Total Energy Services Q1 2023 Earnings Call Transcript

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May 12, 2023

Key Takeaways

  • Total Energy delivered record Q1 2023 results, with consolidated revenue up 42% YoY, a 26% gross margin (up 6 ppts) and substantial increases in EBITDA and net income.
  • Compression & Process Servicing segment saw a 68% YoY revenue gain and 287% jump in EBITDA, supported by a 26% increase in fabrication backlog and 50% higher equipment utilization.
  • Rentals & Transportation Services revenue rose 59% YoY and segment EBITDA climbed 73%, as a 12% uptick in equipment utilization combined with 41% higher revenue per unit.
  • Strong balance sheet moves included a $5.5 M bank debt reduction, net debt of $11.4 M at quarter-end, and repurchase of 975,000 shares ($8 M), cutting share count by 2.8% year-to-date.
  • Geographical mix shifted with the U.S. now generating 56% of revenue (versus Canada 33% and Australia 11%), reflecting growing U.S. industry activity and equipment deployments.
AI Generated. May Contain Errors.
Earnings Conference Call
Total Energy Services Q1 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to Total Energy's First Quarter Conference Call and Webcast. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Daniel Halleck, President and CEO of Total Energy Services Inc.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning. Welcome to Total Energy Services' Q1 2023 conference call. Present with me is Yuliya Gorbach, with Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for

Speaker 2

and Investor Trends and projected activity in the oil and gas industry. 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 and Total's Businesses and Oil and Gas Services Industry in general. These risks, uncertainties and other The factors are described under the 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 at www. At tedar.com. Our discussions during this conference call are qualified with reference to note to the financial highlights contained in the news release issued yesterday.

Speaker 2

Unless otherwise All financial information in this conference call is presented in Canadian dollars. Total Energy's Financial results for the 3 months ended March 31, 2023, represent record quarterly results. Underpinning our Q1 results was improved North American industry conditions in all business segments and the deployment of equipment upgraded pursuant to our 2022 capital expenditure program. 1st quarter consolidated revenue increased 42% on a year over year basis and continued to substantial year over year Increases in cash flow, EBITDA and net income. Geographically, 56% of first quarter revenue was generated in the United States, 33% in Canada and 11% in Australia.

Speaker 2

This represents the 2nd consecutive quarter that the United States has set parts Canada as the largest contributor to consolidated revenue. By business segment, compression and process servicing generated 43% of the 1st quarter Consolidated revenue followed by contract drilling services at 32%, well servicing at 14% and Rentals and Transportation Services at 11%. In comparison, for the Q1 of 2022, the CPS segment Contributed 36% of consolidated revenue, contact drilling services 37% well servicing 17% and the RTS segment contributed 10%. Consolidated 1st quarter gross margin of 26% was 6 percentage points higher than Q1 of 2022. This 30% improvement was driven by improved margins In all business segments, there was sufficient to more than offset the drag on consolidated gross margin arising from the increased year over year Registration expenses for the Q1 of 2023 increased by $2,600,000 or 30% compared to Q1 2022 as higher profit based employee compensation was recognized.

Speaker 2

Increased drilling activity in Canada and Stable activity in Australia offset somewhat lower activity in the United States, resulting in a 7 Year over year increase in 1st quarter consolidated operating days in CES segment. This, combined with increased pricing in all jurisdictions, resulted in a 22% Year over year increase in 1st quarter CBS segment revenue, a 77% increase in segment EBITDA and 47% increase in segment EBITDA margin. In Canada, increased activity and market share gains contributed to an 18% year over year increase in Q1 operating days. Price increases, in part due to rig upgrades, resulted in a 10% year over year increase In Q1, Canadian drilling revenue per day, which in turn gave rise to a 30% Year over year increase in Canadian Drilling revenue and an 11 fold increase in operating income. In the United States, 1st quarter revenue increased by 12% as 33% year over year increase in revenue per operating day in various customers' drilling programs.

Speaker 2

Despite the revenue increase, cost inflation and low activity contributed to year over year In the Q1 U. S. CDS operating income. In Australia, consistent with 1st quarter drilling rig utilization and a 15% increase in revenue per operating day contributed to a 15% year over year revenue increase and a 27% increase in operating income. The RTS segment also benefited from improved North American industry conditions, A 12% year over year improvement in 1st quarter equipment utilization, combined with 41% increase in revenue per utilized piece of Equipment resulted in a 59% year over year increase in 1st quarter revenue in the RTS segment.

Speaker 2

This segment's leverage to high activity levels, given its relatively high fixed cost structure, was demonstrated by 73% year over year increase in segment EBITDA and a 4 percentage point increase in EBITDA margin despite significant year over year cost inflation. 1st quarter revenue in total CPS segment increased by 68% as compared to 2022. This segment saw the 10th consecutive quarterly increase to its fabrication sales backlog, which was 26% higher on a year over year basis and 4% higher on a sequential quarterly basis. Increased equipment overhaul activity provided tailwinds for CPS Segment's Parts and Service and Rental Businesses Lines. With 1st quarter utilization of the compression equipment fleet increasing by 50% as compared to 2022.

Speaker 2

CPS segment EBITDA for the Q1 of 2023 increased by 2 87% on a year over year basis, with improved pricing and increased activity driving 100% 117% year over year increase in 1st quarter EBITDA margin despite significant cost inflation. The Well Servicing segment saw 1st quarter revenue increased by 19 percent as compared to 2022, underpinned by an 8% increase in consolidated service hours an 11% increase in revenue per service hour. Increased service hours in North America were somewhat offset by a decrease in Australia as one active rig was taken out of service for recertification. Improved North American pricing and utilization drove a 26% year over year increase in 1st quarter segment EBITDA and the modest increase in segment EBITDA margin. From a consolidated perspective, Total Energy's financial position remains very strong.

Speaker 2

During the Q1 of 2023, Total reduced its bank debt by $5,500,000 or 5% And repurchased 975,000 common shares under its normal course issuer bid at a cost of $8,000,000 Total net debt position at March 31, 2023 was $11,400,000 On April 12, 2023, we extended the term of our syndicated Credit Facility till November 10, 2026. Given the significant repayment of debt Since our last renewal and in order to reduce costs, we requested a $50,000,000 reduction to the facility limit, which is now $170,000,000 Including an undrawn $5,000,000 operating facility maintained by a subsidiary. Total currently has $105,000,000 of credit available under with $175,000,000 of Existing Credit Facilities. Total Energy's bank covenants consist of maximum senior debt to trailing 12 month bank defined EBITDA of 3x and a minimum bank defined EBITDA to interest expense of 3x. At March 31, 2023, The company's senior bank to bank EBITDA ratio was 0.36 and the bank interest coverage ratio was 30.59x.

Speaker 1

Thank you, Yuliya. We are pleased with our Q1 results. As Yuliya mentioned, Not only do they represent record quarterly results for Total, but they also reflect the success we have had in growing our business in the United States, particularly in our CPS and RTS segments. That said, Canada remains an important market to us And we continue to see opportunities to grow our market share following several years of industry contraction. For example, we recently contracted 1 Our AC triples with a Canadian producer.

Speaker 1

This rig has been moved to Canada from the U. S. And is currently being recertified and retrofitted for a drilling program scheduled to commence in June. In response to continued strong demand for our high spec doubles and Singles in Canada as well as for certain equipment in our RTS and Well Servicing segments, our Board of Directors has upgraded upgrade and maintenance costs arising from the sustained increase in demand for such equipment that we are experiencing. A portion will also be directed towards new equipment purchases such as drill pipe.

Speaker 1

With $30,300,000 of our increased 2023 capital budget having been funded during the Q1. The remaining $35,800,000 Will be funded with cash on hand and cash flow. While industry conditions remain stable and positive, Global economic uncertainty and commodity price volatility give rise to caution. In such environment, we will continue prudently manage our balance sheet and take advantage of depressed public market energy valuations by repurchasing our shares. From January 1, 2023 to today, we have reduced our share count by 1,150 1,000 shares or 2.8 percent.

Speaker 1

We also continue to identify and evaluate numerous growth opportunities, But necessarily weigh such opportunities against the economics of continuing to repurchase our shares at a historically low valuation. Finally, I would like to invite you to attend our Annual General Meeting of Shareholders that is being held this coming Tuesday, May 16, at 10 a. M. At the Calgary Petroleum Club. I would now like to open up the phone lines for any

Operator

The first question comes from Cole Pereira with Stifel. Please go ahead.

Speaker 3

Hi, good morning all. Sorry, the compression business looks really good this quarter. Can you obviously, the backlog is strong, but can you just share any Details about how you kind of see that business evolving throughout the remainder of the year in terms of financial performance?

Speaker 1

So as we mentioned in our Q4 call, we expected margins to improve and that group delivered and They continue to see strong activity and good visibility for the remainder of the year. Again, That's a business that I think is being driven as much by long term infrastructure investment as it is to short term Gas prices. And so again, our backlog there gives us pretty good visibility for the remainder of the year and We'll continue to try and execute and improve the profitability.

Speaker 3

Got it. And just on the AC Triple rig move, any further details you can offer on How much the upgrade will cost and the duration of the contract?

Speaker 1

So it's more retrofitting as opposed to upgrade. The rig was in Good shape, but obviously when you bring a rig from the U. S. To Canada, you've got to certify it for Canadian requirements As well as things like changing gauges from Imperial to Metric and equipping it for winter work, So plumbing and boilers and all that kind of stuff. So really no upgrades.

Speaker 1

It's a very good rig, but we We had an opportunity to deploy it with a very good operator in Canada and commence work here in June.

Speaker 3

Got it. And then just on the Canadian drilling front, can you talk about what you're seeing for the second half of the year In terms of activity, where pricing might be going, etcetera?

Speaker 1

So we're in the middle of breakup right now, but current indications are we're going to have a Patience are we're going to have a very strong post breakup in Canada.

Speaker 3

Got it. Okay. That's all for me. Thanks. I'll turn it back.

Speaker 1

Thanks, Cole.

Operator

The next question comes from Joseph Schachter with Schachter Energy Research. Please go ahead.

Speaker 4

Good morning, Dan and Julio. Congratulations on the quarter. The market share likes what It's pushing up 9% on the day right now. So they love the numbers. On On the compression adding to a little on that, are you starting to see the equipment sizes that our people are buying For compression and for the facilities that they're going to be building in Northeast BC and Northwest Alberta for LNG takeaway.

Speaker 4

What sizes are you building? And are you building the biggest sizes that may be needed by Co Steel TransCanada and others or is that a different business run by larger entities?

Speaker 1

Joseph, basically we will build this big package For gas driven and electric driven compression as anyone will build, where we generally don't play is turbine Driven compressors, that's a very, very niche market. But anything with gas drive or electric drive, We'll build the biggest that's out there. And so on the gas driven side, you've got the Cat 36 16 is the biggest engine. We're a big player in that market. Electric drive, we built North of 10,000 horsepower packages.

Speaker 1

So, we compete, I would suggest, in Well over 90% of the market. And so we'll build pretty much anything there.

Speaker 4

Are you starting to see long term delivery requirements into 2024, 2025, 2026 For LNG takeaway from any of the potential projects that everybody is talking about on the West

Speaker 1

Currently, a big, big, big portion of our business is U. S. Infrastructure. My sense is there's going to be a round in Canada coming. We're obviously playing in it, but I would say the immediate term is more driven South of the border.

Speaker 1

The lead times on, for example, cat engines are North of the year, so we've had to step up our inventory investments to Put ourselves in a good position to compete as increased Canadian activity occurs over the next several Quarters as we expect, but honestly, I would say most of our current Q1 activity is demonstrated by our revenue mix on a consolidated basis north of 50% coming out of the U. S. A lot of that Driven by U. S. Compression Deliveries.

Speaker 1

Okay, good.

Speaker 4

Is there any a number of companies that are involved in activity in Australia have talked about difficult times there, No real improvement in their profitability. Can you talk about when you see Australia Being a more generous contributor and what will it take to get

Speaker 5

there? Yes. So we've seen

Speaker 1

a bit of the same. I think over the last Australia seems to lag North America both up and down. So 3, 4 years ago, It definitely contribute above its weight as North America was going down and it's kind of lag. But our drilling group Had a good quarter there. We've over the last year diversified our customer base quite a bit.

Speaker 1

As you know, we've got a 6th rig that will be heading over there in Q1 of next year. And On the service rig side, definitely seen some pullback there a bit. Part of it is just customers trying to catch up with programs and a bit Choppy with weather, but weather is always an issue in Australia. But Yes. No, Australia is a good market for us.

Speaker 1

We look forward to the next year. I We position ourselves to have a good market share in both drilling and well servicing and I'm optimistic over the next couple of years.

Speaker 4

Lastly for me, you mentioned M and A Activity not really providing the returns versus buying back the stock. Are you contemplating given the great financial

Speaker 1

I would defer to the Board as they consider that in due course. But certainly, we're as As you know, Joseph, we were committed to shareholder returns, and I think our Board is always looking at ways to do that in a sustainable manner And also get the biggest bang for our buck.

Speaker 4

Yes. Yes. Well, thanks very much and congratulations

Speaker 1

Great. Thank you, Joseph.

Operator

Please go ahead.

Speaker 6

Yes. Thanks. Good morning, everyone.

Speaker 1

Good morning, John. Good morning.

Speaker 6

So most of my questions were answered here. But one big A picture question for you here. I mean with the Blueberry agreement and LNG moving closer to 1st Did you get the sense that maybe Canada could have a bit of a leg up on the U. S. In some regards?

Speaker 6

And in that light, Your relocation, could there be more to come in terms of assets coming back to Canada?

Speaker 1

Well, I think in our year end conference call, I recall someone asking a question about demand for our heavy end. And I think my question was where are the rigs going to come from? Well, I I know now where one of them is coming from.

Speaker 3

The reality

Speaker 1

is BC definitely on a year over year basis Has increased dramatically. And I think if you look at the Canadian well count, March actually had higher activity than January February and a lot of that increase was BC. I think the moratorium on well licensing in BC really has put that area a bit under the gun. And your drilling is your lead indicator and to I think Joseph's question, compression always follows Drilling and we're reasonably bullish on Canada here in the next while. Got it.

Speaker 1

That's terrific color.

Speaker 6

I appreciate it. And that's it for me. Thank you.

Speaker 1

Thanks,

Operator

The next Question comes from Tim Monnessyllo with ETB Capital Markets. Please go ahead.

Speaker 2

Hey, good

Speaker 1

morning. Good morning, Tim.

Speaker 5

I just wanted to focus in on the RTS segment. It probably doesn't get enough airtime. I guess Q4, Q1, we've seen a step change in revenue From the first half of twenty twenty two. And the margins are really strong in Q1 here. How should we think about demand going forward?

Speaker 5

Is there anything one time in nature? Is this just sort of A combination of efforts to get equipment to the right markets over the last through 2022 that's starting to come to fruition now.

Speaker 1

So sorry, was that RTS, Tim? Yes. Okay. Yes, no, I think, First of all, that segment historically in Canada has been much larger. We've had a rough 7 years in Canada really since 2015.

Speaker 1

And so we've spent a lot of time and effort Rationalizing the cost structure and time and expense to bring Equipment to seed our U. S. Operations. Our utilizations are steadily creeping up And we continue to see that provided we have stable industry conditions. I think the biggest driver we're going to see over the next year There are a lot of entities leaving the market.

Speaker 1

It's been tough. And as much Demand increases will help drive that business. I think equally if not more so will be contraction in supply. And so we're long term thinkers. It's been tough.

Speaker 1

We've had to Weather some pretty tough years there, but we're starting to get a payback and I'm optimistic that we'll continue to improve the business there, including by Prove the business there, including by increasing market share. So we'll see. But again, Pleased with the direction it's going and it's been a tough many years, but we're going in the right direction. It's about the high fixed cost structure and so you just need to get that utilization up and get the pricing up.

Speaker 5

Has there been any change in marketing strategy or anything in Canada? Because the revenue has been

Speaker 1

It was

Speaker 5

really strong in Q1. Outpaced the growth in industry activity on a year over year basis. So Is there anything more to it than just?

Speaker 1

No. Just do a good job for your customers, give Good quality equipment. There's a lot of It seems like a simple business, but there's a lot of moving parts and you've got to deliver. The last thing your customers want is a frac being held Because you've got improperly serviced tanks. So we've always committed to do a good job.

Speaker 1

We declined business in tougher times where it didn't make sense and we weren't prepared to wear our equipment out for nothing. And so now we're starting to get a benefit of it. There were competitors that chose to work at prices that We believe weren't sustainable and some of them are gone and more are leaving. And it's a capital intensive business as well. And To wear your equipment out is for no money is just not our way and we've tried to avoid that as best we can.

Speaker 5

Okay. The Australian A rates in the Drilling segment were up pretty strongly from 2022 levels. Is that just the absence of weather related impacts and Standby.

Speaker 1

Partly that, yes, less standby. But also we upgraded 2 rigs. And so you got the full impact of that. And we also there's been some general price Increases in that market as well. Okay.

Speaker 5

And then good to see in well servicing business that rates are continuing to improve. Do you expect that to continue to move in the right direction or are we starting to reach a stabilization?

Speaker 1

I think breakups are always a time where everyone takes a deep breath. I don't really you don't have a lot of clarity or Visibility in breakup in spot market priced businesses. And so I think Generally, we look to see where we're at post breakup and that'll give us a better indication of pricing. But I would say Our visibility obviously in compression is strongest given the nature of the contracts There, drilling, we're seeing good visibility post breakup and typically service rigs will follow Your drilling rigs.

Speaker 5

Okay. That's all for me. Thanks for the time.

Speaker 1

Thanks,

Operator

Tim. This concludes the question and answer session. I I would like to turn the conference back over to Mr. Howick for any closing remarks. Please go ahead.

Speaker 1

Thank you all for participating in our conference call, And I look forward to seeing some of you at our AGM next week. Have a good weekend.

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