CES Energy Solutions Corp.

Good morning, everyone, and welcome to the CES Energy Solutions' fourth quarter 2023 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 an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Tony Alucino, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for attending today's call. I'd like to note that in our commentary today, there will be forward-looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our annual information form, fourth quarter MD&A, and press release dated February 29, 2024. In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies. And for a description and definition of these, please see our fourth quarter MD&A. At this time, I'd like to turn the call over to Ken Zinger, our president and CEO.

Thank you, Tony. Welcome, everyone, and thank you for joining us for our fourth quarter and year-end 2023 earnings call. On today's call, I will provide a brief summary of our strong financial results released yesterday, followed by an update on capital allocation, and then our divisional updates for Canada and the U.S., followed by an announcement regarding Richard Baxter, president of AES. I will then pass the call over to Tony to provide a detailed financial update. We'll take questions and then we'll wrap up the call. I will start my comments today by highlighting some of the major financial accomplishments we were able to achieve in Q4 2023, as well as for full year 2023. The Q4 highlights include Q4 revenue of $553.5 million, our second highest quarter Q4 ever, just 2% shy of last year's Q4. and our third highest revenue quarter ever. Our all-time highest quarterly EBITDA of $84.6 million, beating our previous record level of $80.2 million set in Q4 of last year by 5.5%. Our highest quarterly EBITDA margin in over eight years of 15.3%. This compares to 15% in the prior quarter and 14.3% in the same quarter last year. Annual highlights for 2023 include All-time record revenue of $2.16 billion versus our prior record from 2022 of $1.92 billion, or an increase of 13% year over year. All-time record EBITDA of $315.8 million versus our prior record from 2022 of $257 million, or an increase of 23%. Our highest annualized EBITDA margin since 2017 of 14.6%, which came in just above our stated target range of 13.5% to 14.5%. Significantly reduced cash conversion cycle from 120 days in 2022 to 112 days in 2023. 2023 full year free cash flow of $211.6 million, representing a 20% cash on cash yield at our current market capitalization. Annual return of $93.5 million to shareholders through $22.5 million in dividends and $70.9 million in share repurchases, which represented 8.6% of common shares outstanding at January 1, 2023. And finally, the announced 20% increase to the quarterly dividend to $0.03 per share, which represents a 12% payout ratio. Our capital allocation plans for 2024 remain the same as stated in Q3 2023. We will continue to support the business with the necessary investments required to enable acceptable growth and returns. An increased dividend to $0.12 per year We intend to fully utilize our NCIB expiring in July of 2024 to repurchase the full 18.7 million shares allowable under the program. Then we will renew the NCIB immediately thereafter. We will use the balance of remaining free cash flow to continue paying down debt towards the lower end of our one to one and a half times debt to EBITDA target range. I'll now move on to summarize Q4 performance by division. Currently, our rig count in North America stands at 220 rigs out of the 860 running, representing our highest ever North American land market share at 25.6%. The Canadian Drilling Fluids Division continues to lead the WCSB in market share. Today, we are providing service to 83 of the 234 jobs listed as underway in Canada, or a 35.5% market share. Drilling activity in Canada so far in Q1 2024 has been slightly lower year over year. However, we remain excited about the prospects for 2024 and anticipate it will be a little stronger year overall. We also expect that 2025 will follow with another increase in activity in Canada. This is due to the expected completion and startup of infrastructure projects and their associated takeaway capacity, which should tighten differentials and improve operator economics for this market. Purechem, our Canadian production chemical business, set new records again for quarterly revenue and EBITDA in Q4. We have continued to see growing contributions from our chemical, stimulation, and H2S scavenger groups as we further penetrate each of these end markets and gain market share while utilizing only our current infrastructure and supply chain to support them. The main gains in our outperformance are from the primary business, production treating, which continues to take market share and grow meaningfully. We believe that we are now firmly the number one provider of production chemistry and service to the conventional land market in Canada. AES, our U.S. drilling fluids group, is providing chemistries and service to 137 of the 626 rigs active in the U.S. land market for our highest quarterly market share of U.S. land at 21.9%. This is in a market where the number of rigs working in the quarter was roughly flat from the previous quarter but down significantly year over year. We currently enjoy a basin leading 104 out of the 314 rigs working in the Permian Basin, equating to our highest ever market share in this basin of 33.1%. Our second barite grinding facility located in the Permian Basin now enables us to supply 100% of our barite needs going forward, supporting increased market penetration and further margin improvement. Our soft entry into the Haynesville market is on track and we are slowly establishing customers and working through fine-tuning our supply chain to the area. Obviously, with the lower natural gas prices currently, activity is muted in the area at 43 rigs currently versus 68 a year ago. Our strategy is to establish success with an operator or two so that whenever operators start picking up rigs again, we can position ourselves to be on them. We see our new Permian-based grinding facility providing us with the edge to allow us to gain market share here. Finally, JCAM Catalyst continues to observe outsized growth in revenue and EBITDA as compared to the competitive landscape. We continue to see growth in all aspects of this business unit. Service intensity combined with consistent market share gains are driving the growth. We have continued the recent trend of winning more business in this division, and based on internal analysis combined with available third-party data research, we believe that we have comfortably achieved the number one market share in the Permian Basin, and we also believe, based on the same intelligence, that we are the clear number two production chemistry and services provider in the North American land market. At this time, I would like to publicly announce that Richard Baxter, the president of our U.S. drilling fluids group, AES, is retiring from his current position as planned in April of this year. This date, which aligns with the solar eclipse, was chosen by Richard over a year ago, and we have been planning towards it since then. At the time of planning the retirement date, we also named his successor internally. Richard has spent the past couple of years grooming him to take over this role. Richard joined FMI, the private drilling fluids company that we bought 14 years ago, back in October of 1997. This makes him one of our longest-serving employees with 27 years at the companies, 18 of those with CES. He was promoted the president of AES 10 years ago in January of 2014 after the prior owner of FMI retired. Richard has worked tirelessly in building AES from a smaller market participant at that time with a 7% market share in 2014 into the owner of the clear number one U.S. land market share that AES enjoys today with 21.9%. Richard is responsible for the unique culture and success that AES enjoys today and will be truly missed in his current role by the employees throughout the company, the executive team at CES, as well as the board. Richard is planning to take about a month off to enjoy retirement and then get right back to it. The plan is for him to remain at AES in a strategic executive advisor role and a title of President Emeritus. He will remain on staff and will spend his time working on projects to improve technologies, develop new products and systems, and generally optimize our product offerings and systems while supporting his groomed successor as need be. For those of you who don't know, Richard has a Master's of Science in Petroleum Engineering by education, but he is a scientist at heart. He is responsible for many of the proprietary systems and technologies the company currently utilizes, I want to thank Richard for sharing his life with us all here at CES. He has truly been a committed, honorable, and trustworthy business partner, and most importantly, a friend for the past 14 years. I look forward to spending a few more years with him in his new role, and I will appreciate all further years he chooses to share with us. Going forward, the new president at AES will be Mr. James Strickland. James joined AES 13 years ago back in 2011. He was hired as an account manager in the Northeast USA. He joined us from MI SWACO Schlumberger, where he had spent the prior eight years as a drilling fluids engineer offshore. James has spent these past 13 years working his way up through a variety of positions and locations at AES to his current role as senior vice president, which he has held for the past eight years. Myself, the board, and the executive management have complete confidence in James' ability to fulfill his new role as we have watched him evolve into it over the past few years and look forward to walking him officially into it in about six weeks. As always, I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success at CES. I'm proud to say that we employed 2,236 people at CES at the end of 2023 versus 2,122 at the beginning of 2023, representing an increase of 5.4% year over year. Obviously, this number of employees represents a massive accomplishment from what started back in 2001 as a company with three guys and three pickup trucks. In conclusion, I would like to note that the results in Q4 and throughout 2023 were once again not due to any one division or area excelling. This was a balanced effort across the entire company in which every business group contributed. It speaks once again to the quality of people employed everywhere in every division here at CES Energy Solutions. With that, I'll turn the call over to Tony for the financial update. Thank you, Ken.

CS's financial results for the fourth quarter and full year set record levels of adjusted EBITDA and demonstrated a continuation of strong revenue and free cash flow despite muted rig counts, demonstrating the unique resilience of CS's consumable chemicals business model. These impressive results were achieved through strong contributions across all parts of the business amid a constructive supply-demand environment, increasing levels of service intensity, and leading market share positions throughout the business. 2023 revenue of $2.2 billion represented a new record and a 13% increase over $1.9 billion in 2022, while adjusted EBITDA of $316 million reached record highs and represented a 23% increase, over $257 million in 2022. Adjusted EBITDA margin for the year was 14.6% and up from 13.4% in 2022. These achievements were underscored by $212 million of free cash flow, a $101 million reduction of our long-term debts, and a $93.5 million return of capital to shareholders through $22.5 million in dividends and $70.9 million in share repurchases. Focusing on the fourth quarter, CS generated revenue of $553 million and a record quarterly adjusted EBITDA of $84.6 million, representing a 15.3% margin. Q4 revenue of $553 million maintained our annualized revenue run rate level of $2.2 billion and came in 3% ahead of $536 million in Q3 and was consistent with $563 million in Q4 of 2022. Revenue generated in the U.S. was $361 million, or 65% of total revenue. This revenue was in line with $361 million in Q3 and slightly below the $378 million a year ago. Revenue generated in Canada set a record at $192 million in the quarter, up from $175 million in Q3 and compared to $184 million in 2022. US and Canadian operations saw increased levels of service intensity and production chemical volumes driven by complex drilling programs and customer emphasis on optimizing production through effective chemical treatments, countering declines in industry rig counts, and showcasing the unique resilience of our consumable chemicals business model. Adjusted EBITDA of 84.6 million set a record in Q4 and represented a 5% increase from the 80.3 million generated in Q4 2022. and a sequential increase of $4.4 million, or 5% from the $80.2 million generated in Q3. Adjusted EBITDA margin in the quarter increased to 15.3% compared to 15.0% in Q3 and 14.3% in Q4 2022. And it was reflective of favorable product mix, strategic procurement initiatives, and maintaining prudent SG&A level. During the quarter, CS generated $39.9 million in cash flow from operations compared to $99.9 million in Q3 and in line with the $38.8 million in Q4 2022. Q4 included a typical seasonal working capital build of $28.9 million leading up to the Canadian winter drilling season, similar to the $28.1 million in Q4 2022. Funds flow from operations, which excludes the effect of seasonal working capital changes, was $68.2 million for the quarter, representing an 18% increase over $57.9 million in Q3 and in line with the $66.9 million in Q4 2022. The more illustrative full-year cash flow from operations totaled $302 million. compared to a use of $2.7 million during 2022 as CES invested in working capital to support significant growth during that year. The year-over-year improvement was driven by strong financial performance with higher contribution margins on associated activity levels relative to the comparable period, combined with a lower required investment in working capital. During the year, CES achieved free cash flow of $212 million compared to a use of $64 million in 2022, which was reflective of the strong cash flow generation capability of the business now that revenue growth rate levels have stabilized and we are realizing the significant benefits of our working capital optimization efforts. CES continue to maintain a prudent approach to capital spending through the quarter with CapEx spend net of disposals of $15.9 million, representing 3% of revenue for an aggregate spend of $61 million in 2023. We will continue to adjust plans as required to support existing business and growth throughout our divisions. And for 2024, we expect cash CapEx to be approximately $70 million, split evenly between maintenance and expansion capital to support sustained revenue levels and the creative business development opportunities. During Q4, we were active in our NCIB, purchasing 5.3 million common shares at an average price of $3.61 per share for a total of $19.1 million. We continued our buyback activity into 2024 purchasing 3.5 million shares at an average price of $3.61 per share for a total of $12.6 million. We exited the year with total long-term debt of $391 million, representing a reduction of $101 million from $491 million a year ago. Included in long-term debt is $141 million in net draw on our senior facility compared to $92 million at September 30th and $208 million at December 31st, 2022, and the $250 million Canadian term loan, which was used to settle the company's senior notes in November of last year. We ended the year with $470 million in total debt, representing a decrease of $88 million year over year. Total debt is comprised primarily of the $250 million Canadian term loan facility, a $141 million net draw on the senior facility, and $73 million in lease obligations. Total debt to adjusted EBITDA remained at a prudent level of 1.49 times at the end of the quarter compared to 2.17 times a year ago, demonstrating our continued deleveraging trend. We are very comfortable with our current debt level and leverage in the one to one and a half times range, thereby facilitating strong return of capital to shareholders and prioritizing sustainable dividend and share buyback levels. I would also note that our working capital surplus of $633 million exceeded our total debt of $470 million by $163 million. and demonstrated continued improvement year over year. Continued focus on working capital optimization has led to a year over year reduction in cash conversion cycle to 112 days from 120 days and a reduction in working capital as a percentage of annualized quarterly revenue to 29.0% from 30.9%. Each percentage improvement at these revenue levels represents approximately $22 million on our balance sheet, and I commend the entire CES team for realizing approximately $50 million in total value creation through an exceptional working capital culture during 2023. This very strong surplus-free cash flow trend is indicative of the cash flow generating potential of CES in this environment, which is further demonstrated by our current net draw which has declined by $21 million to a total of $120 million as of February 29th. We have dedicated our efforts to profitably growing market share, improving margins, and delivering consistent free cash flow at steady record-setting revenue levels underpinned by prudent capital structure. These consistent near-record levels have allowed CES to deliver on our commitment to returning capital to shareholders. During the quarter, we returned $25.1 million through $19.1 million in share buybacks and $6 million in dividends. For the full year, we returned $93.5 million through $70.9 million in share repurchases and $22.5 million in dividends, representing 44% of free cash flow. In accordance with that view, I am pleased to announce that on February 29th, the Board of Directors approved a 20% increase to the quarterly dividend from 2.5 cents per share to 3.0 cents per share. This represents a dividend yield of 2.8% on an annualized basis based on yesterday's closing price and a modest payout ratio of approximately 12%. At current levels of activity, market share, and service intensity, CS remains in a position of strength and flexibility, supporting our capital allocation priorities as outlined by Ken. At this time, I'd like to turn the call back to the operator to open it up for questions for Ken and I to address.

Certainly. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. The first question comes from Erin McNeil with TD Cohen. Please go ahead.

Hey, morning, all, and thanks for taking my questions. Richard, if you're listening, it sounds like your retirement will be short-lived, but congratulations nonetheless. You mentioned the outsized growth and the service intensity for JCAM Catalyst in your prepared remarks, and I can appreciate that you don't have all the specific details at your fingertips, but at a very high level, is the treatment point data that you publish quarterly becoming a more reliable barometer of segment performance, or is there still this ongoing shift in well mix from verticals to horizontals? And how would you sort of guide us on overall volume expectations or changes for both Canada and the U.S. in 2024 versus 2023?

Yeah, I mean, the shift is still happening, and the treatment point data is uh guideline that we use as well but it's not as concise as it once was right it used to directly or fairly directly relate to volumes and it i would say it does not do that anymore we have to take that in combination with a lot of other information as far as trends go i mean service intensity on the production chemical side applies specifically in a few ways and one of them is on volumes on initial production So we are seeing volumes going up. Quantifying that can be a little difficult, and giving you guidance towards volumes in 24. I mean, I would just point to overall industry activity. As much as production chemical is more stable and a good portion of it is related directly just to the production, there is a portion that's related to initial production, which relates to drilling rigs. So if you follow the drilling rig numbers, you can see, I would suggest you can see the increase in the production chemical side to some degree. But it's a pretty complicated, I don't have an easy answer for this. It's a complicated answer, even for us from our forecasting.

Fair enough. Figured I'd try. Just a point of clarification on the Haynesville entry. Are you currently working in Basin today and What would you see as a successful entry by year end 24 in terms of number of active rigs or any other metric that you prefer?

So we have been working on one rig. I believe the rig is down today on a window, but it's coming back. So we've sort of been establishing everything that we need to establish, getting some baseline on supply chain primarily is our biggest concern because we have worked in the Haynesville, you know, in the past and things there haven't changed I mean, they've changed, but they haven't changed so much that we haven't kept up with it. So we have the one rig, and I would say a successful picture for us is for every five additional rigs. If we could get one of them, that would be a win initially.

So you're not trying to fight over the current rig count, I guess?

No, I mean, I think we have a strong enough advantage with our bear right position, and those wells are – the mix on those wells is – is pretty heavy to bearite because of the density involved, which steers us to strengths on invert products that we manufacture ourselves, including the rheology modifiers, as well as the bearite that we're grinding ourselves. So we believe we have an ability to maintain, to match pricing in the area. We don't have to go undercut anybody, and we can still make decent margins.

Okay. Thanks, guys. We'll turn it over.

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

Hi.

Good morning.

I think you may have dropped an operator. Do you want to go to the next person in the queue?

The next question comes from Jonathan Goldman with Scotiabank. Please go ahead.

Hi. Good morning, guys. Congrats on the quarter. Really, three years, a culmination of hard work. My first question is on the U.S. market share. It's been increasing since the beginning of last year. It looks like a quarterly record in Q4, as far back as my model goes. Are there any unusual dynamics to call out in the quarter or maybe ask another way? Why wouldn't the current share be sustainable or possibly go higher going forward?

We believe it is sustainable and we believe it will go higher. And good morning, Jonathan. Nice to hear from you.

I'll take the answers just first. That's good, too. I guess my second question then is on the strong margin print. Again, it looks like at least the highest margin for Q4 since 2014. Your press release called out a number of factors, you know, the higher service intensity, mix, cost management. Would you characterize those factors as structural? And again, same question on the margins. You know, outside of the typical seasonality, you think this is a new level that's sustainable going forward, or should expectations rebase higher at least?

I think we've, you know, I've guided in the past in this 13.5 to 14.5 range. I'd say that probably 14 to 15 is reliable now. There'll be times like this where there's outliers where we'll get a little high and there's going to be times probably where we can be on the low side or in the lower end of that range. We don't anticipate going under the 14 anymore. And as far as what's driving it, it's like a, We could make a list a mile long of the things that are driving it, but it's attention by everybody to all the details, and it's looking at everything we're doing. It's as simple as our CapEx number this year allows us to do some spending on stuff that internally improves margins without having to go do any big acquisitions. It's just simple things like totes, where we used to have volumes that only justified single-use totes or volumes that justified storing even within our own facilities in totes, that now we're doing enough volume in our different divisions that we're putting in permanent upright tanks to store it. They're not big capital expenditures, but they instantly improve bottom-line profitability. We've got cash conversion cycle that everybody's focused on getting billing done faster, and we can't change how the operator pays us, but we are taking care of everything we can on our side of that equation. More emphasis on working capital and keeping inventory levels at appropriate levels. So it's a lot of things going on and a lot of effort by a lot of people, and it's paying big dividends, and we're going to continue to push on that.

One other thing to consider, Jonathan, on the structural aspect of that margin, it happened to be a very strong 15.3. It was 15.0. As Ken mentioned, we're talking now about 14 to 15 versus 13.5 to 14.5. It's not lost on us that there's been headwinds in the sector through the year, right? Rig count has gone down. We continue to put up big numbers. And part of that is structural. And by structural, I mean... The fact that our business model is quite different than most OFS peers where ours is not a day rate model and it's a consumables chemicals business model. And you've seen drilling rates go higher. You've seen well complexities go higher and longer. And those all bode very well for our model because these companies are using more of our product in a shorter period of time. And the farther out they go and the more complicated, they tend to use the more specialized product and chemicals that we provide that happen to have better margins associated with them. So that's one part of the structural narrative. The other part is we talk a lot about expansion capex, and that's half of our $70 million. I just want to emphasize that when we talk about expansion capex, that's not necessarily just capex that's spent to gain more revenue. That's a big part of it. But the other big part of it that each of the divisions has done an amazing job at that Ken highlighted as well is they'll spend that expansion capex on not necessarily growing revenue, but by doing some of those operational efficiency activities that Ken mentioned that end up increasing EBITDA and gross margins. So those two things together, they're not perfectly going to keep us up at this level always, but those are two significant elements of the structural capability of the company with these margins.

That's great color, guys. I really appreciate that. And I guess one then related to that structural improvement, and again, you touched on this, is the working cap improvements. You've undershot your working cap incremental investment rate now for several quarters. I think, Tony, you mentioned 29% this quarter. Given all the initiatives you've implemented that seem structural and, at the very least, made a lot of progress, do you think it's fair to think of a lower investment rate for working cap going forward?

You know, I'll start with that. The reality is prior to us putting up these numbers, the record level was, in run rate scenario for this company, was 116 days and 31%, I believe. We're in sort of uncharted territories in a good way. And, yeah, we'd love to continue to pierce through 29%. That might be possible. I wouldn't hang my hat on that yet. But hopefully I'll be proven wrong. And it's not a magical technology or science. It's everybody understanding how working capital works, how valuable it is. And as Ken said, doing all the little things to assist us in getting the working capital down. I still can't believe it's down from 120 to 112-ish. But we're going to continue to try to stay here and pierce below it.

I mean, the numbers seek themselves. Maybe just one more housekeeping one before I pass the line. You know, the headlines about the Red Sea shipping disruptions. Have you guys noticed an impact to margins or costs in 2024? Do you anticipate that being a headwind at all?

No, we haven't. Nothing major. I mean, you always have challenges that way, but there's been no major incidents. Prices are still moving around a little bit. You get the odd bit of pressure here and there, but Nothing like 2022, nothing that we observe as a huge headwind for us. Things have been pretty stable, and that's a big part of the reason the conversion cycle is where it is. I mean, we've been able to work in a stable environment for a little over a year now, which really allowed us to fine-tune inventories and billing.

Perfect. Thanks to all the color guys there. Appreciate it.

The next question comes from Cole Pereira with T4. Please go ahead.

Hi, can you guys hear me?

Yeah, welcome back. Morning, Paul.

Thanks. So, yeah, on the new margin guidance, so would it be fair to assume that that assumes kind of a flattish rig count in North America? And, you know, I'm not going to hold you to this, but conceptually if we see a meaningful rise in the rig count, higher operating leverage could drive that figure higher as well? Correct.

but that's what we would anticipate.

Gotcha. And then, Tony, just on the NCIB, you guys are obviously very active with it this year. How do you kind of think about that level of utilization going forward once you refresh the plan, acknowledging that it's obviously, you know, valuation dependent?

Yeah, our current plan, based on everything we know about what we believe this company is going to do and even where valuation is today, is going to lead us to renewing that NCIB on July 21st for 10% again.

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

The next question comes from Tim Monticello with ATB Capital Markets. Please go ahead.

Hey, good morning, everyone. Good morning, Tim. Good morning, Tim. um quick question on um the capex there tony you did about 17 million maintenance capex it sounds like the capex this year is going to be split 50 50. um has there been any change in i guess the capital intensity of the business or why are you seeing maintenance capital move up um significantly in 20 in 24. what we found is uh especially in areas of the business that has seen growth uh

We were a bit light on the last year, year and a half, on what otherwise should have been a bit of a higher maintenance capex level in 2023 and maybe part of 22. So it's a bit of catch-up.

Yeah, I would say that there was issues with heavy equipment, getting big trucks. We needed more. We knew we needed more. We just couldn't get more. So we're finally catching up to some of that. And then the impacts, you know, we have 1,000 pickup trucks in this company. And you know what – fleet discounts have done across North America as the majors sort of ran short on trucks last year. So we've seen a big spike in the price of those things and the lease rates for those things. So there's been a whole bunch of stuff that we're playing catch up on that partially because we couldn't get them before. And then other stuff that's just, it's inflation that everybody's seeing in their own lives.

Got it. So like on a go forward basis, I think it's maybe in between that sort of 17 and 35 million. on a normalized basis?

Yeah, closer to the 35 than the 17, Tim. Okay. At these $2.2 billion revenue levels for sure.

Okay. That's helpful. And then our modeling at least suggests you're going to have a lot of ample free cash flow to pay your dividend and fund your CapEx and probably do some share purses if you want to throughout the year. And then past that, you'll probably even have extra to, you know, put to the words of balance sheet. Do you envision just continuing to reduce leverage rate levels on an absolute basis? Or do you have like a sort of a base level where you think your capital structure is benefiting from some leverage?

Yeah, at this point, at this point uh we stand by the one to 1.5 times range we're very comfortable where we are if we're a little bit higher that would be fine for the right reasons as well if we got down to the 1.0 times level based on our current revenue run rate cash flow generation then then we would have some good hard decisions to make but i think we're still Unless things change significantly a good couple of years away from that year to two years away from that. Okay. Based on our planned dividends and planning on looking at the dividend every year and touching it in the first half of the year and buying back 10% of the stock on an annualized basis as it makes sense.

Okay. That's helpful. And then I mean, you guys don't speak specifically to the production chemicals market share, but the numbers sort of tell a story that that market share has been growing significantly, and I guess you guys have been talking around it at least for a while now. You know, what do you attribute that success in the market to? Obviously, very competitive space, and you guys are doing really well there. So, you know, you think you continue to grow market share, like you alluded to there, Ken. So, What's the success attributed to?

We're awesome, Tim. It's pretty simple. It's everything, right? We have a good cost base. We manufacture. We're responsive. We have facilities that can build, blend, figure out how to fix problems and react. And we have people that are qualified in the field that are best in class. And We have infrastructure everywhere to support it. So it's that and everything those people do that make this all go around. And we're just going to, you know, I don't see any reason we wouldn't continue to grow at the same kind of rates that we've been growing at. And we have that decentralized model, of course, and it allows our decision-making in places like Midland where we have a huge market share and the guys down there can make big decisions quickly and react to any problems that may come up for a customer quickly and And with our infrastructure and our manufacturing capability, it makes us almost unique. It definitely creates a barrier for companies smaller than us. I mean, we continue to go head to head with Champion and Baker like always, but it makes it harder on the private companies. They don't have the kind of infrastructure and scientists back up that we do.

Got it. And you got ample capacity in JCAM Catalyst to continue the space.

We have nothing but capacity and we have the ability. I mean, all this, when we talk about expansion caps and maintenance cap, I mean, we're constantly evolving the Sterling facility. So when it makes sense to put in another reactor, we add another reactor. When it makes sense to put in more storage, we put in more storage. These aren't big steps to take and we can adapt that facility as much as we need to. And it's sitting on 100 acres there on rail, so we've got tons of room to expand it. And same with Carlisle. Grand Prairie is a little bit landlocked, but it's not a blending facility. It's primarily, I mean, it is for FR, but other than that, it's just a distribution hub. So, you know, we've got space everywhere. We've got the ability to turn up volume. You know, one of the CapEx spends this year is going to be for our NISQ facility. scavenger facility we can increase the throughput on that place by like 40% in the summertime by spending some money on chillers to control the temperature to make the reactions go faster so we're gonna you know we didn't need that extra capacity so we didn't spend the money a couple years ago but we identified this winter that as soon as it gets warm out we might have a problem so we're in keeping up with our supply so we're gonna spend a couple of million dollars there and and tune that facility up a little bit as well. But lots of levers to pull still to keep capacity in line.

Okay, got it. I appreciate it. Congrats on the nice quarter again. You guys are starting to make this look easy, and I'm sure it's not. I'll turn it back.

The next question comes from... Sorry. The next question comes from Keith Mackey with RBC. Please go ahead.

Hi, good morning. Maybe just following on to the line of questioning around your growth opportunities, production chemicals certainly has grown very well, and I know that part of that's been the introduction or success of some more fracked chemicals and things like that. You've also discussed entry into the Hainesville, and then certainly there's also some, I'm sure, inorganic potential. Can you, Ken, maybe just give us a bit of a ranking to the extent you can in terms of the growth potential and impact of the various opportunities that you see to keep the growth levels at around the same levels that you've been seeing?

Yeah, I mean, we prioritize organic, and we've been doing that for the last, really since 2016. There's plenty of opportunities where We've got a ranking of different parts of the chemical business that we may enter into on both sides of the border. We try and get into them and not complicate things by being everything to everyone, but rather choose the ones we want to participate in, get into it in a meaningful way, maximize profitability of it, and then move on to the next. We've got a couple of other lines that we can potentially get into that we're getting close to entering now. and then the ones that we are in we just continue to to push on i'd say that frac chemistry is still a small piece of what we do just to clarify that it's we've bolted it on and we've we're um playing in the market where it makes sense and we've got some good customers but it's not in in the big scheme of things it's production chemical treating is what's driving this business it's It's a big portion. I don't know what exactly the percentage is, but 75% of the business on the production chem side is just production chemistry, not even the ancillary commodity stuff. To answer your question, I guess it's organic, although we've been looking at a lot of M&A for the last two years. We continue to look at a lot of M&A. Where we're prioritizing M&A is in North America. It's organic, except for uh vertical integration if there was an opportunity there and in and we've talked a lot about in the past about uh the middle east and and south america being markets we want to explore at some point as well perfect appreciate that and and certainly there is a lot of pending emp consolidation in the permian

As time progresses, I'm sure you've learned a little bit about what might happen there, but can you just run through maybe your exposure to that and any risks or opportunities that you see as customers continue to consolidate?

Yeah, so just from a thematic perspective, our business model is built to uh to to prosper in that environment of increased consolidation where companies get bigger more results oriented uh more technology driven more supply chain driven there's there's only a hand of a handful of us that have the capabilities infrastructure scientists engineers chemists and facilities that that we do so We believe that this small group of us will be in higher demand by what's going to be continually bigger combined entities. That's number one. And number two is we are definitely focusing on the fact that you will see some of this consolidation happen, and there will be times where they're going to come back out to bid. We believe that based on our track record, We've been lucky and fortunate by design where we've either been neutral to positive in all of the M&A that have affected our customers. And the other thing is it's really unique. I've learned in my role watching the guys and their relationships with customers because of the good work that we've done with these drilling engineers and production engineers throughout their careers. They're the guys and gals that end up moving and being in positions of decision-making at these new combined entities. And these are good allies, and they understand our capabilities. So it's a long-winded answer, but we know that it's been neutral to positive for us, and we expect it to be more positive going forward, given their requirements and our capabilities.

Yeah, I'll throw in, like, even when it's too... big companies that we don't work for, which has happened from time to time, it's still an opportunity because we weren't working at either one, but now when they put it together, they're going to take a hard look at how they're spending their money, and it generally leads to an RFP and gives us an opportunity to potentially get in where, as individual companies, they would have probably continued doing what they were doing.

Fair enough. Appreciate the answers, and that's it for me. Thanks a lot.

Thanks, Keith.

Once again, if you have a question, please press star, then 1. The next question comes from Joseph Schachter with Schachter Energy Research. Please go ahead.

Good morning, Ken and Tony. Congratulations on the great results and a 52-week high on the stock this morning, 465. So congratulations on that. I want to continue to work on this growth potential side. Number one, you had the offshore business that you were working on. Has that gotten to the point where you see scaling that up or getting involved with more entities, or is that still something that's a work in progress and then getting to still understand that business?

So that's been a work in progress. We've been working through the supply chain side of that. They have some pretty – specific rules and regulations that are sort of NASA-grade quality, which takes time to recreate. But we've worked through that now. We've got the supply chain. We've got an appropriate lab. And we've got some people that we've hired. And I'll just say that we haven't had a huge step change in revenue out of that division to date, but we're optimistic that we're close to some. How's that? Okay.

Can that be a significant stage upward in revenues and profitability from the size it is today, or would you need to do M&A to turn it into a decent-sized division?

Well, I mean, M&A is always a way to step quicker, but no, we're going to continue to grow by ourselves. Unless we saw somebody that had something unique or different that we didn't have as far as a retail presence, I think We've got enough of a reputation now. We're well-respected in industry. We have unique capabilities that some of our competitors don't even have. So the only reason I can see us doing M&A in any of these spaces from here would be some sort of unique technology or vertical integration.

And the next question is with the LNG on the West Coast moving forward and potentially an announcement of Train 2, do you see having to build out in northwest Alberta, northeast BC, and are we looking at something significant in terms of CAPEX and manpower movements into those areas?

Yeah, I mean, we have the intention that when the activity demands it, so for 25 years, MI Slumber J had an invert blending facility in Spruce Grove, Alberta, a couple of years ago. I think it was during 2020 or 2021. they chose to exit the market completely and dismantle that facility. We bought that facility for pennies on the dollar, and we moved it into our NISQ storage area, and it's sitting there right now waiting, and it's intended to go to northeast BC when the demand is there. So at some point, we will truck that up there and weld it back together. But as far as a significant capex spend, it won't be significant.

Perfect. Again, thanks very much, and congratulations on the quarter and the year.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Ken Singer for any closing remarks. Please go ahead.

Thank you. With that, I'll wrap up this call today by saying thank you to everyone who took the time to join us here today. We continue to be very optimistic about the future here at CES Energy Solutions, and we look forward to speaking with you all again during our Q1 2024 update in May. Thank you.

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