Total Energy Services Q3 2023 Earnings Call Transcript

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November 10, 2023

There are 5 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to Total Energy's Third Quarter Conference Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Daniel Halleck, President and CEO of Total Energy Services Inc. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to Total Energy Services' 3rd quarter 20 3 conference call. Present with me is Yuliya Gorbach, Total's Vice President, Finance and CFO. We will review with you Total's financial and operating highlights for the 3 months ended September 30, 2023. We will then provide an outlook for our business and open up the phone lines for any questions.

Speaker 1

Yuliya, please proceed.

Speaker 2

Thank you, Dan. During the course of this conference call, information may be provided containing forward looking information concerning Total's projected operating Actual events or results may differ materially from those reflected in Total's forward looking statements Due to a number of risks, uncertainties and other factors affecting Total's businesses and the oil and gas service industry in general, These risks, uncertainties and other factors are described under heading Risk Factors and elsewhere in Total's most recently filed Annual information form and other documents filed with Canadian provincial securities authorities that are available to the public atwww.sira.com. Our discussions during this conference call are qualified with a reference to the notes to the financial highlights contained in the news release issued yesterday. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars. Total Energy's financial results for the 3 months ended September 30, 2023 Reflect relatively stable industry conditions.

Speaker 2

Despite lower year over year North American industry activity levels, Market share gains resulting from equipment upgrades and improved results from our Compression and Process Services segment contributed to modestly higher 3rd quarter results in 2023 as compared to 2022. 3rd quarter Australian activity levels were lower compared to prior year as one drilling rig and one service rig were out of service during the Q3 of 2023 for recertifications and upgrades. 3rd quarter consolidated revenue increased 12% On a year over year basis, while EBITDA increased by 6%. Our CPS segment was the largest contributed to year over year increase in 3rd quarter revenue and EBITDA. Geographically, 48% of 3rd quarter revenue was generated in Canada, 43% in the United States and 9% in Australia as compared to Q3 of 2022 When 47% of consolidated revenue was generated in Canada, 37% in United States and 16% in Australia.

Speaker 2

By business segment, Well Servicing at 10% and Rentals and Transportation at 9%. In comparison, for the Q3 of 2022, The CPS segment contributed 42% of consolidated revenue, Contract Drilling Services 36%, Well Servicing 13% and the RTS segment contributed 9%. 3rd quarter consolidated gross margin was consistent with the prior year 24%. Margin strength in our CPS segment as well as our Canadian Drilling, U. S.

Speaker 2

Rentals and U. S. Well Servicing Businesses offset year over year margin contraction in other businesses. Decreased drilling activity in all geographies resulted in a 7% year over year decrease in 3rd quarter consolidated operating days in CDS segment. Offsetting lower activity was a 10% increase in consolidated segment revenue per operating day.

Speaker 2

This resulted in a 2% year over year increase in the Q3 of CDS segment revenue and flat EBITDA. In Canada, lower industry activity resulted in a 2% year over year decrease in 3rd quarter operating days. Price increases in part due to rig upgrades resulted in an 8% year over year increase in 3rd quarter Canadian drilling revenue per day, which in turn gave rise to a 7% year over year increase in Canadian Drilling revenue. In the United States, 3rd quarter revenue decreased by 11%, as an 8% year over year increase in revenue per operating day was offset by 17% decrease in operating days due to lower industry activity and the transfer of a triple drilling rig to Canada in the Q2 of 2023. Lower revenue and crew retention costs resulted in a 50% decrease in operating income.

Speaker 2

In Australia, operating days decreased as one drilling rig was taken out of service for recertifications and upgrades. This rig returned to operations in mid October. Reduced operating days were partially offset by a 29% increase In revenue per day results in a 6% increase in revenue. Offsetting higher revenue with crew retention and equipment reallocation expenses associated with rigor certifications and upgrades. Also negatively impacting Australian operating income was a weakening of Australian dollar relative to Canadian U.

Speaker 2

S. Dollars. In RTS segment, a rationalized equipment fleet in Canada and market share gains In the United States contributed to a 12% year over year increase in 3rd quarter equipment utilization And a 14% increase in revenue per utilized piece of equipment, which in turn resulted in a 17% increase and 3rd quarter revenue. 3rd quarter EBITDA and EBITDA margins were 10% And 24% lower respectively as compared to 2022 due primarily to additional costs incurred in Canada To mobilize equipment and personnel for upcoming winter season. 3rd quarter revenue in total CPS segment increased by 28% as compared to 2022.

Speaker 2

This was due to a significant increase in U. S. Fabrication sales that more than offset lower sales in Canada. Also contributing to the year over year increase in segment revenue was increased equipment overhaul activity and the 10% increase in utilization of compression rental fleet. 3rd quarter EBITDA increased 81% and 44%, respectively, for 2023 as compared to 2022.

Speaker 2

The fabrication sales backlog decreased to CAD152,900,000 compared to the CAD $197,800,000 backlog at September 30, 2022. Sequentially, the quarter end backlog decreased CAD 32,700,000 due to a moderation of Cronin activity Converting to sales during the Q3 of 2023 with no corresponding decrease in production activity as well as the shift in customer demand towards Renting Compression Equipment. 3rd Quarter Well Servicing segment consolidated service Hours decreased 16% as Canadian abandonment activity decreased significantly following the conclusion of Government incentive programs and in Australian service rigs was taken out of service in the second quarter for recertifications and upgrades. A 1% Decrease in revenue per service hour and decreased activity resulted in a 17% decrease in well servicing segment revenue. Lower revenue and operating hours in Canada and Australia were partially offset by 26% increase in service hours And the 30% increase in revenue in the United States as our U.

Speaker 2

S. Service rig business expanded its customer base during 2023. 3rd quarter segment EBITDA and EBITDA margin decreased by 27% 13%, respectively, As compared to 2022 due to lower activity and competitive pricing in Canada and Australia. From a consolidated perspective, Total Energy's financial position remains very strong. At September 30, 2023, Total Energy had CAD127.6 million of positive working capital, Including $29,900,000 of cash and 0 net debt.

Speaker 2

During the Q3, we repurchased 252,804 common shares under our normal course issuer bid At a cost of CAD2.3 million, Total currently has CAD115 1,000,000 of credit available under CAD175 1,000,000 of existing credit facilities. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bank defined EBITDA and 3 times or 3 times in the minimum bank defined EBITDA to interest expense of 3 times. At September 30, 2023, the company's senior bank debt to bank defined EBITDA ratio was 0.27 End bank interest coverage ratio was 29.04x.

Speaker 1

Thank you, Yuliya. We are pleased with our 3rd quarter results. Despite lower North American drilling activity, our investment in upgrading our equipment fleet over the past year An improved performance by our CPS segment resulted in modestly improved year over year Q3 financial results. Significant share repurchases over the past 12 months amplified our results on a fully diluted per share basis. During the Q3, Total continued to fund its capital investments, repay its debt and return capital to shareholders through dividends and share buybacks Entirely from operating cash flow.

Speaker 1

As Yuliya mentioned, we exited the 3rd quarter with 0 net debt, Continued lower year over year North American industry drilling activity levels, our investment in upgrading our equipment fleet continues to mitigate Such as we enter the seasonally active winter drilling season in Canada. Demand for compression and process equipment remains strong With a notable increase in demand for rental equipment, in response to such demand our Board of Directors Has approved a CAD20 1,000,000 increase to Total's 2023 capital expenditure budget which is earmarked towards continued growth of the compression rental fleet. Our 2023 capital expenditure budget now stands at 90 $2,100,000 of which $59,600,000 has been funded to September 30, 'twenty 3. The remaining CAD32.5 million will be funded by cash on hand and cash flow. Significantly mitigating the cash required to execute the CAD20 1,000,000 compression rental fleet expansion will be the utilization of major components currently sitting in the inventory.

Speaker 1

Finally, I am pleased to report that during the Q3, we experienced a significant improvement in our safety performance across all business segments With a meaningful decline in both the frequency and severity of incidents, a particular note is the fact that we suffered no lost time incidents during the quarter. This outstanding operational execution contributed directly to our improved year over year financial results. I would like to take this opportunity to thank all of our employees for their ongoing focus and commitment to conducting our operations in a safe and efficient manner. I would now like to open up the phone lines for any questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Cole Peria of Stifel. Please go ahead.

Speaker 3

Hi, good morning all. Good morning, Cole. Dan, I'm wondering if you can just add Some color on what the M and A market looks like in the services space right now. And you previously talked about your cost of capital being a hurdle To M and A, but as you know, is improved balance sheets across the sector maybe a bit of a hurdle as well?

Speaker 1

I would say we're pretty active in the space and stay tuned.

Speaker 3

Got you. Fair enough. And then some of your larger peers have outlined some pretty attractive Day rate upside in Canada, more for the high spec rigs, high spec AC Triples. Can you kind of talk about what you're seeing For your rig fleet in terms of year over year pricing gains?

Speaker 1

I would say going into winter, We are completely sold out of our AC heavy doubles, our triples and our super singles. And Assuming relatively stable commodity prices, I expect we'll have a decent winner.

Speaker 3

Got it. And there was some color in the release just on the contracting CPS backlog. I mean, it sounds like that's just The normal fluctuations and due to timing and not really a shrinking opportunity set or anything like that?

Speaker 1

Yes, I would say, obviously, it's one point in time coal, and so that changes weekly. The other notable difference I would say this time versus last quarter or a year ago is significantly I'm not sure if it's increased demand for rental or the fact that we're more competitive now that Cost of capital notably debt has increased and that's making our ability to compete In the rental market better. In other words pricing has gone up which allows us to Entertain new opportunities in that regard. And just a couple points on that Cole. First of all, we do not build any compression rental equipment on spec And so any new additions to the fleet are backed by signed take or pay contracts multi year.

Speaker 1

And so the other point is fabrication sales backlog does not include Horsepower that's being built for rent. And so when you have a shift from a sale to a rental, The rental horsepower or rental dollars are not reflected in our fabrication sales backlog. So, it doesn't necessarily mean a lower backlog doesn't mean we're still not building things.

Speaker 3

Okay, got it. Yes, that makes sense. That's all for me. Thanks. I'll turn it back.

Speaker 3

Thanks,

Operator

Our next question comes from Jonathan Orford of ATB Capital Markets. Please go ahead.

Speaker 4

Good morning. Thanks for taking my questions. I guess I'll start off with the CPS segment. I'm wondering if you could provide some color on the timing and the expected rental fleet growth associated with the $20,000,000 increase?

Speaker 1

So as I just mentioned that Jonathan, we don't build any compression rental fleet on spec and so Any new additions to the fleet are backed by take or pay multi year commitments and I would expect you will see Over the next few quarters our rental fleet utilization go up as well as the size of our rental fleet as those units are The other thing regarding utilization, again at a point in time you tend to get a lot of On horsepower but underneath that is the sale of units, the return of units. There is constant churning there And so again it's a little bit like your fabrication sales backlog. It's a point in time and based on our Board's decision to increase the capital for that line of our business, I think it's fair to assume that our

Speaker 4

And Toll business will grow over the next few quarters. And just a follow-up on that for the increase, do you expect to spend that Higher amount in 2023 or is there going to be some carryover do you think?

Speaker 1

It will probably be some carryover. As I mentioned in my remarks Don, there's a significant portion of that cost has already been paid for and it's sitting in inventory, Major components on a cash basis it will be less.

Speaker 4

Okay. We will

Speaker 1

just transfer from inventory to our PP and E.

Speaker 4

Okay. That's helpful. And just lastly, I'm just wondering if you could provide some color on the outlook heading into Q1. I know you provided some color on pricing earlier. So just curious if you could provide some color on outlook, especially in Canada?

Speaker 4

It's

Speaker 1

a I call it a Goldilocks environment. It's not too hot, not too cold. I think producers You to exercise tremendous discipline. There's been a fair amount of M and A which obviously Distracts from drilling and completion. The flip side is the competitive landscape on the service side has tightened up We're not at newbuild economics in most areas of our business.

Speaker 1

And I would say it's a fairly balanced relatively stable business. There's a lot of global macro Economic uncertainty, I think that kind of keeps a lid on things, but we continue to execute. We We continue to remain disciplined in where we invest our owners' capital and we continue to be working hard to Try and execute on good opportunities.

Speaker 4

Okay. Thanks for that. That was it for me. Thanks.

Speaker 1

Thanks, John.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Mr. Halleck for any closing remarks.

Speaker 1

Thanks to everyone for participating in our call. I hope you have a good long weekend and look forward to speaking with you after our Q4. Thank you.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Key Takeaways

  • Quarter consolidated revenue rose 12% and EBITDA increased 6% year-over-year, driven by market share gains from equipment upgrades and improved performance in the Compression and Process Services segment.
  • The Compression and Process Services segment delivered a 28% revenue increase and 81% EBITDA growth, led by strong U.S. fabrication sales and a 10% jump in compression rental fleet utilization.
  • Total Energy exited Q3 with 0 net debt and CAD127.6 million of positive working capital, funding capital investments, debt repayment and shareholder returns entirely from operating cash flow, including Q3 share repurchases of CAD2.3 million.
  • The Board approved a CAD20 million increase to the 2023 capital expenditure budget to expand the compression rental fleet, leveraging major components currently held in inventory.
  • Safety performance improved markedly across all segments, with no lost time incidents recorded during the quarter, supporting operational efficiency and financial results.
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Earnings Conference Call
Total Energy Services Q3 2023
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