Total Energy Services Q2 2023 Earnings Call Transcript

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August 11, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to Total Energy's Second Quarter 2023 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 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, and good morning, and welcome to Total Energy Services' Q2 2023 conference call. Present with me is Yuliya Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the 3 months ended June 30, 2023, and then provide an outlook for our business and open up the phone lines for questions. Yuliya, please go ahead.

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 results, anticipated capital expenditure 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 Total's business and the oil and gas service industry in general. These risks, uncertainties and other 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 ww at w.cira.com. Our discussions during this conference call are qualified with reference to the notes to the financial highlights contained in the news release issued yesterday.

Speaker 2

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 June 30, 2023, represent record Q2 financial results. Underpinning these results were relatively stable industry conditions in all jurisdictions and the deployment of equipment upgraded pursuant to our 2022 capital expenditure program. 2nd quarter consolidated revenue increased 17% on a year over year basis, while EBITDA increased by 5%. Included in Q2 2022 EBITDA was $7,400,000 of contract cancellation revenue in our CPS segment.

Speaker 2

Excluding such contract cancellation revenue, Q2 EBITDA increased 41% on a year over year basis with CPS segment EBITDA adjusted for contract cancellation revenue accounting for 55% of this increase and the RTS segment 40%. Geographically, 47% of 2nd quarter revenue was generated in the United States, 40% in Canada and 13% in Australia as compared to Q2 of 2022, where 26% of consolidated revenue was generated in the United States, 54% in Canada and 21% in Australia. By business segment, Compression and Process Servicing generated 54% of 2nd quarter consolidated revenue, followed by contract drilling services at 26% and Mutual of All Servicing and Rentals and Transportation Services contributing 10%. In comparison, for the Q2 of 2022, CPS segment contributed 52% of consolidated revenue Contract Drilling Servicing, 28% Well Servicing, 13% and the RTS segment contributed 7%. Consolidated 2nd quarter gross margin of 19% was 2 percentage points lower than Q2 2022.

Speaker 2

Excluding the $7,400,000 of CPS contract cancellation revenue received in Q2 2022, 2nd quarter gross margin improved by 2 percentage points compared to 2022. This improvement was driven by improved pricing in all business segments that more than offset cost inflation and the drag on consolidated gross margin due to the increased year over year relative revenue contribution of the Lower Margin CPF segment. Increased drilling activity in Canada was offset with lower activity in Australia in the United States, resulting in 6% year over year decrease in 2nd quarter consolidated operating days in CDS segment. Offsetting lower activity was a 17% increase in consolidated segment revenue per operating day. This resulted in a 10% year over year increase in 2nd quarter CDF segment revenue and 17 and 12% increase in segment EBITDA.

Speaker 2

In Canada, increased activity and market share gains contributed to an 8% year over year increase in 2nd quarter operating days. Price increases, in part due to rig upgrades, resulted in a 19% year over year increase in Q2 Canadian drilling revenue per day, which in turn gave rise to a 29% year over year increase in Canadian drilling revenue. In the United States, 2nd quarter revenue decreased by 7% as a 13% Year over year increase in revenue per operating day was offset by an 18% decrease in operating days arising from modest slowdown in industry activity and the transfer of 1 triple drilling rig to Canada. Despite the revenue decrease, 2nd quarter U. S.

Speaker 2

TDS operating income increased by 3 12% as a result of increased pricing and cost efficiencies. In Australia, operating days decreased as one drilling rig was taken out of service for recertifications and upgrades. This rig returned to operation in July. Reduced operating days were partially offset by a 27% increase in revenue per day, resulting in a 2% decrease in revenue. Lower revenue, combined with crude retention and other costs associated with recertification of 1 drilling rig contributed to a 71 79% decrease in operating income.

Speaker 2

In the RTS segment, improved Canadian industry conditions and meaningful market share gains in the United States contributed to a 7% year over year increase in utilization and a 48% increase in revenue per utilized piece of equipment, which in turn resulted in a 47% increase in revenue. This segment's leverage to high activity levels, given its relatively high fixed cost structure, was demonstrated by a 102% year over year increase in segment's EBITDA and a 10 percentage point increase in EBITDA margin despite significant year over year cost inflation. 2nd quarter Revenue in total CPS segment increased by 22% as compared to 2022. This was due to a significant increase in U. S.

Speaker 2

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 a 44% increase in utilization of compression rental fleet. CPS segment EBITDA for the Q2 of 2022 included $7,400,000 of contract cancellation revenue. Excluding this contract cancellation revenue, 2nd quarter And EBITDA margin increased 64% and 22%, respectively, for 2023 as compared to 2022. The fabrication sales backlog increased to $185,600,000 compared to $181,700,000 backlog at June 30, 2022.

Speaker 2

Sequentially, the quarter end backlog decreased by $41,800,000 as conversion of cloning activity to sales moderated somewhat during the Q2 with no corresponding decrease in production activity. 2nd quarter well servicing segment service hours decreased 13% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs. Partially offsetting reduced activity was a 6% increase in revenue per service hour resulted in an 8% decrease in well servicing revenue. Lower revenue and operating hours in Canada And Australia were partially offset by 27% increase in service sales and a 41% increase in revenue in the United States as our U. S.

Speaker 2

Service rig business expanded its customer base during the Q2 of 2023. Negatively impacting 2nd quarter activity in Australia was the removal of service rig from operations for recertifications and upgrades. Lower activity, additional maintenance costs following the busy winter season in Canada and operating cost inflation that exceeded price increases contributed to a 23% decrease in 2nd quarter segment EBITDA and a 19% decrease in EBITDA margin. From a consolidated perspective, Total Energy's financial position remains very strong. During the Q2 of 2023, Total reduces bank debt by $10,500,000 or 9%, bringing its net debt position to $2,700,000 at June 30, 2023.

Speaker 2

During the second quarter, We repurchased 375,000 common shares under our normal course issuer bid at a cost of $3,300,000 and we currently have $115,000,000 of credit available under $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 3 times and a minimum bank defined EBITDA to interest expense of 3x. At June 30, 2023, The company's CGM bank debt to bank EBITDA ratio was 0.27 and the bank's interest coverage ratio was 29.59x.

Speaker 1

Thank you, Yuliya. We are pleased with our record second quarter results. Such results reflect the continued investment in upgrading our equipment fleet as well as a significant increase in the relative contribution of our RTS segment following several years of restructuring that segment in response to challenging industry conditions in Canada. Despite a moderation in U. S.

Speaker 1

And Australian activity and the normal seasonal slowdown in Canada that was exacerbated by lower well abandonment activity, Total generated $43,900,000 cash flow after changes in noncash working capital items during the Q2 that was used to fund $12,700,000 of capital expenditures, repaid $10,500,000 of bank debt, reduced the number of outstanding common shares by 1% with $3,300,000 of share repurchases and paid $3,200,000 of dividends to our owners. Canadian activity levels gained momentum as we entered the 3rd quarter, and we currently expect continued favorable market conditions in North America and Australia for the remainder of the year provided commodity prices remain relatively stable. Contributing to our constructive outlook for the remainder of 2023 is the reactivation of equipment being upgraded and recertified pursuant to our 2023 capital expenditure budget. Such equipment includes a triple drilling rig relocated to Canada from the U. S.

Speaker 1

And an Australian drilling rig that both returned to service in July following recertification upgrades completed during the Q2. That said, an Australian drilling rig that came off contract in July is currently undergoing routine inspection and maintenance and is expected to return to service in the Q4 of 2023. In direct response to customer demand, we have modestly increased our 2023 capital budget by $6,000,000 to $72,100,000 This increase will be directed towards continued equipment recertification and upgrades. With $42,500,000 of our 2023 capital budget funded to June 30, The remaining $29,600,000 will be funded with cash on hand and cash flow. While industry conditions remain stable and positive.

Speaker 1

Global economic uncertainty and commodity price volatility give rise to caution. In such an environment, we will continue to prudently manage our operations and exercise discipline in the deployment of capital. We continue to be presented with numerous growth opportunities, but necessarily weigh such opportunities against the economics of continuing to pay down debt and repurchasing shares. I would now like to open up the phone lines for any questions.

Operator

Thank you. We'll now begin the question and answer session. Our first question is from Tim Monachello with ATB Capital Markets. Please go

Speaker 3

ahead. Hey, good morning.

Speaker 1

Hey, good morning, Tim.

Speaker 3

I I was just curious, we saw some margin compression, particularly in the CDS segment, And there were some rigs that were sidelined. Obviously, you've got some impacts in Canada just given seasonality. I'm curious how much you think the margin was impacted by rig mobilization and other sort of one time items that might have hit the cost line?

Speaker 1

So certainly relative to the Q1, you're going to have some Contraction at Tanda with the absence of boiler revenue, but overall, the margins were fairly stable on a year over year basis. Definitely, we had some costs associated with relocating the triple from the U. S. To Canada And obviously, no corresponding revenue off that rig. And then typically, spring breakup in all divisions, You tend to have increased maintenance costs, particularly after Q1, which was a fairly busy quarter.

Speaker 1

So you definitely have Some of that seasonal pickup in maintenance expenses, but year over year margins were relatively stable. And So we didn't see anything unusual there. I don't know, Yuli, anything

Speaker 2

Yes, 21% last year, 21% this year in the Q2. So but definitely a little lower than Q1 For sure.

Speaker 3

Yes, but rates have moved a lot higher over the last year, have they not?

Speaker 1

Yes, rates and costs.

Speaker 2

Yes.

Speaker 1

Certainly, lower activity in Australia and the U. S. U. S. Was more macro.

Speaker 1

Australia was When you pull 1 out of 5 rigs out of service, that hits your activity recently hard. But Yes, there wasn't definitely a cost inflation, but recently stable margins. So rate increases have been Offsetting costs, but that's a constant battle.

Speaker 2

And definitely utilization in Q1 of 'twenty three was higher than Q1 of 2022, so that brings a bit relatively more cost for maintenance in breakup season.

Speaker 1

So, yes, no, we don't see anything particularly unusual with the margins in Q2 in CES. Okay.

Speaker 3

I guess on the margin, what are you seeing from a pricing perspective in The North American rig markets.

Speaker 1

I think pricing has stabilized. There are select Areas where you've got some upward bias, but I would say relative to a year ago, you've definitely got the market more stable And I would say more balanced.

Speaker 3

Okay. And then in the CPS segment, it's the Q1 in a long time that we've seen the backlog come down sequentially. Are you seeing a slowing or a tempering of demand from your customers? Or is it more just A higher consumption level in the Q2, and perhaps like an elongation of the period to actually sign up new orders. I think that was mentioned or alluded to in

Speaker 1

the MD and A. Yes. So typically summertime, you tend to get a bit of a breather, just A function of summer holidays, that sort of thing. Again, we had a pretty significant ramp up over the past 4, 5 quarters. You can't go up every quarter.

Speaker 1

I think part of it was Normal seasonality where a year ago, we're coming off such a slow period that it was hard not to increase your backlog. The other thing is you build up a backlog, your delivery time start Going out and you lose some bids on delivery, you lose some bids on pricing. We certainly When you've got a strong backlog, you're not going to cut your pricing just to get work. Bid activity remains strong. So we see a pretty healthy market there.

Speaker 3

So no, you haven't noticed any fundamental change in demand?

Speaker 1

No. Okay.

Operator

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

Speaker 1

Thank you, everyone, for participating in our conference call. I hope you have a great summer and look forward to speaking with you after our Q3. Have a nice weekend.

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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Earnings Conference Call
Total Energy Services Q2 2023
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