Total Energy Services Q2 2024 Earnings Call Transcript

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August 9, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Total Energy's 2nd Quarter 2024 Results 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 the opportunity to ask questions.

Operator

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

Speaker 1

Thank you. Good morning and welcome to Total's Q2 2024 conference call. Present with me is Yuliya Gorbach, our Vice President Finance and CFO. We will review with you Total's financial and operating highlights for the 3 months ended June 30, 2024. We will then provide an outlook for our business and open up the phone lines for any questions.

Speaker 1

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 businesses and the Oil and Gas Services 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 on Canadian Provincial Securities Authorities that are available to the public at www.sirapplus. Ca.

Speaker 2

Our discussions during this conference call are qualified with 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 June 30, 2024, represent record 2nd quarter financial results. Relatively stable industry conditions in Canada and Australia, continued strong demand in North America for compression and process process equipment and the acquisition of Saxon Energy Services in March more than offset a year over year decline in U. S.

Speaker 2

Drilling activity. Consolidated revenue for the Q2 of 2024 was 2% higher compared to Q2 2023. The addition of Saks in Australia, increased compression rental revenue in the CPS segment following the addition of new rental units in the first quarter and effective cost management contributed to a 24% increase in 2nd quarter EBITDA as compared to 2023. Geographically, 46% of second quarter revenue was generated in the United States, 36% in Canada and 18% in Australia as compared to Q2 of 2023 when 47% of consolidated revenue was generated in the United States, 40% in Canada and 13% in Australia. By business segment, the CPS segment contributed 51% of 2nd quarter consolidated revenue, followed by the Drilling segment at 32%, well servicing at 9% and the RTS segment at 8%.

Speaker 2

In comparison, for the Q2 of 2023, the CPS segment generated 54% of 2nd quarter consolidated revenue, followed by contract drilling services at 26%, and each of well servicing rentals and transportation services contributing 10%. 2nd quarter consolidated margin was 23% as compared to 19% for the prior year. Margin improvement in CDS and CPS segments more than offset a decrease in the Well Servicing segment. As compared to 2023, the CDS segment saw a 2nd quarter revenue increase by 25% and EBITDA by 47%. Underpinning this improvement was stable industry conditions in Canada, cost management in the United States and the acquisition of Saxon on March 7, 2024, in Australia.

Speaker 2

Canadian drilling activity and financial results for the Q2 of 2024 were consistent with 2023. In the United States, efficient operational and cost management more than offset the 39% year over year decrease in 2nd quarter operating days, such that 2nd quarter operating income increased by 9% as compared to 2023. In Australia, 2nd quarter operating days more than doubled following the acquisition of Saxon on March 7, 2024. The addition of Saxon's deeper rig fleet resulted in a 32% year over year increase in Australian Q2 revenue per operating day, which was also the primary reason for a 19% year over year increase in the 2nd quarter consolidated CDF segment revenue per operating day. Revenue in the RTF segment decreased compared to Q2 of 2023 as a result of lower industry activity in the U.

Speaker 2

S. A modest increase in revenue per utilized piece of rental equipment mitigated the negative impact of lower equipment utilization in the segment's EBITDA given this segment's relatively high fixed cost structure. 2nd quarter revenue in total CPS segment decreased slightly as compared to 2023 due to increased demand for rental equipment in the United States. The deployment of newly constructed rental units late in the Q1 and into the Q2 resulted in a 15% increase in rental fleet utilization in the United States. This increased rental activity, combined with improved fabrication sales margins and increased parts and service businesses, resulted in a 42% year over year increase in 2nd quarter CPA segment EBITDA and a a 50 8 basis point increase in EBITDA margin.

Speaker 2

The quarter end fabrication sales backlog increased to $204,600,000 compared to $185,600,000 backlog at June 30, 2023. Sequentially, the quarter end sales backlog increased by $18,900,000 during the Q2 of 2024. 2nd quarter well servicing segment utilization decreased 20% compared to prior year quarter due to lower activity in all jurisdictions, particularly in the United States as a result of lower industry activity that was due in part to a significant customer consolidation. Price increases in Australia following the completion of rig upgrades more than offset weaker pricing in the United States, resulting in a 5% increase in the segment's revenue per operating hour. However, this increase was not enough to offset the decrease in service hours such that segment revenue decreased by 16% and the segment EBITDA by 27% compared to the Q2 of 2023.

Speaker 2

From a consolidated perspective, Total Energy's financial position remains very strong. At June 30, 2024, Total Energy had CAD71.8 million of positive working capital, including CAD24.8 million of cash. Working capital decreased from December 31, 2023, as CAD42 1,000,000 of mortgage debt during April 2025 became current during the Q2 of 2024. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months, bank defined EBITDA of 3x and the minimum bank defined EBITDA to interest expense of 3x. At June 30, 2024, the company's senior bank debt to bank EBITDA ratio was 0.45 and the bank interest coverage ratio was 10 point 17 times, excluding $10,500,000 of non recurring interest expense relating to an income tax reassessment in Q1 2024.

Speaker 2

The interest coverage ratio was 27.99 times.

Speaker 1

Thank you, Yuliya. Our record second quarter results reflect the strength of our diversified business model, our continued investment in growing upgrading and maintaining our equipment fleet and the quality of our people. During the Q2, we continue to execute on our 2024 capital expenditure plan with 20 point $7,000,000 of capital investments. Dollars 50,300,000 of our budgeted $80,500,000 of 20.24 capital expenditures, which includes $14,200,000 of capital commitments carried forward from 2023 was funded to June 30, 2024. We expect to fund the remaining 30 point $2,000,000 of 20.24 capital expenditures with cash on hand and cash flow from operations.

Speaker 1

In addition to funding $50,300,000 of capital expenditures during the first half of this year, in the first quarter we funded the $47,400,000 acquisition of Saxon and $19,700,000 of non recurring income tax and related interest expense following a Canadian income tax reassessment related to our conversion from an income trust. With these major expenditures behind us, we expect to generate significant free cash flow for the remainder of the year. During the Q2 of 2024, $26,100,000 was returned to our shareholders by way of $12,000,000 of share buybacks, $10,500,000 of debt repayment and $3,600,000 of dividends. Year to date, Total has reduced its outstanding share count by 2.8% with $12,700,000 of share buybacks. Looking forward, we are optimistic as to the prospects for the second half of this year.

Speaker 1

The significant investment we have made to grow our Australian business began to pay dividends in the second quarter. Synergies arising from the ongoing integration of Saxon with Savannah Australia and the completion of several capital projects during the 3rd quarter will see this momentum continue. As noted in our press release, 2 drilling rigs and a service rig will be reactivated in the 3rd quarter. This includes a Saxon drilling rig that was reactivated in late July and a service rig that just returned to service earlier this week following completion of recertification and upgrades. In addition, a newly constructed drilling rig is scheduled to commence operations in late August.

Speaker 1

All three of these rigs are under long term contracts. Looking into the Q4, another Saxon drilling rig and a service rig operations following completion of recertification and upgrades. These two rigs will also operate under long term contracts. Despite weak North American natural gas spot prices, demand for compression and process equipment remains strong, driven primarily by infrastructure investment to support expansion of North American LNG export capacity. This demand is evidenced by the increasing CPS fabrication sales backlog, which exceeded $200,000,000 at June 30, and which gives us visibility to the Q1 of 2025.

Speaker 1

The impact of our significant investment to grow our U. S. Compression rental fleet was reflected in the CPS segment's 2nd quarter results and will continue to benefit the CPS segment in the quarters to come as such investment was supported by long term contracts. Finally, I'm pleased to report that for the first time since Total began consolidating safety statistics in 2,008, our consolidated rolling 12 month total recordable incident frequency or TRIF at June 30 was less than 1. Specifically, it was 0.96.

Speaker 1

Further, we had 0 lost time incidents during the quarter and our 12 month rolling LTI rate is 0.04. This is a tremendous achievement that reflects the continued commitment of our employees in all businesses and in all countries to operating in a safe and responsible manner. It's also no coincidence that this achievement occurred at the same time as we recorded record second quarter results as conducting our operations in a safe and efficient manner is good business. Congratulations and thank you to each and every one of our employees for making this happen and please keep up your excellent performance. 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. And today's first question comes from Jonathan Roufford with ATB Capital Markets. Please go ahead.

Speaker 3

Good morning. Thanks for taking my questions. Dan, it looks like the CPS segment is well positioned for growth here and you touched on improving demand. I'm just wondering if you're able to provide a bit more color on the outlook for bookings within the CPS segment?

Speaker 1

Good morning, Jonathan. I would say that we continue to see positive momentum today with our fabrication sales backlog. So I'm hesitant to give specific numbers, but it continues to grow.

Speaker 3

Yes, okay. Got it. And then I'm just also I got a question related to CapEx. I'm wondering if you're able to provide some color on 2025 CapEx expectations relative to 2024 now that some of those one time costs in early 2024 are out of the way?

Speaker 1

So we'll our process for capital budgeting effectively we start at 0 and the first line of CapEx is focused on maintenance capital, what do we need to expand to keep our fleet running based on expected activity levels. And so that process will begin late in Q4 and into Q1, which will release our preliminary budget in early January. In terms of growth CapEx, really that is addressed on an opportunity by opportunity basis. I think what I would say is over the past 3 years, we've done a lot of equipment upgrade capital expenditures that have served us well, particularly within our contract drilling business. As you do those upgrades, there's less to do going forward.

Speaker 1

So everything else being equal, there's just less of that opportunity available. Not to say there's none, but I would expect that those opportunities will pursue as the market makes sense. The one area that I would say is a bit of an exception to that will be Australia. Just the Saxon acquisition has been, I would say, has exceeded our expectations so far and the opportunity to redeploy previously idle equipment is significant and we're seeing that over into Q3, Q4 this year and I expect that will continue next year. So stay tuned on that.

Speaker 3

Okay, got it. That's helpful. I'm just curious if you anticipate any carryover from 2024 CapEx guidance into 2025?

Speaker 1

No, there's probably always a little bit. Last year 2023, we had a fair amount, I think it was 14,000,000 roughly. Most of that was within our compression and process services group with a number of compression rental units that we commenced construction in Q4, but the bulk of it was done in Q1. Again, depending on what kind of happens here over the next several months, that'll play out. But we do not budget or construct compression rental units on spec.

Speaker 1

They are all budgeted for and funded only once firm contracts have been entered into. And so you don't we won't have a compression process services capital budget for rentals based on speculation. And so I can't predict the future. So if we get a big order for rental units in Q4, that's likely would cause some carryover, but I'm not going to speculate at this point. We hope to have most of our non basically most of our major projects done by year end.

Speaker 1

We have 3 rigs in Australia coming into service Q3, another 2 in Q4. A bunch of our rental CapEx will come into Q3, early Q4, upgrades within our well servicing group in Canada will be done here. So if everything kind of stays to plan barring any major changes should be pretty clean here. And there's about $30,000,000 left to fund here.

Operator

Thank you. And that concludes our 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 joining us this morning and we look forward to speaking with you after our Q3. Have a wonderful summer.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Total Energy Services Q2 2024
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