Pason Systems Q3 2024 Earnings Call Transcript

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November 8, 2024

There are 6 speakers on the call.

Operator

contents of today's call are predicted 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 describes forward thinking 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. Thank you.

Operator

Good morning. My name is Andrew, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Pason Systems, Inc. 3rd Quarter 2024 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. Celine Boston, CFO, you may begin your conference.

Speaker 1

Thanks, Andrew. Good morning and thank you for attending Pason's 2024 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 will then take questions.

Speaker 1

I'm pleased to report on Pason's Q3 2024 results, which demonstrate our strong competitive position and continued ability to outperform industry drilling activity. As a reminder to listeners, Pason acquired and began consolidating Intelligent Wellhead Systems or IWS on January 1 this year, creating a new completion segment for the company. As such, references made to 2024 will include IWS' financial results, whereas 2023 will not. Saison generated $105,900,000 in revenue in the 3rd quarter, a 14% improvement from the $93,100,000 generated in the Q3 of 2023, despite a 5% reduction in North American industry drilling activity in that same period. I'll start with an overview of segment performance for the quarter.

Speaker 1

Against a challenging industry activity backdrop, particularly in the U. S, Pason's North American drilling business unit generated revenue per industry day of $10.58 a new record level and a 9% increase from the Q3 of 2023. As a result, outpacing the 5% reduction in industry drilling activity, the North American Drilling segment generated revenue of 74.1 dollars in the Q3 of 2024, which was 3% higher than the Q3 of 2023. The segment's cost base remains mostly fixed in nature and saw lower repair expenses in the 3rd quarter, while depreciation and amortization expenses grew year over year with increased capital expenditures recently. Resulting segment gross profit of $45,500,000 in the Q3 of 2024 was 3% higher than the 44,200,000 dollars generated in the Q3 of last year.

Speaker 1

Our International Drilling segment generated $15,300,000 in quarterly revenue, a level consistent with prior year, with stable industry activity and continued strength in our competitive position in international end markets. The segment also carries a mostly fixed cost base and saw slightly higher depreciation and amortization in Q3 of 2024 with resulting gross profit of $7,600,000 compared to $7,900,000 in the Q3 of 2023. Our Completion segment includes results from Intelligent Wellhead Systems, completions technology business that we fully acquired and began consolidating on January 1, 2024. Through very challenging industry conditions and completions in the Q3 of 2024, IWS had 28 active jobs and revenue per IWS day of $4,868 compared to 29 active jobs and revenue per IWS day of $5,108 in the Q2 of this year. The decline quarter over quarter is driven by reductions in completions activity from existing customers with new customer additions offsetting some of these declines.

Speaker 1

Reported revenue for the segment was $12,500,000 Gross profit for the segment of $300,000 represents operating expense investments made for the growth IWS has seen recently along with $5,100,000 in depreciation and amortization expense associated with the property and equipment and intangible assets acquired on January 1, 2024. Energy Toolbase, which is reported within our Solar and Energy Storage segment, generated $3,900,000 in quarterly revenue, a decline of 30% from the 2023 comparative period with the timing on deliveries of control system sales driving the difference year over year. The segment's revenue will continue to fluctuate with timing of these deliveries going forward. Sequentially, Pason's results benefited from the seasonal improvements in Canadian drilling activity coming out of spring breakup and also from a 7% increase in revenue per industry day quarter over quarter. These improvements more than offset the continued decline seen in U.

Speaker 1

S. Drilling and completions activity from Q2 to Q3 and revenue increased by 10% or $10,000,000 from $95,900,000 in the Q2 of 2024 to $105,900,000 in the Q3. Highlighting the fixed cost nature of the business, adjusted EBITDA grew by $11,000,000 quarter over quarter, while revenue grew by $10,000,000 Consolidated adjusted EBITDA in the Q3 of 2024 was $44,100,000 or 41.7 percent of revenue compared to $42,300,000 or 45.4 percent of revenue in the Q3 of 2023. While adjusted EBITDA in absolute dollars highlights the operating leverage of Pason's business on its mostly fixed cost base, a comparison of adjusted EBITDA margin reflects the addition of lower margin revenue from IWS in 2024 given its current state of maturity and growth. We will continue to make the necessary investments in our cost base to deliver on further revenue growth and create opportunities for long term free cash flow generation.

Speaker 1

Depreciation and amortization for the company has increased from $7,000,000 in the Q3 2023 to $13,700,000 in the current quarter. This increase is attributable to higher levels of capital expenditures in recent quarters with growth related investments within our newly acquired completion segment, along with the depreciation and amortization associated with the fixed asset and intangibles capitalized as part of the IWS acquisition on January 1 this year. Further, as a result of the lower average cash balances during the current quarter and a declining interest rate environment in Canada, Pason saw lower levels of interest income in the Q3 of 2024 in comparison to the prior year comparative period. Resulting net income attributable to Pason for the 3 months ended September 30, 2024 was $24,200,000 or $0.30 per share compared to $27,700,000 or $0.35 per share generated in the Q3 of 2023. Our balance sheet remains strong and coupled with our free cash flow generation allows us to make growth related investments while returning meaningful levels of cash to shareholders.

Speaker 1

Net capital expenditures in the Q3 of 2024 totaled $13,700,000 which included the addition of capital expenditures for IWS' business as we make investments to build out their fleet of rental assets. Free cash flow in the Q3 of 2024 was $16,700,000 compared to $25,000,000 in Q3 of 2023. With this free cash flow, we returned $11,300,000 to shareholders our quarterly dividend and share repurchase program and ended the quarter with total cash, including short term investments, of $73,900,000 and no interest bearing debt. In summary, we continue to be well positioned for growth with our established and resilient position within drilling and our growing position in completions and solar and energy storage. I will now turn the call over to John for his comments on our outlook.

Speaker 2

Thank you, Celine. Our financial reports for the Q3 of 20 24 demonstrate the resilience of our business. Consolidated revenue in the quarter was 14% higher than the prior year period despite North American land drilling activity being down 5% over the same period. Our North American Drilling segment continues to hold a strong competitive position evidenced by revenue per industry day of $10.58 in the quarter, up 9% compared to the Q3 of 2023. In our International Drilling segment, revenue was unchanged from the prior year period.

Speaker 2

Our completions business posted revenue of $12,500,000 in the quarter with the sequential revenue decline mirroring the decline in the reported number of active frac spreads in the quarter. Revenue per IWS Day remained strong at $4,868 While IWS has been disproportionately exposed to the effects of a challenging natural gas market and significant M and A activity in the E and P sector, IWS continues to enjoy high retention rates of existing customers while adding new customers. Given its stage of development, IWS is much more sensitive to customer mix and changes in the activity of specific customers than our drilling related business where our financial results are much more strongly correlated to overall industry activity given our substantial market share. ETB posted revenue of $3,900,000 in the 3rd quarter, up 24% sequentially from the 2nd quarter, driven primarily by the sales of additional control systems. As a reminder, quarterly revenue for ETB will fluctuate as a result of timing of control system deliveries, and the year over year decline in ETB reflects the higher number of deliveries in the Q3 of 2023.

Speaker 2

Energy Toolbase continues to see strong growth in its bookings and its pipeline of sales opportunities for energy management control systems. Pason generated $44,000,000 in adjusted EBITDA in the 3rd quarter. Sequentially, adjusted EBITDA increased by $11,000,000 while revenue increased by $10,000,000 We expect that North American land drilling activity will remain near current levels in the remainder of 2024 before beginning to increase in 2025 with completions activity following a similar trajectory. While Pason would benefit from growing North American land drilling activity, our ability to deliver meaningful growth and strong financial results is not fully dependent on higher activity levels. As customers continue to deploy data automation and analytics technologies in their operations, our drilling and completions related businesses stand to benefit.

Speaker 2

Our innovative new drilling mud analyzer provides continuous real time readings of critical drilling mud parameters and we are seeing higher adoption of our automation products. Our well site automation products provide valuable safety and efficiency benefits for customers in their completions operations. And we are working closely with customers to develop compelling data aggregation and management solutions for the completions market, benefiting both operators and service companies. The gains that we have made in increasing North American revenue per Industry Day in our drilling segment and in expanding our customer base while maintaining a strong revenue per IWS day in our completions business should translate into continued outperformance against industry conditions. Our demonstrated ability to outperform the underlying industry activity, coupled with our high operating leverage, should position us to deliver strong results if and when industry activity improves.

Speaker 2

Our priorities with respect to capital allocation remain focused on pursuing attractive growth opportunities, while returning meaningful capital to shareholders. We will continue to pursue disciplined returns over time through our regular quarterly dividend, which we are maintaining at $0.13 per share. Outside of the regular dividend, our primary focus remains making the necessary investments to position ourselves for higher levels of free cash flow in our drilling and completions related businesses. We expect capital expenditures in 2024 to total up to $70,000,000 down from our previous guidance of between $75,000,000 $80,000,000 In 2025, we expect to spend approximately $65,000,000 in capital expenditures. We evaluate our capital program with a focus on increasing revenue, generating free cash flow and creating value for shareholders over time rather than simply in response to prevailing near term industry conditions.

Speaker 2

Our balance sheet remains strong. At September 30, we had $74,000,000 in total cash including short term investments and positive working capital of $118,100,000 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 outside of oil and gas drilling, including completions and solar and energy storage and to return meaningful capital to shareholders. And we would now be happy to take any questions that you might have.

Speaker 3

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question is from Keith Mackey from RBC. Please go ahead.

Speaker 4

Hey, thanks and good morning.

Speaker 2

Good morning, Keith.

Speaker 1

Good morning.

Speaker 4

Good morning. First, I wanted to start out on IWS. I know the growth hasn't quite been as strong as we would have thought at the beginning of the year and certainly the market has played into that. But John, your comment around the near term activity remaining close to where we are now. Just curious where your confidence in that statement comes from?

Speaker 4

Certainly, we're hearing a lot about E and T budget exhaustion around the Thanksgiving timeframe in the U. S. So just curious for some comments around that. And the second part of the question is the longer term potential for IWS growth on the completion side. Are you still confident that, that business or that market can ultimately be the size of your drilling business?

Speaker 2

Thanks, Keith. So I'll take those questions in order. I think for the remainder of the year, I think your comments around the impact of budget exhaustion on the completions market as it relates to the drilling market are probably somewhat consistent with how we would see it. So I'd say there probably is a chance that the completions market is a little softer than drilling would be in the remainder of the year, but we don't expect it will be significantly disconnected from what we would see on the drilling side. As it relates to our confidence in the IWS business, our confidence is actually probably higher today than it might have been historically in terms of the opportunities for that business.

Speaker 2

Your point is quite consistent with how we would see it in terms of 2024. The second half has been a little slower than we would have originally anticipated. We had anticipated that existing customers would maintain or maybe increase their activity levels and they would layer on new customers. What's played out, of course, is that existing customers have slowed their activity a little bit as they've gone through M and A activity and through some effects of the natural gas environment. And so we feel quite confident going into 2025 that some of that work comes back as people sort of complete their M and A transactions, and we're quite encouraged by the opportunities we're seeing with additional customers in that market.

Speaker 2

So we're quite confident in that business. And it's a question of time as we think we've said previously, it's much more of a question around the timing of the revenue as opposed to confidence in the deliverability of the revenue.

Speaker 4

Okay. Copy that. One more on general drilling and completion efficiencies, and you touched a little bit on that in your prepared remarks John. But certainly we're hearing more and more about E and Ps looking to get more efficient and that's historically been seen as a negative for the service industry as it potentially shrinks the market. So for your business today, John, where do you see the drilling and completion opportunity or drilling and completion efficiencies on an opportunity versus threat basis?

Speaker 4

And any comments you can give as to why would also be helpful.

Speaker 2

Yes, sure. I think maybe this comment is about the drilling market a number of years ago, and so maybe it applies in the completions market slightly more go forward. But I think when we look at the question of efficiency as a day rate business at its face that appears to be more of a threat than opportunity. But what we've, of course, discovered in the experience in the drilling side and the way we're seeing the completion side starting to unfold is that a lot of those efficiency gains are actually coming from increased use of technology and those technologies rely on data. And so our ability to participate in the efficiency and to generate revenue opportunities as a driver of efficiency rather than simply being a victim of efficiency is certainly how it's played out on the drilling side.

Speaker 2

And we think the same opportunities are going to show up on the completion side where the use of technology is in the much earlier innings than what we see in drilling today.

Speaker 4

Okay. Thank you. I'll leave it there.

Speaker 2

Perfect. Thanks, Keith.

Speaker 3

Your next question is from John Gibson from BMO Capital Markets. Please go ahead.

Speaker 5

Good morning and congrats on the nice quarter here. My one question is on revenue per day. Obviously, nice to see you reach a new record. Is it being driven by product rollouts or pricing or a combination of both? I guess, what are the main drivers of it?

Speaker 5

And then as we think into 2025, I know you've talked down the growth expectation a little bit, but like why I guess what's stopping it from growing it up the same cliff into next year?

Speaker 2

So I think your question, if I interpret it correctly, John, relates more to the revenue per industry day on the drilling side. That has been much more from the adoption of products, more so than pricing. Pricing has had a been a contributing factor, but it's been much more on the adoption of additional products. It goes a little bit back to the earlier question there around the increasing use of technology that requires data helps us and people are using more of the products. Now because price is one of the factors that does contribute, our experience has always been that it's pricing is a little bit easier to affect in stronger markets as opposed to markets that are flat to softer.

Speaker 2

And so the opportunities on the pricing side might be a little bit more challenged in the current environment, and that will play out over run rate effects as you go into 2025. We still see growing demand for products in terms of adoption on the revenue per Industry Day side contribution. So we do think it continues to grow into next year, but it's probably going to even be more on the adoption side than kind of a mix of the 2 in 2025 than we would have seen in 2024.

Speaker 5

I guess if we extrapolate then, it seems like the new products you're rolling out are at higher day rates on average than your existing set. I guess, how do we think about that longer term impacting the overall number?

Speaker 2

Well, clearly, one of the products that we talked about a reasonable amount is the MUD analyzer, which is a much higher day rate than many of our other products. So as you start to see increasing adoption of the MUD analyzer, it doesn't take significant adoption rates to make an impact on revenue per Industry Day.

Speaker 1

Yes, John, you would have heard us previously say that over the last decade, we've delivered a 6% to 7% CAGR on that revenue per industry day metric. And that's the level that we feel quite confident on being able to deliver going forward. And I would say nothing's changed in that context.

Speaker 5

Okay, great. I appreciate the comments and I'll turn it back.

Speaker 2

Thanks, John.

Speaker 3

Thank you. Ladies and gentlemen, Your next question is from Keith Mackey from RBC. Please go ahead.

Speaker 2

Keith, we're not hearing you if you've got a question.

Speaker 4

Sorry, I was muted. Hi, Steve. I'm back. Just one more question on the MUD analyzer. What sort of contribution might that product have had in the revenue per industry day growth on the drilling side year over year?

Speaker 4

And can you just talk a little bit more about the rollout and adoption for that product over the next year? What does it look like? What are some of the maybe key milestones?

Speaker 2

Sure. Happy to. So it wouldn't have had a very significant impact on the revenue per Industry Day in this quarter. Obviously, we do have some revenue contribution from that product in the quarter. And so it's not no contribution, but it's not particularly significant at this stage.

Speaker 2

It's probably useful to remind folks, Keith, that as we think about the Money Analyzer, you almost need to think about we have a technology partner in that product and then there's kind of all other customers. The technology partner is very motivated to have the And so that will certainly drive additional adoption of units. Now that comes at a lower data rate, at least for a period of time under kind of the arrangement we have as a technology partnership. And on the other side, I'll say all other customers, we customers that we're working with there. Now, I would say businesses have 3 problems, revenues never high enough, costs never low enough and progress is never fast enough, right?

Speaker 2

So within this, the mud analyzers, the question is probably in Category 3, the progress question. And I would say there, one of the discoveries as we rolled out is that there's differences between the completions operations and some of the other companies related to or relative to the way the technology partner might do things. And so as we discover some of those differences, it does require some adaptation of the product. It does require some additional training of personnel companies that may be less familiar with the technology. We are standing up some additional support to help customers who are using the technology for the first time understand how to fully utilize both the technology and the data comes from it.

Speaker 2

And we're spending a bit of money to really adapt the technology or the mine analyzer to cold climates because we've had some interest to go into some other geographies with the mine analyzer and it does require some adaptation for cold climates as well.

Speaker 4

Got it. And just how is the progress going on the cold climate adoption? Is that something you might be able to roll out in the next couple of quarters?

Speaker 2

Yes. So from a technical perspective, it's certainly kind of established how we do it. It's more of a process of now building them out and that building is happening now. So we do have units that are available for cold climates. We'll continue to increase the number that are available, but they will certainly be available for deployments in short order, which of course is timely because cold climate and certainly where we're coming from today in Calgary is not that far away.

Speaker 2

So we need to be ready for that.

Speaker 4

Okay. Thanks very much.

Speaker 2

Yes. Thanks,

Speaker 3

There are no further questions at this time. Please proceed with closing remarks.

Speaker 2

Thanks very much, Andrew. And thanks to all those who have joined the call today. We certainly appreciate your interest and your questions. If you have any other further questions, don't hesitate to reach out to Celine or myself. And we'll look forward to talking to you at the end of the Q4 and with our full year results at the end of February.

Speaker 2

Thanks very much for your time.

Speaker 3

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Key Takeaways

  • In Q3 2024, Pason delivered 14% revenue growth to $105.9 M despite a 5% decline in North American drilling activity, led by record North American drilling revenue per industry day of $10.58 (+9% YoY).
  • The newly consolidated completions segment (IWS) generated $12.5 M in revenue but only $0.3 M in gross profit due to growth investments and $5.1 M of depreciation and amortization from the IWS acquisition.
  • Consolidated adjusted EBITDA rose to $44.1 M (41.7% of revenue), up $11 M sequentially, highlighting Pason’s operating leverage under a mostly fixed cost base, though margin was compressed by lower‐margin IWS revenue.
  • Pason reported net income of $24.2 M ($0.30/share) and generated $16.7 M of free cash flow, returning $11.3 M to shareholders via dividends and buybacks, ending the quarter with $73.9 M in cash and no debt.
  • Management expects North American drilling and completions activity to stabilize in late 2024 and improve in 2025, supported by continued investments in automation and data technologies like the mud analyzer to sustain market outperformance.
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Earnings Conference Call
Pason Systems Q3 2024
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