Trican Well Service Ltd.

Good morning, ladies and gentlemen. Welcome to the Trican Wealth Service second quarter 2023 earnings results conference call and webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Brad Fedora, President and Chief Executive Officer of Trican Wealth Services Limited. Please go ahead, Mr. Fedora.

Good morning, everyone. Thank you for attending the Trican second quarter results conference call. To start the call, Matt's in our Chief Financial Officer overview of the quarterly results. I will then provide some comments with quarter, the operating conditions and the near future. I'll try to get through my comments as fast as possible. I know there's lots of calls, so we're hoping to wrap this up within 20 minutes or so. And then we will then open the call for questions. Several members of our executive team are here today on the call and are available for questions. And now I'd like to turn the call over to Scott to start things off.

Thanks, Brad. So before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our MD&A for Q2 of 2023. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2022 annual information form in the business risks section of our Q2 2023 MD&A and our MD&A for the year ended December 31st, 2022 for a more complete description of the business risks and uncertainties facing Trican. These documents are available both on our website and on CDAR. During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q2 2023 MD&A. And our quarterly results were released after close of market last night and are available both on CDAR and on our website. So with that, let's move on to the results for the quarter. Trican's results were significantly improved with continued solid industry activity levels and a more moderate inflationary environment which led to a more sustainable margin profile and improvements across virtually all major financial categories. Revenue for the quarter was $168.2 million, about a 10% increase compared to the same period in last year. This was mostly attributable to a more constructive pricing environment which allowed us to offset some of the inflationary pressures we were facing at this time last year. Adjusted EBITDA came in at $31.9 million. a significant improvement over the 19.2 million we generated in Q2 of 2022. And I would note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $1 million in the quarter and were expensed in the period. Adjusted EBITDAs for the quarter came in at 32.9 million or 20% of revenues, which is stronger when compared to the 23.6 million and 15% of revenues we printed last year. To arrive at EBITDA, we add back the effects of cash settled share-based compensation costs recognized in the quarter to more clearly outline the results of our actual operations and remove some of the financial noise associated with changes in our share price as we mark to market these items. We recognized approximately $1 million in expense related to those items in the quarter. On a consolidated basis, we generated positive earnings of $9.8 million in the quarter, which translates to about $0.05 a share basic. and $0.04 per share on a fully diluted basis. We generated free cash flow of $22.7 million during the quarter as compared to the $14.6 million we printed last year. And again, our definition of free cash flow is effectively EBITDA, less non-discretionary cash expenditures, maintenance capital, interest, cash taxes paid, and cash settled stock-based compensation. CapEx for the quarter totalled $14.4 million, split between our maintenance capital program, about $8.8 million of that was maintenance capital, and upgrade capital of $5.6 million. The upgrade capital was dedicated mainly to our Tier 4 capital refurbishment program and the ongoing electrification of some of the ancillary frac support equipment, which Brad will touch on later. Balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $128 million. including cash of about $40 million. And finally, in terms of return of capital, we were quite active in our NCIB program during the quarter and repurchased and cancelled 7.5 million shares at an average price of about $3.24 per share during the quarter. We remained active in July and repurchased and cancelled an additional 2.7 million shares, which successfully concluded our 2022-2023 program. As noted in our press release, the Board of Directors yesterday declared a dividend of 4 cents per share to be paid on September 30th, 2023 to shareholders of record as of close of business on September 15th, 2023. And I would note that the dividends are designated as eligible dividends for Canadian tax purposes. So with that, I'll turn things back to Brad for some comments on our current operating conditions and our outlook. Okay, thanks.

I'll try to get through this as fast as possible. Overall, Q2 pretty much went as forecast. We're happy with the quarter. We always budget for bad weather and activity interruptions, so the fires and then, believe it or not, some of the floods did not have a material impact on our quarter. Some of the work was delayed until the summer, but that's to be expected. We did, on the cost side, we did, we are still experiencing inflation on certain items, but Overall, I would say inflation has really slowed down and with the improving exchange rate and some of the removal of some of the fuel surcharges, some of our items actually went down in price. So that's a refreshing change for our customer base. On the pricing side, Although the pricing has generally been stable for the last year or so, we did experience some pricing pressure during the bid season late in the quarter. It's always disappointing to see, but it feels like it's sort of stabilized here now that the bids are over. And I wouldn't expect there to be a lot of pricing changes for the remainder of this year. Everybody is sort of, I would say overall, fairly full. I think pricing pretty much stable here, year of 23. On the fracturing side, we're still operating seven frac crews. It's important to note, this means that we're operating about 60% of our equipment. We have sort of a maximum capacity of 11, 12 crews, depending on the size of the crews. But, you know, comparison to our competitors who are operating basically at capacity, Tricam is still at a stage where I wouldn't say our business is operating maximum efficiency with respect to revenue costs. And we can still improve our situation as we cruise to the basin. And we will not add those crews to the basin unless there is incremental. Certainly, I would say even quite profitable in our space, we can definitely improve on that as we bring more field. On the cementing side, really happy with that division. really speaks how activity has of the year. As I've made reference to in prior, I think this will get better and better as the years go by. See more of a material slowdown in December just for the Christmas season, like sort of every other business. I think that's a welcome change And certainly something I hope to get along this trend. Our market share in some innings about 35% overall, but 50% in the money in the debate. We feel we have the most value to add with our technical abilities and our blends and our laboratory full service product offering. We're looking to add more into place like clear water and heavy oil. We've previously pulled out of the labor shortages. So we're looking to get back to those areas as we think they will be a continued focus of the next five years. And our ability to add in those spaces is really only limited by our ability to add staff. As everybody knows, addition for good quality labor is tough, people have lots of choices. So we'll do high quality labor so that we can continue on with our best in class service. On the coil side, we had a fairly slow quarter in coil, but so far Q3 has started with a bang. So we're not discouraged by we're operating sort of oil units. And although it's not a significant portion of our sales, We're still working to improve that division. I think I've mentioned in the past, it's not operating at a level that we're happy with. So we'll just continue to spend time on that. And we've hired people that are dedicated full-time to getting that vision operating at a level that we're happy in. It's keeping up with internally with fracturing perspective. So we'll just continue to grind away on that to make improvements. Outlook for the second half of this year, I think it's pretty similar to last year. The rig count, although it was much higher in Q1, it seems to be basically tracking so far in Q3, it's similar to last year's levels. And so I think the second half of this year looks a lot like last year. Maybe Q3 is slightly higher and maybe Q4 is even maybe slightly lower, but overall I would say it should be kind of a repeat of last year to a large extent. Even though our revenue is up 25% year to date, I don't think we're undersupplied and I don't think we're oversupplied. You know, and it seems like it's sort of steady as she goes here. Our customers, their capital budget is very thoughtful in the way they're allocating capital and even just the timing of the completions. I think... industry is getting more and more complicated. So, you know, they're spending less than 50 free cash flow and completions. And so, you know, it's commodity prices always have volatilities. That sort of percentage of cash provides a really good shock absorber. And I don't think you'll see big activity reactions to changes in commodity prices and marketing in the U.S. region. they were sort of surprised how stable Canada would be. And, you know, one of our answers was, hey, you know, last year when we had $100 oil in May, you know, you didn't see a direct response to that. And so they sort of had activity, you know, through these ups and downs in the commodity cycle. You know, we've got a hot summer in the U.S. and Europe, helping to clear out some of the gas storage to more normal levels. And so if we get a normal winter, I would expect we'll see gas prices go higher. and maybe we'll start the activity copying incrementally. We're very encouraged with the advancements of the industry's relationship. We look at the LNG facilities, two of which is very near term. LNG drilling activity has started This project is a very long life, you know, 50 plus years. Something the First Nations are very happy to be involved with. It's, you know, very much lined with their investment profile and timeline. So with, you know, various facilities, whether it's, you know, in Squamish BC, you know, Wood Fibre, LNG Canada, in Kitimat, you know, we expect this to build over time. Really underpins long-term stability in this basin, of course. The Mott & Ead Deep Base, you know, primarily gas-focused, which means they're very fracture-intensive. So we think this is a great place to invest in and do business with over the long term. And we think our product offering in particular is really well-suited to this incremental LNG demand. You know, high-pressure wells, customers want low emissions, You know, both the customer and the First Nations want small footprints. They want less water consumption, clean air, you know, all of that, all of the technology that we've been investing in. On the supply chain, you know, we are seeing just as the amount of ton, the tons of sand per well is growing and we have some, you know, some big numbers in the Montney in particular, we are seeing what we will believe are current and future constraints within the logistics of stand. We think the whole transporting system, rail system, trucking industry is basically running at capacity. And we've already seen instances where there's a chance to end shortage in certain areas of Western Canada. We don't think this will get anything but worse, frankly. Third-party trucks and logistics system in general It's very tight. It's not that well built out as we expand into northeast BC. You know, there's less and less class one drivers want to drive in the oil field today. So, you know, this, of course, we see as an opportunity. We're looking at lots of different stuff. We want to invest in sand logistics and making sure that the last mile logistics is as low as possible, which, you know, has a drastic impact on costs. our product offerings. Again, we're very bullish on Western Canada. We think we're going to play a growing role in the overall global natural gas picture. So we want, we're invested for the long term and make sure that we can deliver our services as efficiently as possible. You know, we believe plays like the Montney combined with on GS sports will be a long-term base of activity. We still have a pristine balance sheet. We exited the quarter with about 40 million of cash, lots of positive working capital. And that just gives us the, frankly, the luxury of looking at anything and everything to improve our business. We're gonna invest predictable long-term returns and making sure that, you know, good for our shareholders. We continue on with our differentiation and modernization strategy, you know, state-of-the-art equipment, making sure our systems are leading edge, you know, really focusing on the ESG side of the business, developing out our, you know, partnerships with D&L, you know, that'll play a role at, to go forward. And this is all under the guiding principle of clean air and clean water. And we're making sure that our investments align with all of those principles. We rolled out our first low emissions spread last year. We're really happy with how that technology is performing. We get our fifth tier four fleet in late Q4 of this year. five out of seven crews will be, you know, state-of-the-art brand new tier four spreads with low emissions, low footprints, less people able to withstand the pumping times. We've started this program, 38 million liters of diesel with natural gas. So, you know, something we're really proud of. It's something that our customers and the communities really want to see more. The lines, it'll, oil and gas activity and development with what the public wants, smaller footprint, less carbon emissions, et cetera. You know, we expect this technology will continue. We expect it will become the standard in the industry. And so as a result, you know, we need to continue to look at ways to differentiate ourselves. And as Scott was mentioning, you know, starting in Q1, we've, electrified the ancillary equipment fleet, which means, you know, that means operation enables us to reduce the number of people that we have on what we call the hot zone where the pressurized pipe is laid out. And it also combined with tier four technology allows us to have gas substitution rates of over 90%. So again, Our goal is to have 100% natural gas on location to pump no diesel at all. And this is just the next step in that overall goal. We'll continue to invest in that electrified equipment as we move forward, as we think it's a win for us and for our customers. Just the design of the blender in particular, I think we've the reliability of still working out some gains in the design, but we think overall it'll be a much improved piece of equipment. And it's important to note, since we've upgraded so much of our fleet, that we now actually have sort of 11 of 12 fleets that are field ready. We've generally been upgrading parked equipment. And as we've been upgrading that equipment before, we've been sort of displacing a traditional diesel spread. But now we have 11 fleets field ready. And so when you think about this air capacity in Canada, you know, we pretty much have the bulk of it and it is ready to go. Any more capital investment for us, when you look at the parked equipment at our competitors, you know, just like to get it. So, you know, not only do we have the most technically advanced new fleet, but our entire fleet has basically been reworked. So you look back fast to, to this industry and where we were at, you know, even just a short few years ago, you know, we've gone from an aging fleet that required a lot of capital to basically half our fleet is brand new and half is ready to go. So we feel like we're in a great position to take advantage of increasing activity and even just increasing focus in Northeast BC, Northwest Alberta. So I'm really happy where we're positioned. On the return of capital side, you know, our priorities have not changed. We want to build a resistant, sustainable, and differentiated company, invest in growth opportunities that provide, you know, returns for our shareholders and our customers long-term, and, of course, provide a consistent return on capital for our shareholders through dividends and buybacks. So we finished, you know, we focused heavily on the NCIB this year. We finished it early. Like Scott was saying, we bought 23.1 million shares since last October at an average price of 337 a share. When you roll back, when you roll this program back to 2017, you know, overall we've bought 143, over 143 million shares at an average price of two share, which represents just over 41. Very successful program, you know, regardless of how the market is valuing us in our space. We look at these multiples and think it's screaming by, it can't go on. So we expect to renew our NCID in October and remain committed to this program for what may be the long term. You know, we now pay a quarterly, well, just to provide some certainty and ability in our return strategy, but look for us to be active again in the fall on stairs back. I think I'll stop there, and I'll turn the call over to the operator for questions.

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 Aaron McNeil with TD Cohen. Please go ahead.

Hey, morning. Thanks for taking my questions. As it relates to the quarter, I was a bit surprised to see prop and pump down 15% on a year-over-year basis, but revenues up 10%. I know you referenced both stronger pricing and a change in customer well designs in the disclosures, but I'm hoping you can sort of parse that out a bit more for us. Like what was pricing, what was well design, and what specifically changed in well design on a year-over-year basis?

Oh, we don't have all of that information with us here, but I wouldn't get too fussed by those stats. You know, like just depending on the customer base and what they're developing, what they're completing, you know, that can change. quite drastically from quarter to quarter, frankly. But I don't have any more detail handy here, Aaron, to give you much more than that. It's not something that we track that closely, frankly.

Fair enough. You sort of touched on this at various points of your prepared remarks, but, you know, you've seen ARC, Sanction, Attachee, Strathcona just went public or intends to go public via Pipestone and are guiding to growth in the sort of high single digits. Logan, again, small, but also committing to more of a traditional growth model. You highlighted the parked equipment in your prepared remarks. I guess I'm just trying to understand, what do you think the likelihood is, in your view, that some of this equipment goes back to work in 2024 or another timeframe that you think is reasonable?

I think for sure we'll be bringing one, maybe two spreads into this basin in the next 12, 15. Just the momentum, it feels like there's always slowdowns and there's always little pauses along the way, but it's in this business for the long term. And when you think about LNG and the transactions that you just mentioned, I mean, those transactions, they result in increased activity, right? Like they don't, you've taken sort of not assets, but maybe under capital, into much stronger hands, you know, financially stronger hands. So that just means an increase in activity. And when you've got, you know, LNG is real, TMX is real, you know, the world wants more Canadian natural gas, in particular, more Canadian oil. As we know, it's the cleanest, it's the cleanest hydrocarbons in the world. You know, I look at this and I've never felt, I've said this before, I think a few times, but never felt good, this good about the business when I look up five, 10 years. You know, and I don't think it's going to go crazy. And I don't think we're going to see these huge swings in activity level from year to year that we all thought was normal when you go back, you know, pre-2016. So, no, I think it's going to, I think all of that parked equipment that we have or, you know, those five spreads that are ready to go, some of it comes off the tier in the next year.

That's great. Thanks, Brad. I'll turn it over.

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

Morning, all. Just thinking about capital allocation in 2024, I mean, with your five Tier 4s, do you feel there's adequate demand and upside for more of those upgrades, or are you kind of fine with your footprint in that regard? And, you know, how do you kind of think about, you talked about share buybacks, but maybe further dividend increases, potentially M&A, et cetera?

Yeah, I mean, we're always pausing and reviewing different technologies. So we've got five. We're currently waiting on the results from what was 100% natural gas engine. We're still waiting to see how that works out. And so we might pimp our never ending pursuit of having that natural gas. But we don't feel, we don't sort of feel, we feel like we're very much ahead of the game. And that gives us the luxury of being able to pause and look around and say, hey, let's not have the blinders on with our technology. So we'll figure out what's happening. And I still think more of our fleet will be converted. I think the industry is going to just base everything I've already said. So we have a placeholder for capital. It's very similar to this year. Our NCIB will be pursued. then this is a board decision, not my decision, but I would expect sort of once a year we'll recalibrate our dividend so that the overall aggregate dividend payout doesn't change from year to year, but just as our share count shrinks, you would expect the dividend per share to go up. That seems like a logical approach. And as far as M&A goes, nothing's changed. I mean, we're all trading at crazy low multiples which maybe makes it hard, but as with oil, you know, looking back 20 years, you know, the market for M&A and oil field is always, it's maybe, you know, it's a consolidated space already. So, you know, we continue to look at that and look at other operating division company. So, you know, we're clean balance sheet, excess cash in the bank. We have a relatively well-priced AUC within us. So we think we're in a great... Okay, got it.

Thanks. And just quickly, Scott, can you talk about how we should be thinking about working capital changing into Q3? And can you refresh... you know, the timeline when you think TRICAN goes cash taxable? Thanks.

Yeah, I think we'll see a similar cadence in terms of working capital that we saw through 2022. Like we saw a pretty big release coming out of Q1 into Q2. That'll start to build a little bit as we come through three and four, you know, as you would expect as activity increases from there. You'll note, one of the things we did make note of is that We are now moving into a cash taxable position, so we expect to actually fund some of the current tax liability that we've got occurring on the books early next year when that goes out. So you'll see that number build through the year, and then we'll make our first payment likely in Q1 next year, and then we'll install as normal from there.

Okay, got it. Thanks. That's all from me. I'll turn it back. You bet.

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

Hi, good morning. Just wanted to start out on your differentiation strategy, which you've been very clear on in the last year to two, Brad. And so you've got four to five DGB fleets. You're starting the electrification of the ancillary items. But I imagine as you think about your competitors potentially catching up on some of those things, the differentiation strategy has to be a continuum. So what is next in your view on where you need to differentiate in order to, you know, maintain the position you've got and put yourself in potentially the best position to capture some of the emerging work, whether it's L&T or other types of work?

Well, we're not going to – yeah, maybe I'll just say this. I absolutely agree with you that, you know, differentiation in our space is temporary because, in general, you know, you can replicate almost any technology, and so it's very, very hard. to continue to say that you are going to be a leader in technology, but, you know, so far it's been working and we're, but that's why, you know, things like, okay, that's nice, but what, right, and probably will remain that way for some time. And, you know, and so the differentiation gets maybe more difficult if technology isn't rapidly changing. And you got to obviously make sure you get a return in the near term. So, you know, I would say what's next for us is more on the logistics side of the business. And I'm not going to give you any more color than that, but it's, you know, there are a lot of product moving around. And when you've got Montney Wells with 10, and I'm talking metric tons here, it doesn't much matter, but, you know, you've got 10,000, plus tons in a well, that's an awful lot of product to get from A to B in a very knowing full well that you just can't store it. And every time you take it from truck to rail or rail to truck, it's, you know, you add 10 bucks a ton to the equation very quickly. So, you know, we're starting to look at almost turning the clock back and starting to look at the basics again, because logistics can really have an impact on not just the quality of your service offering, but on the profitability of it and looking for little places to squeak out little savings and efficiencies. You know, when you're looking at this many tons per year of sand pumped, man, you scrape a few nickels off the edges, they add up quickly.

Yeah, yeah, got it. And just to follow up on that, so with the potential to get into more logistics type of offerings or whatever it ends up being in general, would you see a necessity for your capital intensity to change? Like, could you continue to do those types of investments meaningfully without spending materially different from how you're – you know, the amount of capital you're spending – You know, today is that kind of $100 million, $115 million? Or how should we think about that?

Yeah, I mean, that probably depends on the year. But I think it's a pretty good placeholder, you know, when you look out a few years. I mean, you know, I don't know the answer, and it can change every day. But it feels to me, I mean, you know how it goes in this business. You can only spend so much money intelligently without overbuilding or, you know, causing a bunch of. product inflation and just the supply chain of stuff, whether it's an engine or a rail car, you just can't get everything you want in the time you want it. And so when you think about the aggregate cap and on a per year basis, it feels like what we've been doing probably should be relatively consistent And there's going to be years where it's less and there's going to be more, but I think it's a pretty good placeholder from building a capital model, say.

Okay. Thanks, Brad. I appreciate the comments. Thanks.

Once again, if you have a question, please press star, then 1. The next question comes from Bokar Saez with ATB Capital Markets. Please go ahead.

Thanks for taking the question Brad as you think about building your logistics business Your thinking is mostly confined to us frac sand logistics or You're also thinking of maybe you know people who says well a distribution they can you know master guess others number one and number two is the logistics business you're thinking about only to cater to your own fleets or also to be providing services to third parties as well?

I don't want to answer any of those questions.

I mean, everything. You know, you've pointed out a good – you found a good point. Like it's not just sand, right? Our business is not just, it's not just sand that's moving around. When you have these natural gas fleets, there's an awful lot of natural gas that needs to be delivered on location in a short period of time. And not everybody has the luxury of a, you know, 10 wells that were drilled last year to tap into for gas supply, right? So it could be, you know, it could be fuel, whether it's, you know, diesel and natural gas or, You know, the other big items obviously are sand and then there's some chemicals, but that's probably time. And as far as, you know, we're going to do it for our own benefit or are these like sort of independently operating businesses? The answer is we're looking at everything, you know, and there's no press release coming tomorrow. We're looking at it. We're being very thoughtful, you know, very analytical. You know, we're looking at the whole structure sort of value chain, I guess, right from the beginning. And, you know, we love Canadian market. So we'd much rather grow our presence here than sort of take Hail Mary's in other countries. So we're looking at that means we look at everything.

And then in terms of the supply chain for Tier 4 DGB, how is that improved or changed? And so what's kind of the previous delivery if you were to order a new fleet today?

Yeah, I'll hand that over to Todd to your COO.

Yeah, the supply chain has improved slightly, but it's still quite a long lead time, probably in the neighborhood of 12 to 18 months for delivery and retrofit of equipment.

Okay. And any changes on the pricing side for that equipment?

Yeah. Okay. Thank you, Seth.

Thanks. Okay, thanks, everyone. I guess this concludes our call. There's no more questions in the queue. So thanks for joining. Thanks for taking the time. The executive team is available for the remainder of the day for questions. Please call us directly if there's any other questions you would like to ask. Thanks. We'll talk to you again next quarter.

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