Enerflex Ltd

TSX:EFX

Earnings Call Analysis

Enerflex Ends 2023 with Strong Operating Results and a Positive Outlook

Enerflex reported its fourth quarter and year-end 2023 results, highlighting a strong year-end finish and steady operating results across its geographies, which culminated in adjusted EBITDA of $126 million for the quarter and free cash flow of $185 million, showcasing the company's solid business momentum. The U.S. contract compression assets boasted a high utilization rate of 93% in Q4, while the aftermarket services business enjoyed increasing activity levels and demand for parts and services. Despite a setback in the fourth quarter where a CCUS project was canceled due to failure in obtaining pipeline approvals, Enerflex demonstrated resilience with strengthened bookings, marking $327 million for the quarter and $1.7 billion for the year. Further, Enerflex has seen significant success in its cryogenic natural gas processing business line, receiving orders for 5 large-scale facilities during 2023 and an additional award in early 2024, reflective of its robust and expanding product offerings.

Optimizing Operations and Financial Positioning

Enerflex is nearing the completion of integrating Exterran, leading to enhanced annual run-rate synergies surpassing the previous target of $60 million. These synergies are partly the result of a streamlined global manufacturing footprint and the exit from several non-core geographies. The concentrated efforts to enhance the profitability of core operations have enabled Enerflex to pay down $167 million of long-term debt in Q4, reducing leverage to 2.3x and fortifying the company's balance sheet and financial flexibility for future strategic initiatives and shareholder returns.

Foreign Exchange Impact and Cash Solidity

While grappling with a $39 million reduction in adjusted EBITDA due to foreign exchange losses, particularly in Argentina, Enerflex has established measures to manage the exposure to foreign currency volatility. Meanwhile, the company managed to maintain strong operating cash flows, reporting $209 million in Q4, including a working capital recovery of $144 million, thus underscoring efficient management of its global capital and the potential for reallocating free cash towards shareholder-return activities such as dividends or share repurchases.

Reduction in Debt and Looking Ahead

Enerflex saw a reduction in net debt by $151 million, ending the year with $1.1 billion in net debt and a bank-adjusted net debt-to-EBITDA ratio that improved to 2.3x. These measures align with the company's strategy to enhance shareholder returns in the mid to long term. Looking forward to 2024, Enerflex anticipates its operating results to be supported by the highly contracted energy infrastructure product line and aftermarket services, projected to account for 55% to 65% of gross margin. With a disciplined approach to capital expenditures planned between USD 90 million to USD 110 million, primarily for maintenance, the company expects to allocate capital to selectively expand its energy infrastructure business on opportunities that drive returns and enhance shareholder value.

Future Capital Structure and Allocation

Enerflex is currently reviewing its optimal capital structure and allocation strategy for the long term. This review aims to improve the company's ability to manage debt, control cash flows, and lower finance costs, which will, in turn, fortify the foundation for sustainable shareholder rewards. Moreover, they maintain a commitment to paying down debt as a primary capital use, beyond maintenance capital expenditures, with an intention to finalize optimal leverage points and capital allocation in the coming months, aimed to build upon the company's success and create enduring value for stakeholders.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Enerflex Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Fetterly, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

[Jeffrey Fetterly, executive]

Good morning, everyone. Welcome to our fourth quarter and year-end 2023 earnings call. With me today are Marc Rossiter, President and CEO; Preet Dhindsa, Interim CFO; and Ben Park, Vice President, Corporate Controller. During today's call, we'll speak to our fourth quarter and year-end results, outlook for 2024 and provide an update on how we are progressing on our 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' 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 Plus and EDGAR profiles. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. I'll now turn it over to our President and CEO, Marc Rossiter.

[Marc Rossiter, executive]

Thanks Jeff and thank you all for joining us in this morning's call. Yesterday, Enerflex reported its fourth quarter and year-end 2023 results, which reflect a strong finish to the year and solid operating results across our geographies. Our energy infrastructure and aftermarket services business lines demonstrated steady performance in 2023 and are positioned to continue driving stable, sustainable returns, thanks to Enerflex's diversified global footprint.

Approximately 2/3 of Enerflex's gross margin before depreciation and amortization, both for Q4 and full year 2023 was generated from recurring sources. And markets outside North America contributed approximately 50% of our total gross margin during this period. Our Engineered Systems product line achieved record annual revenue during 2023 and successfully navigated a volatile supply chain environment to deliver solid margins.

Touching briefly on the quarter, Enerflex delivered adjusted EBITDA of $126 million and free cash flow of $185 million, demonstrating the strength and continued momentum from our recurring businesses as well as the Engineered Systems product line. Energy infrastructure is generating stable results, and we continue to evaluate opportunities to maximize performance across our geographic platform. Our U.S. contract compression asset is operating at high utilization rates, averaging 93% in the fourth quarter. The aftermarket services business is benefiting from increased activity levels, price adjustments and continued strong demand for spare parts and services.

We recorded Engineered Systems bookings of $327 million in the quarter and $1.7 billion for the year, reflecting demand across 3 continents and solid client activity levels. However, bookings during the fourth quarter reflect a CCUS project that was canceled after our client was unable to secure required pipeline approvals. The project was originally booked in 2022.

Despite the cancellation, Enerflex continues to see strong client activity across our regions, including the United States. We are especially pleased with the success of our cryogenic natural gas processing business line with Enerflex receiving orders for 5 large-scale facilities during 2023 and an additional facility award in early 2024. This is a reflection of our expanded product offerings stemming from the Exterran transaction.

As we enter 2024, visibility across our business is strong, supported by contract coverage across our energy infrastructure assets, the recurring nature of aftermarket service and a $1.5 billion Engineered Systems backlog.

Shifting to the integration of Exterran, we are in the home stretch with efforts focused on final systems integration. We have updated our synergy guidance to reflect annual run rate synergies, having exceeded our previous target of USD 60 million. Recent achievements include the streamlining of our global manufacturing footprint, exiting several noncore geographies and monetization of noncore assets.

We expect these actions, coupled with their focus on further enhancing the profitability of our core operations to enable continued debt reduction throughout 2024 and enhance Enerflex's ability to deliver shareholder returns in the mid- to long term. We remain committed to enhancing our financial position, repaying $167 million of long-term debt in the quarter and reduced our leverage ratio to 2.3x at the end of December, consistent with our guidance.

Our focus remains on strengthening the balance sheet and enhancing the company's financial flexibility. We were pleased to recently announce the appointment of Preet Dhindsa as Senior Vice President and CFO effective March 1. Preet has provided solid leadership and financial stewardship since joining Enerflex in October, and I'm excited to welcome him as our CFO at this important time for our company. We look forward to his continued leadership of Enerflex's strong global financial organization as we continue to unlock the benefits of the Exterran acquisition and position our company for long-term growth and value creation.

Before I turn the call over to Preet, I want to emphasize that the underlying macro drivers for 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' energy infrastructure and energy transition solutions.

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

[Preet Dhindsa, executive]

Thanks Marc and good morning, everyone. I'm pleased to continue my work at Enerflex and help unlock the business' full potential for the benefit of our shareholders, customers, employees and other stakeholders. My efforts will be focused on supporting the execution of our global strategy, improving the profitability and resiliency of the business, generating sustainable free cash flow and strengthening our financial position.

Turning to our financial results. Enerflex met or exceeded all of its full year 2023 financial guidance metrics as last provided with our third quarter results in November. During the fourth quarter, consolidated revenue of $782 million was largely consistent with third quarter levels and driven by continued strong performance from Enerflex's recurring businesses. Gross margin before depreciation and amortization or D&A, increased to $216 million or 28% of revenue compared to $201 million or 26% of revenue in Q3 2023.

Energy Infrastructure and aftermarket services product lines generated 67% of consolidated gross margin before D&A during the fourth quarter of 2023, which is comparable with the third quarter. Energy Infrastructure gross margin before D&A of $104 million was relatively consistent with the previous quarters in the year. In Engineered Systems, our gross margin before D&A improved to 18% as we execute on higher-margin backlog. And our aftermarket services gross margin before G&A was 22% in the quarter, the highest level in over 2 years and reflective of increased activity levels, inflationary price adjustments and continued strong demand for spare parts. Enerflex' SG&A of $102 million declined $13 million from the third quarter, which was largely driven by lower compensation costs.

Foreign exchange losses, which were previously included in SG&A are now presented as a separate line item on our income statement. Transaction, restructuring, integration costs were $25 million in Q4 compared to $6 million in Q3 as we incurred cost related to consolidating our operations and integrating systems. We expect to incur approximately $30 million of restructuring and integration costs during 2024. As Marc mentioned, we're in the home stretch of completing the integration with efforts focused on final systems integration.

Our adjusted EBITDA was $126 million in the fourth quarter compared to $122 million in Q3. Adjusted EBITDA was reduced this quarter by $39 million, resulting from losses related to foreign exchange and associated instruments, principally in Argentina. We generated $4 million in offsetting interest income that is reported in net finance costs and excluded from adjusted EBITDA. Enerflex continues to manage foreign exchange volatility and is implementing measures to reduce exposure to the Argentine peso. Excluding the impact of foreign exchange, our business in Argentina continues to perform well and generate strong operating cash flow for the business.

Cash provided by operating activities was $209 million, which included a working capital recovery of $144 million. In the third quarter, we generated $71 million of cash from operations, including $15 million from the recovery of working capital. We are pleased with our ongoing global efforts to more efficiently manage working capital and target further progress in 2024, although we do not expect that the magnitude of the recovery realized during Q4 will be repeated. We've also introduced free cash flow as a key performance measure for our company. Free cash flow helps readers assess the level of free cash available to fund other nonoperating activities such as growth capital expenditures, discretionary debt repayment, share repurchases and/or incremental dividends.

During the fourth quarter, Enerflex generated $185 million of free cash flow compared to a use of cash of $46 million in the comparable quarter of 2022. Including free cash flow for the fourth quarter is a benefit of $52 million related to unrealized changes in foreign exchange and short-term investments. While we do not experience an outflow of cash associated with these unrealized losses, they impact cash available to fund other nonoperating activities. We invested $24 million in the business during the fourth quarter, including $6 million of growth investments and returned $3 million to shareholders through dividends.

As Marc mentioned, our focus remains on strengthening the balance sheet and enhancing the company's financial flexibility. We reduced net debt by $151 million during the quarter, exiting the year at $1.1 billion and reduced our bank adjusted net debt-to-EBITDA ratio to 2.3x from 2.7x at the end of Q3 and 3.3x at the end of 2022.

Enerflex will continue to focus on debt reduction, global cash management and lowering net finance costs in 2024, which will improve our ability to provide shareholder returns over the medium and long term. We continue to evaluate our target long-term capital structure and capital allocation parameters and expect to provide more clarity in the coming months.

Let me shift to our outlook for 2024. Operating results will be underpinned by the highly contracted energy infrastructure product line and the recurring nature of aftermarket services, which together are expected to account for 55% to 65% of gross margin before depreciation and amortization. Complementing Enerflex's recurring revenue businesses is the Engineered Systems product line, which carried a backlog of $1.5 billion as at December 31, 2023. The company expects the majority of its backlog to convert into revenue over the next 12 months.

Enerflex is targeting a disciplined capital program in 2024 with total capital expenditures of USD 90 million to USD 110 million. This includes a total of approximately USD 70 million for maintenance and PP&E capital expenditures. Investing to expand our energy infrastructure business in 2024 is discretionary and will be allocated to customers supported opportunities that are expected to generate attractive returns and deliver value to Enerflex shareholders.

Finally, Enerflex is committed to delivering a sustainable dividend to shareholders with our Board declaring a quarterly dividend of $0.025 per share. The dividend is payable on May 1, 2024, to shareholders of record March 13, 2024. I'll conclude by saying that with the support of Enerflex's strong global leadership team and talented employees we're improving the profitability and resiliency of our overall business with an objective to generate sustainable free cash flow. I'm pleased to continue my work at Enerflex and help unlock the business full potential for the benefit of our shareholders. customers, employees and other stakeholders. With that, over to you, Marc, for closing remarks.

[Jeffrey Fetterly, executive]

Take questions...

[Operator]

[Operator Instructions] Our first question will come from the line of Aaron MacNeil with TD Cowen.

[Aaron MacNeil, analyst]

Marc, you mentioned you hit the cost synergy target, you're on the home stretch on integration activities. I guess, it sort of begs the question of how you're thinking about the market position of the combined business going forward? And maybe more specifically, are there new end market opportunities to exploit that either stand-alone Enerflex or Exterran wouldn't have been as good of a position to capture. And I guess, how would you discuss your competitive position across the various end markets and geographies today?

[Marc Rossiter, executive]

Aaron, in the Eastern Hemisphere and Latin America specifically, the transaction has allowed us to become -- to have the largest market share in our particular product line in those geographies. So that's good. And those businesses are highly focused on energy infrastructure. And like I said in my prepared remarks, our biggest focus right now is improving the operational effectiveness of that energy infrastructure. So our increased scale should allow us to save some money in operations and supply chain. Also for the last number of years, Enerflex and Exterran's customers had been coming to us with increasingly large projects, increasingly complicated projects, and the combined team is much more well set up right now to co-invest with our client partners in those larger, more complicated projects down the road.

For now and throughout 2024 and into 2025, our focus really is on doing our best to improve gross margins in all of our product lines, but the enhanced scale, especially in Eastern Hemisphere and Latin America will be a real catalyst for that activity. In Engineered Systems, we're really quite happy to mention that we booked 5 cryo plants in 2023. More than half of those plants are destined for international destinations, on an export basis from our North American shops. So neither Enerflex nor Exterran would have been able on their own to do that volume of work in 1 year. And indeed, it's the combined efforts of our Tulsa shop, and our Houston shop, and our Calgary shop, and that concerted effort that's allowing us to address such a high volume of international and domestic demand for gas processing and compression.

So I think it's good. I mean it was a consolidation play to realize synergies. But once the synergies are realized, which they are, focus of management has to go towards leveraging the increased scale and size to improve gross margins. And that's our focus going forward.

[Aaron MacNeil, analyst]

Makes total sense. On a similar vein, should we expect further dispositions beyond the manufacturing footprint announcements that you've done already? And if so, what would you sort of characterize as core and noncore in the combined business?

[Marc Rossiter, executive]

We regularly review opportunities to optimize our geographic footprint and the business platform to ensure we're appropriately positioned in the market to now the best possible growth in gross margins and in revenue. And we operate in -- we have several countries where we have high amounts of investment we've made over the past decade. Some of those countries, especially for energy infrastructure specifically United States, Brazil, Oman, Mexico, Bahrain. And those are what I would call from an energy infrastructure point of view, those are core countries.

We are not actively looking to sell assets in noncore countries. But if we have people that approach us and people that have a valuation of those assets that would allow us to increase Enerflex shareholder value in the short, medium and long term, then we would engage in those discussions.

[Aaron MacNeil, analyst]

Makes sense. I guess more specifically on the water business, like do you see that as core or noncore? Or how should we think about some of those [ indices ]?

[Marc Rossiter, executive]

I view it as quite core. I mean, it represents over 10% of our EBITDA right now. We've got 2 very successful projects that we completed in 2023 with core customers in a core country in the Middle East, Oman, and so I do believe they're core. The customers are core and the geographies are core, and the technology is working really well. And those assets, I mean, they are infrastructure. And this transaction, the strategic rationale was all about leaning into the infrastructure first strategy to provide that sustainable level of cash flow for our investors long term. And the water business is very core to that message.

[Operator]

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

[Cole Pereira, analyst]

So you exited the year below your leverage target, you have line of sight to keep reducing debt. How do you think about the level of leverage that this business can support over the longer term?

[Preet Dhindsa, executive]

Well, it's Preet. As you noted, we've done a fairly good job in a disciplined manner getting to under around 2.3x as of the end of last year. We're going to continue paying down debt as our primary use of capital there above and beyond any other maintenance CapEx that we've already called out. And right now, we are still working on determining our final or optimal capital structure and capital allocation parameters. And over the coming months, we'll like we have points of view on that. But right now, we are heavily focused on reducing gross debt, minimizing cash in the region. Therefore, net debt will start coming down and still focused on the key leverage metrics. So that's what we'll be doing over the next several months. And then we will report back on where we think we need to be optimally in the coming months.

[Cole Pereira, analyst]

Got you. That makes sense. And then maybe thinking about in tandem with that a longer-term capital allocation update. Can you guys just provide kind of a ranking on how you kind of think about maybe additional growth CapEx and dividends, share buybacks, et cetera?

[Marc Rossiter, executive]

Cole, we're going to reiterate, be a little pedantic on this front, reducing debt this year is the priority. Once we get into our target debt range, which we believe will be in the 2025 time frame, we'll have the ability to choose amongst those levers you mentioned in a way that we think ensures the best long-term success for Enerflex and create long-term value for our shareholders.

[Operator]

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

[Tim Monachello, analyst]

First question, I just wanted to touch on synergies and congrats on getting over that line. But with still, I think you said $20 million to $30 million of integration costs left in 2024. You've already realized USD 62 million of synergies raises the question of where does that synergy number ultimately land? Any comment on that would be helpful.

[Preet Dhindsa, executive]

Yes, we know a little over USD 60 where we're landing on synergies. And as you know, integration costs, call it, CAD 30 million split probably evenly over the next 3 quarters of 2024. And so my view generally is integration will be ending around 15, 18 months after deal close, which is upon us in the next few months. And then less about integration synergies and integration costs, more about continuing to optimize and refine the business. that's what we're going to be focused. And then we are integrated. We've got the 2 companies together, and we're operating as efficiently as possible and continue to look for opportunities to refine our businesses.

[Tim Monachello, analyst]

Okay. So safe to assume that you're most of the way there on synergies?

[Preet Dhindsa, executive]

Yes. We are most of the way there. The final leg of integration is largely systems related and we feel good about how we're going to transition former Exterran onto our platform.

[Marc Rossiter, executive]

And Tim, this is Marc. We're never done looking at cost efficiencies. No good companies are ever done looking at ways to save costs and improve margins. I think you'll see us shift our discussions away from deal synergies and more on to how we make this a more effective, more profitable business long term. So we're not done looking for ways to reduce overheads and improve gross margins by a long shot. But I think you'll see us sort of moving off the synergy conversation and moving more on to being the most effective organization we can be long term.

[Tim Monachello, analyst]

I'm glad you mentioned that because that's my next line of questioning. You kind of mentioned, Marc that margin improvement would be one of your top priorities alongside debt reduction in 2024. Can you talk about, I guess, the low-hanging fruit there and what you think you can do in terms of quantifying how much do you think margins can move?

[Marc Rossiter, executive]

Well, sure. I mean, first of all, I'd like to just point out our financials have reported a pretty significant gross margin increase year-over-year. I'd like to call it our aftermarket services business put 2 points of margin year-over-year in their business in addition to about 47% increase in top line. Our Engineered Systems business had a good year. We increased gross margins there almost by 3 points. So we've been executing at higher levels of gross margin as the market has been supportive of that. It's a continued focus of ours to improve gross margins on energy infrastructure. Our Eastern Hemisphere business is underpinned by long-term take-or-pay contracts. The best way to improve gross margins there is by really doing a very best on OpEx, trying to be the premier operator that now we are and continuing to get better at that.

In Latin America and our U.S. contract compression asset, those are a little bit lower tenor terms, and we have been benefiting from realizing higher market-driven rates throughout 2023, and we see that trend continuing in 2024. So it's really a combination of making sure that we're getting fairly paid for the talents and services that we bring to the table, but also making sure that the new Enerflex is paying as close attention as possible to operating expenses.

[Tim Monachello, analyst]

So in the operating expense side, I would imagine that features most heavily in the energy infrastructure part of the business. Is that where you think you can see the most margin improvement?

[Marc Rossiter, executive]

I think that there's -- in any of the business lines, every point of cost reduction will have a significant impact on our free cash flow. And so we're trying to apply attention to all of our staff and all of our business lines to get that increased margin.

[Tim Monachello, analyst]

Okay. And then around CapEx for 2024, a significant amount of that is discretionary and seems like it's unallocated. So USD 70 million is sort of sustaining and USD 90 million is bottom end of the range. Does that mean that USD 20 million is already allocated?

[Preet Dhindsa, executive]

That does not mean that. I would say that roughly we've got $30 million of growth capital earmarked and we have allocated very little of that. So yes, it hasn't been spent yet.

[Tim Monachello, analyst]

Okay. And then you mentioned that there's been a lot of demand and probably one of the thrusts of the acquisition or the merger of Exterran was to be able to service larger projects. but you're focusing on deleveraging in the near term. So does that mean you're focusing mostly on opportunities that are smaller in scale. And I would imagine that those are mostly in the North American space.

[Marc Rossiter, executive]

Are you talking about energy infrastructure specifically or any sort of growth opportunities?

[Tim Monachello, analyst]

Yes, sorry, CapEx energy infrastructure.

[Marc Rossiter, executive]

Oh yes, okay. We know that there's a very clear, easy-to-understand return for our shareholders via debt reduction. So when we think about spending those discretionary dollars, the returns have to be significantly above the return realized if we reduce debt. They also would have to be quite strategic. So when I say strategic, I would think core customers, core assets. In the U.S., it would have to play into an electrification or decarbonizing strategy for our customers, which has been one of our most successful themes over the last 3 years in our contract compression asset class.

In the Middle East, it would have to be very high rates of return, and it would have to be with core customers and core product lines. So we will be picky with where we spend the money, and it will have to provide a significant short- and long-term attractive return for our shareholders or we'll hold the money and reduce debt.

[Operator]

[Operator Instructions]

Our next question comes from the line of John Gibson with BMO Capital Markets.

[John Gibson, analyst]

Nice to see the big free cash flow number this quarter. There are obviously some onetime-ish numbers in there. Wondering what a more normalized number would look like absent the asset sale and some of the prepayments on the Engineering Systems side?

[Preet Dhindsa, executive]

I can talk to that. So thanks for the question. So as we noted here, a couple of things. One is Q4 versus Q3 funds from operations before the working capital pretty consistent. And obviously, the working capital is a big driver, $144 million. We've got AR, we've got contract assets, deferred revenue. Deferred revenue came up quite a bit Q-over-Q. Inventories come down as well as onetime asset sale LatAm. We signaled in Q3 about $40 million of asset sales coming up Q4 and that one asset sale is the majority of that. So that's another nonrecurring item there. So we expect clearly that this will not be repeatable at these levels. So we expect some sort of an unwind, deferred revenue will start to unwind, of course. But I would say somewhere take a little bit off of this and take away the deferred revenue and the onetime sale. And I think that's probably where we're going to end up. However, nowhere near the buildup in the first half of last year, nothing like that. So just modest use of working capital over the next couple of quarters, but we will be managing it extremely well on a global basis.

[John Gibson, analyst]

And I guess along the same lines, what gives you confidence or what levers can you pull or I guess, what has changed in your business this year versus last year that should see working capital normalize a little bit in '24?

[Preet Dhindsa, executive]

I think a little bit more rigor and discipline and regional connectivity with the folks in our major regions. How we are getting cash repatriated back, how we're focused on receivables, getting cash in the door, and then we're using that free cash to pay down debt, as you can see, year-over-year, our cash balance has also come down. So a little bit more dialogue with the regions and a little bit more connectivity to bring everybody focused on working capital, which I feel good about where we're at on that, and we're going to continue the rigor and discipline throughout this year.

[Marc Rossiter, executive]

John, I'd like to add to that. The single biggest driver for working capital build in the first half of '23 was the fact that Engineered Systems and AMS almost doubled in 1 year. And whenever those businesses experienced that level of growth, they will be a consumer of working capital. This year, we're predicting a much more steady pace. And so when it's a steady pace, if you've got the commercial discipline, that our people have, you really shouldn't see significant consumption or release of working capital from those businesses specifically. That's the biggest difference between the 2 years.

[Operator]

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

[Keith MacKey, analyst]

All right. Just a question on Engineered Systems bookings. Marc, you did mention just now that you expected that business to be more stable this year. Can you just talk about what you're seeing in terms of the bookings environment looking ahead? I know there is some concern about weak natural gas prices in North America, causing some issues for services, which service demand, which could potentially impact your business as well. But can you just talk to your exposure to that and your general outlook for bookings for 2024?

[Marc Rossiter, executive]

Sure, Keith. I'd like to start by answering the question with the fact that the 5 cryo plants we sold in 2023, not a single one is going to a dry gas basin in the United States. They're going to international markets, which are all about flare gas recovery, continued decarbonization of electricity grids, et cetera, and the North American sales are largely going to oil plays or associated gas plays at the very least. That being said, there is no doubt that activity in the Permian Basin and the Montney Shale are big drivers of our North American Engineered Systems business, and we pay very close attention to any markers of potential slowdowns in those businesses. So we will watch it.

Right now, our client partner conversations have been constructive and positive. And so we'll continue to keep a close eye on that. And we really focus on oil economics, liquids economics when we think about our future on top of the fact that over half of our business is really global, on Engineered Systems and a ton of the infrastructure revenue comes from global operations, which aren't really impacted at all by Henry Hub price or rig counts in the U.S.

[Operator]

And I have a follow-up from Tim Monachello with ATB Capital Markets.

[Tim Monachello, analyst]

Just given deleverage to free cash flow on that Kurdistan project. I'm wondering if you can give an update on that or a timing update when you think that will be commissioned if anything has changed there?

[Marc Rossiter, executive]

So that's the Pearl project we're executing in the Middle East, the cryo project. That's what you're asking about, Tim, just to make sure I heard it properly.

[Tim Monachello, analyst]

Yes.

[Marc Rossiter, executive]

Yes, we were active in completing that project. We've got a lot of people on the ground, a lot of Enerflex management. We're working to bring that project to a conclusion, and we're quite confident that will happen in the second half of 2024.

[Tim Monachello, analyst]

And then I just wanted to clarify one comment and Preet your opening remarks just around the Argentina business. I think you said that it was generating strong operating cash flow. Is that inclusive of the FX losses? Or is that sort of a cash-negative business after the FX losses?

[Preet Dhindsa, executive]

If you back out the FX noise, whether it's the cash, money market instruments, the bond funds, it is profitable pre the FX downturn.

[Tim Monachello, analyst]

And then do you think that the instruments that you have in place now are sufficient to mitigate the losses in '24?

[Jeffrey Fetterly, executive]

Tim, it's Jeff. As Preet mentioned in his prepared remarks, our approach has shifted to minimizing our exposure to the Argentinian peso. So there was tremendous volatility and depreciation in the peso in 2023. There's a range of potential outcomes and expectations this year, but our focus is minimizing our exposure to the Argentinian peso and then continuing to protect the cash that we do have in country that's generated from our operations.

[Tim Monachello, analyst]

So like can you help put that in context on maybe a year-over-year basis, like you've put in some actions here through '23 to try to mitigate that. So is the expectation that the net impact will be lower in '24 than '23?

[Jeffrey Fetterly, executive]

Depending on what the assumption is for currency volatility, obviously, 2023 was exceptionally high and almost unprecedented, but from a 2024 sense, our expectation is that we will see less FX noise and impact in the year relative to '23, yes.

[Operator]

And this concludes our Q&A portion. I would now like to turn the call back over to Mr. Marc Rossiter for closing remarks.

[Marc Rossiter, executive]

Listen, it's my distinct honor to deliver the solid fourth quarter financial and operating results on behalf of my 4,800 teammates at Enerflex. These 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 remains steadfast as we work to further enhance the 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 transaction and continue to offer best-in-class natural gas treated water and energy transition solutions.

I look forward to building on our progress to create significant value and optionality across these geographies, customers, product lines. Happy leap year day. Thanks for your attention.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.