Pason Systems Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 6 speakers on the call.

Operator

Good morning. My name is Lody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pason Systems Inc. 3rd Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. The contents of today's call are protected by copyright and may not be reproduced without the prior written consent of Pason Systems Inc. Please note the advisory is located at the end of the press release issued by Pason Systems yesterday, which describe forward looking information. Certain information about the company that is discussed on today's call may constitute forward looking information. Additional information about Pason Systems, including the risk factors relevant to the company can be found in its annual information form.

Operator

Thank you. Celine Boston, CFO. You may begin your conference.

Speaker 1

Thank you, Luti. Good morning, everyone, and thank you for attending Pason's 2023 Q3 conference call. I'm joined on today's call by John Faber, our President and CEO. I'll start today's call with an overview of our financial performance in the Q3. John will then provide a brief perspective on the outlook for the industry and for Pason and we'll then take some questions.

Speaker 1

I'm pleased to report on Pason's Q3 2023 results, which highlight the company's ability to deliver on strong financial performance Despite a modest decline in activity levels, Pason generated consolidated revenue of $93,100,000 in the Q3 of 2023, which was slightly ahead of the $92,500,000 generated in the Q3 of 2022. With this revenue, Pason generated $42,300,000 in adjusted EBITDA, which represented 45.4 percent of revenue. All of the company's business segments contributed to this quarterly result. Compared to the Q3 of 2022, our North American business unit saw a 14 percent decrease in industry drilling activity. However, the business unit generated revenue per industry day of 9.75 3rd quarter of this year, a new quarterly record and a 12% increase from the same quarter of 2022.

Speaker 1

This result continues to highlight the company's strong competitive position, the growing demand for our products and technologies and a more favorable pricing environment than seen in the Q3 of prior year. Resulting North American revenue was $72,200,000 in the 3rd quarter, only a 4% decrease from the Q3 of 2022 Despite the 14% reduction in industry activity. Gross profit for the business unit was $42,900,000 in the Q3 of 2023, a 12% reduction Cash operating costs titled Rental Services and Local Administration for the business unit only increased by 2% year over year, highlighting the business units mostly fixed cost base. Similarly, revenue generated per day in our international end markets also improved year over year. Reported revenue for our international business unit was $15,300,000 in the Q3 of 2023, down slightly from $15,800,000 in the comparative 2022 period.

Speaker 1

Excluding the impact of hyperinflationary accounting for the company's Argentinian subsidiary in each respective period, revenue would have increased by 14% year over year. Reported segment gross profit was $7,300,000 in the Q3 of 2023 for the business unit, slightly down from the $7,800,000 generated in the Q3 of 2022. Energy Toolbase continues to grow its presence in the solar and energy storage and posted a record quarterly result of $5,600,000 which represents a 293% increase from Q3 of 2022. The segment had increased control system sales in the quarter, which will fluctuate with timing of deliveries on future projects. Sequentially, U.

Speaker 1

S. Rig counts declined throughout the Q3 with the recovery in Canadian rig counts coming out of spring breakup mostly offsetting these declines. Resulting North American industry activity was flat sequentially, while revenue per industry day increased by 7%. This improvement in revenue per day, EBITDA followed suit and increased by 12% from Q2 to Q3. Our 3rd quarter results continue to highlight our mostly fixed cost quarter.

Speaker 1

Which is currently in place to support higher levels of activity than seen in the Q3 of 2023. We will continue to manage our fixed cost structure towards our expectation of upcoming activity levels and we'll work to manage inflationary effects on our business. Activity levels and we'll work to manage inflationary effects on our business. These effects along with changes in foreign exchange, Sales contribution from Energy Toolbase and the relative mix of rigs within our end markets could have an impact on quarterly margins in the coming quarters. Net income attributable to Payfon for the 3 months ended September 30, 2023 was $27,700,000 or $0.35 per share, A 19% increase from the $34,200,000 or $0.42 per share generated in the Q3 of 2022.

Speaker 1

The decline year over year reflects the lower industry activity levels along with higher levels of depreciation and amortization expense on increased capital expenditures in recent quarters Along with higher stock based compensation expense, which reflects the mark to market on the company's cash settled stock based compensation plans. Year to date, Pason generated $276,000,000 in revenue, a 15% increase from $240,600,000 in the corresponding 2022 period. This compares to underlying North American land drilling activity that was essentially flat on average year over year. Adjusted EBITDA for the 9 months ended September 30, of revenue for the 1st 9 months of 2022. Accordingly, net income attributable to Pason in the 1st 9 months of 2023 was 89,000,000 or $1.10 per share, up from $71,400,000 or $0.87 per share.

Speaker 1

A comparison of year to date results reflects the company's operating leverage with higher levels of revenue generated per operating day, improved industry conditions in the Q1 of 2023 and the effects of a strengthening U. S. Dollar. Our balance sheet remains strong and incredibly well positioned to make strategic investments while returning meaningful cash flow to shareholders. Pason generated $31,700,000 in cash flow from operations in the Q3, a slight increase from the Q3 of 2022.

Speaker 1

In the Q3, Pason spent $6,700,000 in net capital expenditures in support of our core business, representing the ongoing refresh of our technology quarter. Also in the Q3, we approved and funded $5,000,000 of the $10,000,000 that was remaining under the company's preferred share agreement with Intelligent Wellhead Systems and approved the funding of the final $5,000,000 subsequent to quarter end. We remain committed to shareholder returns and in the 3rd quarter returned $15,600,000 to shareholders through dividends and share repurchases. We ended the quarter with no interest bearing debt and $178,400,000 in total cash. I will now turn the call over to John for his comments on our outlook.

Speaker 2

Thank you, Celine. Our 3rd quarter results again demonstrated our ability to generate financial and operational results that outpace 3rd quarter. Our revenue increased 1% from the prior year, while North American land drilling activity was down 14% We maintained our leading market position and our North American revenue per industry day increased 12% year over year to 9 Our international business unit had a solid quarter as well. While reported revenue decreased 3% from the prior year, revenue was up 14% Before considering the effects of hyperinflationary accounting related to our operations in Argentina. Energy Toolbase posted its highest quarterly revenue on record $5,600,000 driven by the installation of additional energy storage control systems and growth in revenue from our economic modeling software tool.

Speaker 2

We continue to seek strong growth in our pipeline of control system opportunities, but the timing of booking and deliveries can fluctuate meaningfully between quarters. We are making the necessary investments in operating and capital costs to strengthen our capabilities in areas that directly impact our service and technology advantages And provide capacity for additional revenue growth. We continue to expect that we will see a return to steady growth in North American industry activity. Recently reported North American land rig counts show signs of plateauing around current levels, and we expect rig counts will begin to increase later this year and into 3024. Ultimately, the economic forces of supply and demand established the prevailing direction of industry activity.

Speaker 2

Global oil demand remains strong, while storage and the inventory of drilled but uncompleted wells remain at or near multiyear lows. Any efforts to increase supply will require additional drilling activity. And as such, our outlook for continued growth in land drilling remains positive. Pason sits at the center of the drilling data ecosystem on the majority of rigs in the Western Hemisphere. As customers use more automation and analytics technologies, Data requirements are increasing.

Speaker 2

We are ensuring that we have the capabilities to manage additional sources of data, Higher volumes, throughputs and speeds of data and additional data transmission and storage protocols. We continue to expect capital spending of approximately $45,000,000 in 2023 as we renew and extend the capabilities of important parts of our hosting platform, and we currently anticipate that our 2024 spending will be at a similar level. As always, we will evaluate our capital program with a focus on increasing revenue, generating free cash flow and creating value for shareholders over time quarter. Rather than simply in response to prevailing near term industry conditions. We continue to make investments 13% growth related opportunities outside of our core drilling related business.

Speaker 2

The growth trajectory of Intelligent Wellhead Systems has been impressive. During the Q3, we funded an additional $5,000,000 as part of our previously announced preferred share financing arrangement with IWS, And the final $5,000,000 tranche will be deployed in the 4th quarter. Energy tool base is also showing positive momentum As demand for energy storage is growing as government policies incentivize the deployment of additional energy storage assets. We remain committed to returning capital to shareholders through our regular quarterly dividend and through share repurchases. We returned $51,900,000 to shareholders in the 1st 3 quarters of 2023 through a combination of regular dividends and share repurchases, And we are maintaining our quarterly dividend of $0.12 per share.

Speaker 2

Our balance sheet remains strong with cash and short term investments of $178,000,000 and no debt. The strength of our business allows us to make the required investments to secure our position as the leading provider of drilling data and technologies To pursue additional sources of revenue and to return meaningful capital to shareholders. Our demonstrated ability To generate revenue growth that outpaces the growth in underlying industry activity and our high operating leverage will allow us to deliver strong financial results As rig counts begin to increase. And the momentum within both Energy Toolbase and Intelligent Wellhead Systems gives us further confidence in even greater growth in the future. And we would be happy now to take any questions that you might have.

Operator

Quarter. Thank you. And ladies and gentlemen, we will now begin the question and answer session. Followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number 2.

Speaker 2

3rd.

Operator

Your first question comes from the line of Aaron MacNeil from TD Cowen. Your line is open.

Speaker 3

Hey, morning and thanks for taking my questions. Your reference to growth in the prepared remarks is noted. But I guess I'm wondering if you can provide a bit of an operations update there. Like what's the company working on? Have there been any recent commercial successes?

Speaker 3

And what sort of projects or initiatives are your investments funding today?

Speaker 2

Yes. So there's only so much you can say on Intelligent Wellhead Systems, Aaron, because it's a private company. But I think I can probably provide Some commentary to give you a sense of our confidence in that business and why we've probably accelerated our investment of capital a little bit ahead of our That business is growing really well and has over the last number of quarters. The pace at which we're putting in capital Is related to the pace of growth that we're seeing in the revenue opportunities facing that company. And so we want to make sure that we're well positioned to get In front of those opportunities.

Speaker 2

The business today is active in every U. S. Basin. So that would be a positive operational indicator that I think I'd be prepared to share, but Not much more in terms of number of jobs in various areas. The other thing we've sort of talked about I think in the past is If you look at IWS today, that business generates a day rate that is about 3 times the order of what Pason generates on daily basis.

Speaker 2

And the completions market is approximately a third of the drilling market, if you look at historical relationships between drilling rigs and completions frac spreads. And so if you have 3 times the day rate today with a fairly new business in a market that's about a third time the size, we see a market opportunity that it would be roughly the same size as what Pason faces in the drilling That it would be roughly the same size as what Pason faces in the drilling market. And so we want to ensure that we're well positioned to Pursue that opportunity. And so that's really what's driving the quantum and the pace of investment we're making in the IWS business.

Speaker 3

Makes sense. I guess one follow-up there, and I guess this relates more to your capital allocation than the company itself. But How does your investment in IWS compete for capital with your organic growth opportunities in the core business and energy tool base?

Speaker 2

Yes, sure. So as we think about the IWS opportunity, we sort of think about the allocation of capital 2 ways, Right. One is the acceleration of the business, so call that capital into the business. And then we've also been deploying capital to increase our ownership in the business over time, right. So if you look Oracle investments we made, some would have been new money to the business and some would have been purchases of shares from other existing shareholders.

Speaker 2

So We do have the opportunity to acquire the remainder of that business. There's a pre established mechanism to do that. We could do that comfortably within the cash balance that we have today, But we are certainly preserving cash for the opportunity both to consider that opportunity as well as to continue to accelerate its growth.

Speaker 3

Fair enough. I'll turn it over. Thanks.

Speaker 2

Okay. Thanks, Aaron.

Operator

Thank you. Your next question comes from the line of Keith McKee from RBC. Your line is open.

Speaker 4

Hi, John and Celine. Good morning.

Speaker 2

Good morning.

Speaker 4

First wanted to start out just John on your comments regarding the likelihood for increases in rig counts in North America through 2024. Appreciate your comments on the oil supply demand storage macro and we certainly, I would say, are in a similar camp. But Can you just talk a little bit about what you're seeing in terms of what your business and how it's Setting up for incremental demand, are you seeing an increased or accelerating level of inquiries as new rigs are needed to go back to work? 3rd? Or what is it in your business that you'd say is helping underpin that confidence in next year's outlook?

Speaker 2

Yes, sure. Thanks, Keith. I think the short answer, of course, is that we do have pretty good visibility on the shorter term, right? I think if you In a longer term view, you probably need to talk to the drillers themselves and look to the CapEx programs announced by some of the E and P companies. But we sort of see the near term in terms of what our Technicians are installing on or are uninstalling, right?

Speaker 2

And so that gives us some measure of confidence around the plateauing and starting 3rd quarter. To move up to the move upward from where we are today. I guess the other thing to maybe think about is simply the question around it probably went a little lower than we might have If we were honest about where we saw things a few quarters ago. I mean, there's probably a couple of drivers there, Keith. I think one is, there's been a difference between what we're The behavior of the private companies versus the public companies, right?

Speaker 2

And that may or may not be related to interest rates and how companies fund themselves, but we do see a difference there Between privates and publics. And I guess the other thing is, as you look at consolidation in the industry, it certainly wouldn't be abnormal to both see Companies that may be targets essentially kind of put themselves into a state of kind of status quo while they go through that process. And also on the back end of some consolidation, it's not abnormal to see the pro form a rig count between the two companies go down a little bit in the short term as they Reprioritize inventory and high grade their prospects.

Speaker 4

Yes. Got it. Makes sense. Can you just talk a little bit about the competitive environment for Pason? You certainly had a very strong market share at U.

Speaker 4

S. And Canada The last several years and you mentioned pricing stronger year over year, which isn't true for a lot of different service lines out there. Just talk about the competitive dynamics leading to that and where you ultimately see pricing go from here. And I know adoption is a key part of that conversation as well. So maybe if you could kind of weave all that in, it would be great.

Speaker 2

Yes, sure. I guess what we would say helps us from a competitive position. As you think about I think you've touched on the prospects for both the pricing side and the product adoption side. It's really the fact that companies are trying to do more with data, right, particularly on automation and analytics. And so when you're trying to do more with data, there's probably at least things you care a lot about.

Speaker 2

1 is the quality of the data and that means a lot of different things, but we'll just broadly call it data quality. And then the other side is what I'll call more So if we're trying to put in place programs across multiple rigs, multiple fleets, multiple regions, to the greater extent that, that data It looks the same. It's easier to employ these automation and analytics technologies. So that's really been to our benefit given we've sort of had the leading position in the data Basin drilling for a very long time.

Speaker 4

Okay. Thanks for that. That's it for me.

Speaker 2

I'll leave it there. Thanks Keith.

Operator

Thank you. Your next question comes from the line of call, Ferrera from Stifel. Your line is open.

Speaker 5

Hi, good morning all. So assuming That we're going towards a steadier ramp in the rig count than we would have seen a year or 2 ago. I mean, should we assume it's a fairly limited incremental OpEx burden and your revenue per industry day is stronger. So is it really that out of the question I think that your margins could be stronger than they would have been last year

Speaker 2

at the same activity level?

Speaker 1

Yes. I'd say from a modeling perspective, Cole, we don't expect any significant changes to our fixed cost base For the expected levels of activity that we see in the short to medium term. There's some variable costs associated with our solar and energy storage segments like we saw in the 3rd quarter. But outside of that, our cash operating costs have hardly changed since the Q3 of last year. And since that time, rig counts Like we saw in the Q1 of this year, we're close to 200 rigs higher in North America.

Speaker 1

So we can certainly observe higher levels of within our existing fixed cost base today. I think if you think about margins going forward, we think about Q2 and Q3 levels of this year being sustainable Until we see some of that growth in U. S. Rig counts and then clearly we're capable of generating higher margins once that growth begins with that significant operating leverage in our business.

Speaker 5

Got it. And then just some interesting political developments in Latin America lately. Can you just talk about the outlook and how you kind of think about that business near term?

Speaker 2

Yes. I guess, Paul, we wouldn't want to be considered experts on geopolitical situations. And I guess what I would say is that there's certainly certain factions and certain perspective governments that would be more favorable to oil and gas development than others. That business To the extent that there's some that want to sort of moderate the pace or slow the pace or even decrease the amount of oil and gas investment, of course, that would be sort of a net negative to us. But we have also seen a trend the other way that people are trying to do more with more advanced technologies on the technology side.

Speaker 2

So Like our view is that there's growth opportunities down there, but it's there's probably both headwinds and tailwinds. And I would not be the expert to say which of those will be greater at any given point in time.

Speaker 5

Got it. Okay. That's all for me. Thanks.

Speaker 2

Okay. Thanks, Carl.

Operator

Quarter. And there are no further questions at this time. I would like to turn it back to John Feaver for closing remarks.

Speaker 2

Thanks so much, Luti. We appreciate people taking time to join us for the call this morning. As always, if you have more questions, don't hesitate to reach out to Celine and myself. Otherwise, we will look forward to talking to you after the Q4 and full year results in late February.

Operator

Quarter. Thank you presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Pason reported Q3 2023 revenue of $93.1 M and adjusted EBITDA of $42.3 M, representing a 45.4% margin and slight year-over-year growth despite modest activity declines.
  • North American drilling activity fell 14% but revenue per industry day hit a new quarterly record, driving only a 4% revenue decline and reflecting strong pricing power and fixed-cost leverage.
  • International revenue of $15.3 M was down marginally but would be up 14% year-over-year excluding hyperinflation, while Energy Toolbase posted a $5.6 M quarter (+293%) on solar and storage control system sales.
  • The balance sheet remains robust with no interest-bearing debt and $178.4 M in cash, generating $31.7 M in Q3 operating cash flow and returning $15.6 M to shareholders via dividends and share repurchases.
  • Outlook remains positive as rig counts are expected to plateau then grow into 2024, with ~$45 M capex planned for platform upgrades and accelerated investments in Intelligent Wellhead Systems and Energy Toolbase to diversify revenue.
A.I. generated. May contain errors.
Earnings Conference Call
Pason Systems Q3 2023
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