of two non-core assets generated $40 million, signifying a strategic focus on optimizing assets. The quarter saw $122 million in EBITDA and $71 million in operational cash flow. Engineered Systems orders amounted to $560 million in Q3, reaching a total of $1.4 billion YTD, a $500 million surge from the previous year. A healthy backlog of $1.6 billion indicates promising revenue prospects for 2024, while a high U.S. compression fleet utilization rate of 93% reflects strong demand. Enerflex reduced long-term debt by $41 million with an improved net debt-to-EBITDA ratio of 2.7x from 3.3x, aiming for under 2.5x by year-end.

Enerflex's Progress in Q3 2023: Strategic Priorities and Financial Position

Enerflex showcased notable developments during their third quarter, emphasizing advancements in strategic priorities, particularly with the ongoing integration of Exterran, contributing positively to the company's agenda. They have captured approximately $50 million in annual run rate synergies from the acquisition and expect to realize the remaining $10 million within six months. A robust 60% of Enerflex's gross margin emanated from recurring revenue sources, with 43% of the total gross margin generated from markets outside North America during the first nine months of 2023.

Solid Financial Performance

Financially, Enerflex has taken substantial strides in demonstrating their business strength, backed by an adjusted EBITDA of $122 million and an operating cash flow of $71 million. Engineered Systems bookings surged to $560 million for the quarter, culminating in an increase of approximately $500 million year over year, and notably encompassing $153 million for Cryogenic projects beyond North America and $111 million tied to energy transition strategies. This backs their record Engineered Systems backlog of $1.6 billion, providing significant visibility into future revenues.

Operational Efficiency and Capital Allocation

Operationally, the U.S. contract compression fleet maintained high utilization rates of 93%, reflecting Enerflex's capacity to capitalize on market demand. Moreover, they continue to scrutinize opportunities to enhance the company’s financial flexibility by paying off $41 million in long-term debt during the quarter. Looking at capital expenditures, Enerflex targets a total of $80 million to $90 million for 2023, indicative of their disciplined capital program, with a strong emphasis placed on debt reduction and the realization of operational efficiencies.

Outlook for 2023 and Beyond

Enerflex's management reiterated their full-year 2023 financial guidance, with the anticipation of adjusted EBITDA being at the lower end of their previous guidance range, taking into account foreign exchange market volatility, especially the impact of the Argentine peso devaluation on their financials. They also remain on track to accomplish their capital allocation targets, including both discretionary and nondiscretionary expenditures, with a commitment to a sustainable dividend policy evidenced by the board declared quarterly dividend of $0.025 per share.

Long-term Strategic Focus

The company has imparted a sense of robustness in terms of its long-term goals, stressing on a strong recurring energy infrastructure and aftermarket services product line, alongside a rich Engineered Systems backlog going into 2024. This long-term vision signals a well-disciplined capital program, synchronized with debt reduction and synergy achievements, as Enerflex continues to assess its long-term capital structure and allocation principles.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to Enerflex's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. [Operator Instructions]. Please be advised that today's call is being recorded.

I would now like turn the call over to your host, Mr. Jeff Fetterly, Vice President, Corporate Development and Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, Valerie, and good morning, everyone. Welcome to our third quarter 2023 earnings call. With me today is Marc Rossiter, President and CEO; Preet Dhindsa, Interim CFO; and Ben Park, Vice President, Corporate Controller.

During today's call, we'll touch on highlights from our third quarter results and provide an update on guidance and how we are progressing on our near- and long-term strategic priorities.

Before I turn it over to Mark, 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. All dollar amounts discussed today are in Canadian dollars otherwise started.

With that, I'll turn it over to our President and CEO, Marc Rossiter.

[Marc Rossiter, executive]

Thanks, Jeff, and thank you all for joining me on this morning's call. Last night, Enerflex reported its third quarter 2023 results, which reflect the significant progress we're making in advancing our strategic priorities, including the continued integration of Exterran. .

Our recent results and progress to date also underscore that we have more work ahead of us to unlock the full potential of our combined company. Our global footprint, expanded product offerings and deepened ability to serve the energy value chain is generating operational results that are less influenced by the economics, rig counts and commodity prices of any single region or producing basin.

During the first 9 months of 2023, approximately 60% of Enerflex's gross margin was generated from recurring sources and markets outside North America contributed 43% of the company's total gross margin during the same period.

I'm pleased to report that we delivered strong operating results across all of our geographies. Integration and synergy realization activities related to the Exterran acquisition remain on track.

Since close, Exterran has captured approximately $50 million -- sorry, Enerflex has captured approximately USD 50 million of annual run rate synergies, and expect to realize the remaining USD 10 million for a total of USD 60 million of anticipated synergies within the next 6 months.

In addition, the company continues to review opportunities to optimize its geographic footprint and business platform. To this end, we are in the process of consolidating our global manufacturing facilities from 5 to 3 and in the early part of the fourth quarter, completed the sale of 2 noncore assets for gross proceeds of approximately $40 million. We expect these actions, combined with additional optimization efforts will drive cash flow, enabled long -- enable continued debt reduction and enhance our ability to generate shareholder returns over the mid and long term.

Touching briefly in the quarter, Enerflex delivered adjusted EBITDA of $122 million and operating cash flow of $71 million, demonstrating the strength and continued momentum from our curving businesses as well as the North American Engineered Systems product line.

We recorded strong Engineered Systems bookings in the quarter of $560 million, bringing our year-to-date total in the first 9 months of 2023 to $1.4 billion, an increase of approximately $500 million year-over-year.

Our bookings reflect demand originating from 3 continents. And highlight robust customer activity levels, particularly in North America and notably for Cryogenic and low-carbon solutions. Our bookings during the first 3 quarters of 2023 include $153 million for Cryogenic projects outside of North America and USD 111 million related to projects that advance our energy transition business strategy.

Our record Engineered Systems backlog of $1.6 billion provides strong visibility into revenue generation and business activity levels for 2024. Energy Infrastructure contributed approximately 40% of gross margin during the quarter. This business is generating stable results, and we continue to evaluate opportunities to maximize performance across our geographic platform.

Our U.S. contract compression fleet is operating at high utilization rates of 93% in the quarter. The aftermarket services business is benefiting from increased activity levels, inflationary price adjustments and continued strong demand for spare parts.

We remain committed to enhancing our financial position and repaid $41 million of long-term debt in the quarter, which is consistent with our focus on strengthening the balance sheet and enhancing the company's financial flexibility. However, our reported long-term debt declined by only $5 million in the quarter due to the negative impact of a strengthening U.S. dollar versus Canadian dollar.

On today's call, I also have the pleasure of introducing Preet Dhindsa, who announced -- who we announced as our interim CFO last month, and Jeff Fetterly is our new VP of Corporate Development and Investor Relations.

Preet is a seasoned financial leader with more than 25 years of experience, primarily in the energy and financial service industries. He brings a proven track record of leading large international finance organizations, including through post-merger integration activities. Jeff is well known to many listeners as a well-regarded thought leader in energy equity analysis. I'm excited to be working with Jeff and Preet at this important time for our company, and I'm confident that their experience will serve Enerflex shareholder as well.

Before I turn the call over to Preet, I'd like to emphasize that the underlying macro drivers for our business are robust. With the ongoing focus on global energy security, the growing need for low emissions natural gas, resulting in a strong demand for Enerflex's energy infrastructure and energy transition solutions. As customers aim to decarbonize their operations, Enerflex is poised to capitalize on the growing demand for sustainable energy infrastructure through our vertically integrated natural gas produced water treatment and energy transition offerings.

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 the balance of 2023 and 2024.

[Preet Dhindsa, executive]

Thank you, Mark, and good morning, everyone. I am excited to step into the CFO role to get pivotal time for Enerflex. I've hit the ground running to support the strong global finance team as you work to ensure the company has financial stability and flexibility through industry cycles.

Our consolidated third quarter revenues of $778 million were driven by continued strong performance from Enerflex's recurring businesses and North American Engineered Systems product line.

Enerflex's gross margin was $146 million or 19% of revenue comparable to Q2 2023. Energy Infrastructure gross margin decreased quarter-over-quarter to 30%, primarily related to higher depreciation. Engineered Systems, our gross margin improved to 15% as we execute on higher-margin backlog. Our aftermarket services gross margin was 17% in Q3 2023 compared to 20% in the prior quarter, reflective of the sales mix that included a higher proportion of part sales compared to most recent quarters.

Enerflex's SG&A of $115 million increased by $15 million over the second quarter, which was largely driven by a onetime bad debt recovery of $12 million does recognize in the second quarter. Transaction, restructuring and integration costs were $6 billion in Q3 compared to $12 million in Q2. We do expect to see additional cost for restructuring and optimization. Although, as Mark mentioned, integration and synergy realization activities remain well on track.

This brings me to our adjusted EBITDA of $122 million in the third quarter. Included adjusted EBITDA are foreign exchange losses of $17 million during the quarter related to the devaluation of the Argentine peso. We continue to actively manage this exposure and generate $11 million of offsetting gains from associated instruments. The majority of this amount is reported in net finance cost and excluded from the adjusted EBITDA number we reported.

Excluding the impact of foreign exchange, our business in Argentina continues to perform well and generate strong operating cash flow for the company. Enerflex also continues to manage foreign exchange volatility with the majority of exposure to the Argentine peso, offset by associated instruments.

Cash provided by operating activities was $71 million in the quarter, which included a working capital recovery of $15 million. Comparatively, in the second quarter, cash used in operating activities was $4 million. A $75 million positive swing Q-over-Q.

We invested $26 million in capital expenditures, including $8 million of maintenance capital across the global energy infrastructure fleet and returned $3 million to shareholders through dividends. Enerflex's primary focus for 2023 is to progress the integration of Exterran and strengthen our financial position.

During the third quarter, we repaid $41 million of long-term debt. Although reported long-term debt declined by only $5 million, including the impact of a strengthening U.S. dollar.

We reduced our bank adjusted net debt-to-EBITDA ratio to 2.7x at the end of Q3. From 3.3x at the end of 2022. And we are on track to achieve a ratio of slightly less or less than 2.5x by year-end 2023. We are reaffirming all of our full year 2023 financial guidance as last provided with our second quarter results.

We anticipate adjusted EBITDA as currently reported to be at the low end of this guidance range, inclusive of the impact from volatility to foreign exchange markets, specifically Argentina.

Please note, foreign exchange losses of $41 million during the 9 months ended September 2023, related to devaluation of the Argentine peso is included in our adjusted EBITDA.

We continue to target total 2023 PP&E and growth capital expenditures of USD 80 million to USD 90 million. which includes 2 large water projects that were commissioned in the first quarter and various small-scale customer section project in the U.S., Latin America and Eastern Hemisphere.

Heading into 2024, we expect our performance to be underpinned by recurring energy infrastructure and aftermarket services product line and a robust Engineered Systems backlog. Enerflex is targeting a disciplined capital program in 2024. Consistent with our current focus, we will continue to prioritize debt reduction, synergy realization and operational efficiency. The company continues to review its target long-term capital structure and capital allocation parameters, and we expect to provide more clarity in the coming months.

Finally, Enerflex is committed to delivering a sustainable dividend to shareholders with our Board declared a quarterly dividend of $0.025 per share. The dividend is payable on January 10 to shareholders of record on November 21.

Before I turn it over to Mark, I will conclude by saying that within the support of Enerflex's strong leadership team and talented employees, we are improving the profitability and resiliency of the global business with an objective to generate sustainable cash flow. I am excited to have joined this team and to help unlock the business full potential for the benefit of our shareholders, customers, employees and stakeholders.

With that, over to you, Mark, for closing remarks.

[Marc Rossiter, executive]

Thanks, Preet. Enerflex's third quarter financial and operating results highlight our continued ability to successfully execute against our strategy across our 3 core businesses around the world. our commitment to our key priorities remain steadfast as we work to maximize free cash flow generation, strengthening our financial position, realize the benefits and synergies from the acquisition and continue to offer best-in-class natural gas produced water and energy transition solutions to our customers across the globe.

I look forward to building on our progress to create significant value and optionality 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 of TD Cowen.

[Aaron MacNeil, analyst]

Can you give us a sense of the spending for working capital, work in progress, asset sales and any other discretionary cash flows for Q4, so we get a sense of conversion rates of EBITDA into cash and maybe if you have any preliminary thoughts on 2024 for these types of flows, that would also be very helpful.

[Marc Rossiter, executive]

Yes, sure. Aaron, this is Mark. And I'm going to ask Jeff to answer that with a little bit more specificity, but we did confirm guidance and guidance goes into a fair amount of detail on some of those cash flows. And I don't think we're in a position right now to provide any more guidance on specific areas of cash flow in Q4.

Jeff, do you have anything to add to that?

[Unknown Executive]

Yes. Just to reiterate, Aaron, we talked about from a capital expenditure standpoint, including contract assets, a target range of USD 160 million to USD 190 million for 2023. And the other nondiscretionary expenditures, which is composed of the working capital, finance costs, cash income taxes and dividends of between USD 180 million and USD 210 million. And as Mark said, we reiterated those and we remain on track to meet those targets for this year. Going into 2024, as we said in the script for the prepared remarks, we're targeting a disciplined capital program for the year, and we'll continue to prioritize debt repayment .

[Aaron MacNeil, analyst]

Can you speak to the types of energy transition-related bookings in the quarter? Is it predominantly electric drive compression? Or is there any other carbon capture or biofuels or other projects in there?

[Marc Rossiter, executive]

The majority of the bookings is electrification .

[Operator]

Our next question comes from the line of Keith Mackey of RBC Capital Markets.

[Keith MacKey, analyst]

First wanted to just start out on the margin profile in energy infrastructure. I noticed it's trended down a little bit in this quarter. It's just a snick below the 55% to 65% target range or approximate range on a cash basis. Can you just speak to the factors behind where margins are in that business now? I noticed the U.S. contract compression utilization trended down slightly. So can you just speak to the factors behind where margins are now and hopefully where we should be thinking about margins going over the next 3 to 4 quarters? .

[Ben Park, executive]

It's Ben. Yes, those margins are kind of well within expectations for that business on a run rate basis. If you take a look back to Q2, I think we're closer to that than we were last quarter -- Q1, than we were in Q2. But it's well within the range there.

[Aaron MacNeil, analyst]

And Preet, you joined the organization just recently certainly, as you mentioned at a pivotal time, can you just speak to, as you've kind of gotten into the company and seeing people and operations. Can you just speak to some of the -- maybe some of the strengths in the organization that you've seen in your first impressions as well as some of the areas where you think there could be optimization for the future. .

[Preet Dhindsa, executive]

Sure so I've been here just under 4 weeks of total time, and it's a great place to be. Very happy to be here, a wonderful group of people. I think the executive team, good interaction with the Board this week and my global finance team is fantastic. So good group of folks all around and like the scale and scope of the organization, and we're working through integration and some of our priorities are where my focus is, is integration is clearly important. We put a milestone out there 12, 18 months to complete most of it.

Number two, free cash flow generation, debt reduction is a very important vehicle and we have committed, we will be under 2.5x the key leverage metrics by year-end. And then going forward, the long-term capital structure and the capital allocation priorities we're working towards that to find out how we should be structured as a combined global post acquisition given the mix of our business tied to recurring revenues and also the other side of the business.

So we're working on that carefully and dividends falling to this, leverage metrics falling to this, optimal debt amounts. So those are some of my priorities, I would say. And what I look forward to working with the team and very pleased to be here.

[Operator]

Our next question comes from the line of Tim Monachello of ATB Capital Markets.

[Tim Monachello, analyst]

First question, just on the Engineered Systems margins, you see this picking up a little bit. You booked, I think, 5 Cryogenic plants in 2023. And ass a little bit longer [indiscernible] lead build, but you've got the $1.2 billion of Engineered Systems backlog you're expecting to recognize over the next 12 months. Can you talk a little bit about how that margin -- embedded margin in that backlog compared to where your[indiscernible]?

[Marc Rossiter, executive]

It's in line with what we're executing right now. Tim. And I think we've been pointing to a mid-teens sort of targeted minimum margins in that business, and we definitely would like to move it up higher through operational execution. But knowing the embedded backlog and what we're booking things at. It gives us a lot of visibility to revenue stream from that business line going all the way out through the end that mid-teens target for operating margin is pretty close to where we're going to be in my expectation.

[Tim Monachello, analyst]

Okay. That's helpful. And then in the energy infrastructure business, revenue is down a little bit quarter-over-quarter not much. But I would have expected to see some growth in that revenue line just given those water projects coming on through the first half of the year. Was there any movement in your contract book there?

[Marc Rossiter, executive]

So Tim, it wasn't that -- we expected the revenues to be pretty stable in -- from Q2 to Q3. The water projects, some of them started in Q1 and Q2. So, yes, it's not surprising that it is stable quarter-over-quarter. .

[Operator]

Our next question comes from the line of Jamie Kubik of CIBC.

[James Kubik, analyst]

I've got 2 here for you. Just on the Engineered Systems bookings, can you just talk about maybe the split between Canada and the U.S. and if you've seen much recovery on the Canadian side, given the agreement in BC between the First Nations and government to start the year? .

[Marc Rossiter, executive]

Yes, the bookings in the quarter, they were very international. We had orders from Latin American segment. We had orders in from U.S. customers, Canadian customers and indeed from customers in the Eastern Hemisphere. A lot of those Engineered Systems orders go through the U.S. and Canadian shop.

So -- but yes, a very, very broad base of orders to go to Canada specifically, we've seen an increase in inquiry levels. And I think a lot of our midstream customers have been looking at projects for some time, and it feels like the conversations we've been having, there's an increased conviction to start moving on adding natural gas processing and liquids processing infrastructure in the northwestern Alberta, Northeastern BC area.

Whether that's a direct result of the Blueberry First Nation agreement or not is difficult to say. But we do expect bookings in Canada in 2024 to be more robust than we saw in 2023. And the most obvious macro drivers for that expectation really is the Blueberry First Nations and the LNG Canada. The 2 big drivers. And I think a lot of our -- a lot of the producers in Canada and a lot of the midstreamers are pointing to those same macros for why they see some continued positivity in the Canadian market for next year.

[James Kubik, analyst]

Okay. That's helpful. And then second question for me is a bit along the same line as what Aaron was asking and respect if you don't want to provide more granularity on this, but I'll ask it anyways. But just with respect to 2024, you indicate you're targeting a disciplined capital program for next year. Can you just outline a bit what that ultimately means. Does it mean less capital spending than this year? And then you do talk about evaluating a target long-term capital structure and capital allocation parameters. Just what does that mean? Should we think about 2.5x of debt relative to EBITDA as sort of the high watermark for where you want debt to be? And then should we think about shareholder returns increasing at levels below that. Can you just touch on those items a bit further if you're willing to .

[Unknown Executive]

James, it's Jeff. From a capital spending standpoint, Mark's talked about this in recent calls. After heavy investments in 2022 and '23, the expectation is that the capital spending will come down and be lower in 2024. We are still in the process of evaluating our capital program for next year and expect to provide clarity to the market in coming months on that specifically. But from a directional standpoint, I think that's reasonable to see.

In terms of the debt and the leverage side as Preet said in his prepared remarks, we're on track to reach a leverage ratio of under 2.5x by the end of 2023. Debt repayment will remain a priority for the company in 2024, both in absolute terms and on a relative leverage ratio basis. And we also continue to evaluate what the optimal capital structure and long-term ratio is for the company, and we expect to provide more clarity on that in coming months as well.

[Operator]

[Operator Instructions] Our next question comes from the line of John Gibson of BMO Capital Markets.

[John Gibson, analyst]

Most of my questions have been answered, but I've got one here. Just I guess, more high level, we're just over a year post closing of the Exterran transaction. And obviously, we've seen some noise in the early part of the year. I guess how close are you to getting the pro forma entity to want, in terms of like your facility footprint cost in the system, et cetera. And what surprised you the most as you've worked through the integration over the past year or so?

[Marc Rossiter, executive]

John, we are pretty much complete on the vision of what we want Enerflex to be long term. We've executed on 90% of the people-related streamlining. We've got work to do on the processes and systems, and that's going to be a big part of the effort through 2024. .

Going into 2025, I want the company to be integrated, streamlined all operating in the same processes and systems. But what you'll see from us operationally in 2024 is very close to the long-term Enerflex with respect to the markets we address, the geographies we're present in and our emphasis on our 3 core business lines of Engineered Systems, energy infrastructure and aftermarket services. And our sort of big macros of natural gas produced water and energy transition.

So we're kind of there. We're going to be getting out of the 2 shops that we're closing by the end of this year, early next year. and the cost to complete some of those exits has been better than we anticipated. If I want to flip to some of the things that were a little unanticipated. We do want to exit a lot of countries that we don't view as core and move on. The cost to exit some of those countries was a little bit higher than we thought, and we'll be putting some more thought into that.

Additionally, making sure that the company's stocks compliant in accordance with our SEC filing in our NYSE listing, that's a lot of work. And that's something that our employees have been working really hard on all year to achieve that SOX compliance, and that's something that will require a focus on Preet's team and a lot of operational folks into -- to close out the year and into the first quarter of 2024.

[Operator]

Our next question comes from the line of Nick Corcoran of Acumen Capital open.

[Nick Corcoran, analyst]

Most of my questions have been answered, but I think in the prepared remarks, you mentioned a noncore office sale after quarter. Can you give a little bit more color on what that was and whether there's any other [indiscernible] option to.

[Marc Rossiter, executive]

Sure, Nick. We sold a set of assets in Latin America and the set of assets in North America. And in both instances, we had the counterparties we sold to approach us and had thoughtful discussions about those sales. So it's good in a way that we sold one of the packages to an existing customer. And the positive is that they agreed to have a long-term O&M contract with Enerflex to keep those assets running.

So it's good news. It helps us reinforce our debt reduction priority, the noncore assets don't have material EBITDA that we'll be taking off from our forecast because of the sales. And it's -- in my opinion, it's a bit of a win-win story that we were able to achieve those sales subsequent to quarter close.

[Nick Corcoran, analyst]

And just a related question on our other asset monetizing for ROI[indiscernible].

[Marc Rossiter, executive]

Well, we're always open to conversations with customers and business partners. And if our customers and business partners see significant value in some of our assets, and it makes sense for us and our shareholders, we would have those conversations.

I wouldn't say that we're actively out looking to pay back our business or make any significant transactions. But we're always in the market. We're always looking for thoughtful conversations with counterparties to make sure that we maximize Enerflex shareholder value long term.

[Nick Corcoran, analyst]

And then I think you kind of touched on this in the split between U.S. and Canada, but there's recent consolidation in the Permian. Are you expecting that to have any impact on your business?

[Marc Rossiter, executive]

I think it's going to have a positive impact, Nick. I think that since the whole industry came out of COVID the consolidation theme has been a theme in the service sector, in the midstream sector and in the E&P sector. The Enerflex Exterran situation was part of that consolidation theme. One of the reasons we consolidated is that our customers are looking for solutions to bigger more complex, more long-term problems. And to that end, a bigger Enerflex is better able to serve bigger customers.

One of the things I like is an industry participant with the consolidation in the Permian and the Montney is that you've got a fewer number of players that have very long-term sustainable outlook on developing the overall basin. And so if we could get more stability and less boom bust cycles in the market through the consolidation, that would be wonderful.

Enerflex's ability to respond to these bigger, more sophisticated customers has always been where we position ourselves. And so I do think it does play into our strategic positioning in the market, and it also plays into a more long-term sustainable development of those assets.

[Operator]

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

[Cole Pereira, analyst]

Some good color on how you're thinking about 2024 CapEx and can appreciate that it's still a work in process. But high level, should we assume that your 2023 maintenance capital guidance is kind of a reasonable run rate for the business going forward?

[Marc Rossiter, executive]

That's a reasonable starting point, yes.

[Operator]

Our next question comes from the line of Tim Monachello from ATB Capital Markets.

[Tim Monachello, analyst]

Just a follow-up. On that noncore asset sale, can you quantify what the proceeds might be? And then I mean we're kind of half-way through the quarter here. How should we be thinking in terms of the direction of long-term debt from September 30 year-end and net debt?

[Marc Rossiter, executive]

In the noncore asset sales, Tim, are going to generate roughly $40 million in cash proceeds to Enerflex. And the second part of your question, where do we see total debt going for the balance of the year, Preet?

[Preet Dhindsa, executive]

Yes. I think we talked about the paydown this quarter, CAD 41 million. But we got the offset on the U.S. dollar strengthening FX impact, as we discussed. But I think Q4, think about something similar. We're continuing to focus on debt repayment, maybe a little bit more than where we're at today.

However, the key metric will be -- we're targeting under 2.5x and just to be sensitive to the U.S. dollar continuing to strengthen as at now versus quarter end Q3 and just keep an eye on the U.S. dollar exchange, but that may also offset or temper our debt reduction. So we'll be breaking those out also at the end of the year.

[Operator]

I'm showing no further questions at this time I'll turn the call back over to Mark for any closing remarks.

[Marc Rossiter, executive]

Thanks, operator. I'd like to thank everybody for dialing in today. To reiterate our strategic priorities for the close of 2023 and into 2024, is having a disciplined capital program through 2024. Focusing on generating free cash flow, repaying debt and setting Enerflex up for the future.

I would like to take this opportunity to thank all current and former Enerflex teammates that serve their companies in uniform as we prepare to remember those on Remembrance Day in the Commonwealth and Veterans Day in the United States. Thank you for your service.

We look forward to talking to our investors and stakeholders again when we report Q4 earnings in February.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.