Trican Well Service Ltd.

Good morning, ladies and gentlemen. Welcome to the TRICAN Wealth Service Fourth 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 Service Limited. Please go ahead, Mr. Fedora.

Thank you very much, and good morning, everyone. Thank you for attending the TRICAN Fourth Quarter Results Conference Call. First of all, Scott Mattson, our Chief Financial Officer, will give an overview of the quarterly results. I will then provide some comments with respect to the quarter and the current operating conditions and our outlook for the near future. And then we'll open the call for questions. As usual, several members of our executive team are in the room today and are available to answer any questions anyone may have. And now I'd like to turn the call over to Scott to start things off.

Thanks, Brad. Good morning, everyone. 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 Q4 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 2023 annual information form for the year ended December 31st, 2023 for a more complete description of business risks and uncertainties facing Trican. This document is available 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 Q4 2023 MD&A. Our quarterly results were released after close of market last night and are available both on CDAR and our website. So with that, let's move on to our results for the quarter. Most of my comments will draw comparisons to the fourth quarter of last year, and I'll provide a few comments about our quarterly activity and expectations going forward. Trican's results for Q4 were as anticipated, essentially in line with last year's Q4, with slightly more activity muted a bit by inflationary pressure and impacted by the standard Christmas break, which lasted pretty much through the end of the year. Revenue for the quarter was $254.9 million, an increase of about 8% compared to Q4 of 2022. An adjusted EBITDA came in at $56.4 million or 22% of revenues, down slightly from the $59.4 million or 25% of revenues we generated in Q4 of 2022. This was mainly attributable to our job mix in the quarter based on the specific well designs and customer programs that we executed during the quarter. Adjusted EBITDAs for the quarter came in at 58.8 million or 23% of revenues, again, essentially in line with the 60.1 million or 25% of revenues we printed last year. To arrive at EBITDAs, we add back the effects of cash-settled share-based compensation recognized in the quarter to more clearly show the results of our operations and remove some of the financial noise associated with changes in our share price as we mark to market these items. On a consolidated basis, we continued to generate positive earnings, printing $28.8 million in the quarter, which translates to about $0.14 per share basic and 13% per share on a fully diluted basis. We generated free cash flow of $38.7 million during the quarter, as compared to $47.1 million in Q4 of 2022. Our definition of free cash flow is essentially EBITDA, slash non-discretionary cash expenditures, which includes maintenance capital, interest, cash taxes and cash settled stock-based compensation. As we've previously noted, we moved into a net taxable position in 2023, which is the primary driver of the year-over-year difference. You can see more details on this in the non-GAAP measures section of our MD&A. Capital expenditures of the quarter totaled $18.3 million, split between maintenance capital of about $8.8 million and upgrade capital of $9.5 million. The upgrade capital was dedicated mainly to our ongoing Tier 4 capital refurbishment program and the electrification of ancillary frac equipment, which Brad will touch on later. Updates to our fifth Tier 4 fleet were largely completed in the fourth quarter, with final commissioning occurring early in Q1, and that equipment is now deployed and operating. The balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $153.2 million, including cash of $88.8 million. And I would note that a portion of that cash balance will be used to satisfy our 2023 tax obligations and will flow out in Q1 of 2024. Finally, with respect to our return of capital strategy, we repurchased and canceled 2.6 million shares under our NCIB program in Q4 of 2023. On an annualized basis in 2023, we repurchased and canceled a total of 22.7 million shares at an average price of about $3.46 per share. representing approximately 10% of the shares outstanding at the beginning of last year. We've repurchased and canceled about 2.6 million shares since year end, and we continue to be active and opportunistic with our buyback program. As noted in our press release, our board of directors approved a dividend of 4.5 cents per share for the quarter, representing an increase of 12.5% from our previous quarterly dividend. This essentially offsets the reduction in share count as a result of the company's ongoing NCIB program and will keep our annual expected dividend payout in the $34 to $36 million range. Distribution is scheduled to be made on March 29th, 2024 to shareholders of record as of the close of business on March 15th. And I would note that the dividends are designated as eligible dividends for Canadian income tax purposes. So with that, I'll turn things back over to Brad.

Okay, thanks. My comments will include what happened in Q4, what's happening currently, and what probably most people are interested in, what we expect for the next few quarters, particularly this summer. So on the Q4 recap, overall, like as Scott was saying, it went pretty much as expected. We now expect Q4 to be slower than Q1 and Q3. As the year winds to a close, more work has shifted to Q2 in these last few years and we expect that that'll continue on which is actually great. It keeps our staff busy throughout Q2 and then gives everybody a better Christmas break which is appreciated by the staff in this industry. All of the pricing in each business line did We did feel a little bit of pressure. We're continuing to feel that pressure as people sort of get antsy with gas prices. And particularly in Q4, there was some real aggressive pricing as people positioned themselves the winter. When that's happening, we typically withdraw from those situations, and we will continue to do that going forward. We believe in the value that we have to offer, and we'll make sure that it's priced accordingly. We're still in the fracturing division. We're still running with seven frac crews. We don't think the activity is there yet to justify an eighth or a ninth crew. One of the highlights from Q4 is that we did our first pad for Petronas, which is one of the LNG Canada partners. It went very well. The equipment and the people performed. division continue to prove our expertise and leading marked position in the service line. We ran our cementing division at our absolute active capacity, which means all the equipment that we can staff. We still hold about a 35% market share in the overall basin and just over 50% in the Montney, Duvernay and Deep Basin, which is an indication of the customers looking to us for anything that's sort of technically tricky or or you know critical you know they turn to us for those for that service line and of course we're really happy with this division as a technical year we have a great customer list and we expect that this division will continue to perform really well in the next few years on the coil side we made i think we made we're making good progress there as i've mentioned in previous calls our coil division is one of those that happy with just because of the scale. It's very profitable at the field level, but certainly the scale of that operation needs to increase in order for it to generate a reasonable return on invested capital. We want to run more in the line of 10 coil crews as opposed to seven that we're operating today. We've added a key salesperson from one of our competitors who is already having a significant impact on our activity going forward. and we'll just continue to focus on that and slowly build that division. So what's our outlook for the rest of the year and for Q1 of this year? We expect Q1 of this year will be slightly lower than last year, nothing major. There's a few less rigs running. We have low gas prices, so we have had some margin compression. It'll still be a really good quarter, just probably won't match up to last year. You know, we had a really slow start in January. It seemed like the Christmas break seemed to extend past New Year's. And then just as we were ready to start, we were hit with some brutally cold weather, which lasted for about a week. And so we really didn't get started until the second half of January, which is slow. You know, normally it starts much before that. And then for February and March, you know, we're completely booked, very, very busy, you know, limited only by weather. So... we see 2024, again, I think it's going to be a good year, but it probably won't measure up to last year just due to the fact that we've had some disappointment in the natural gas prices over the last two months. And what does that mean? We've had some work move out of Q1 and pushed into the summer as people are looking for better gas prices and lower water heating costs. We've had very little in the way of outright cancellations, but we do expect drought conditions that are, you know, present in much of Western Canada to cause some water restrictions this summer. You know, we will have to turn more to produce water or recycled water. And as we've talked about in the past, we have an extensive portfolio of chemicals to deal with this exact scenario. So, you know, we're kind of excited to put sort of our technical chemistry to work this year. About 70% of our frac chemistry supports non-potable water, which basically means like produced or effluent or recycled water. And about 60% of our customers make use of non-potable water in their fracturing operations. And we would say overall on an annual basis about 40% of the water we pump is non-potable. So even though we do expect restrictions, we think we're going to fare very well throughout that in our chemical offering. I think will prove to our customers that it's well worth looking into. So we are expecting some choppiness this summer just due to gas prices. The strip for gas is good in the winter, but it's fairly soft in the summer and any time there's sort of any unease in the market, you do expect some margin compression. That's normal. point of activity. The DuVernay is building momentum, very, very frack intensive, and it's sort of oil and liquid space, so that won't be affected by gas pricing. You know, we think that our equipment fleet is very well suited for the DuVernay. Our fifth fleet that just came out was built specifically with the DuVernay in mind. It's heavy duty, high horsepower pumps built to pump at high pressures for long periods of time. And so we will actively market that equipment fleet with the DuVernay customers as it's now ready and operating in the field. We are expanding our cementing services into the clear water, into the heavy oil. That's some of the ground that we gave up just due to the staffing shortage in 2020 and 2021. But I think we'll build that market back up In general, I would say the supply chain is operating still at capacity. We're still very careful to manage, especially things like third-party trucking and sand supplies into northwest Alberta and northeast BC. That supply chain has been playing catch-up for the last few years, and so we'll actively manage that going forward. On the strategy side, even though we expect we could have a choppy summer, We still think Canada is a great place to do business. We love this base going forward. We expect it to be sort of a growth avenue for us. Just in the Montney alone, LNG drilling activity has been very active. That facility is expected to come on stream early next year. So all the players there are active, making sure that they have the production required. Trican has a balance sheet. to allow us to continue executing our strategy going forward. We actually look forward to times of volatility. We're uniquely set up to take advantage of any pauses or choppiness in the market. And we're certainly not concerned about anything from a gas price perspective, as we expect it's going to be short-lived. And we're actually looking forward to taking advantage of any opportunities that may come up. Frack intensity on a per well basis is still increasing. Large sand volumes, lots of stages. We expect over 8 million tons of sand to be pumped in Canada this year, and that's in comparison to just over 6 million in 2021. So sand is something that we're still actively managing. We've talked about sort of our logistics perspectives on how we're going to deal with these increased volumes going into northeast BC. And so we're still looking at investing in that side of the business, and it's another way that we think we'll differentiate ourselves. And as we've said before, you know, differentiation and modernization is the key to our strategy. You know, we have state-of-the-art equipment. We're upgrading our systems. We have indigenous partnerships in northeast BC, all of which makes for a very profitable and sustainable business. We still have the most efficient fracturing fleet in Canada. I think up until recently, we've displaced over So that's something that's been very well received by our customers and we expect that'll be the standard technology in the Monty going forward. We run five of the nine tier four fracturing fleets that are active in Canada today. So we're very fortunate to have had a sort of a two-year head start in that technology. And recently... Another one of our differentiation strategies has been with the electric ancillary equipment. We're the only pumping company in Canada that has electric frac equipment. And when you combine this with the Tier 4 technology, we get over 90% diesel displacement with natural gas. So it's very well received by the customers. It's actually something that we can continue to focus on this year, and we expect to build out our capacity on the electric side in the next few years. It's operationally very efficient, uses less people. We expect less R&M with the equipment, and it's something that we definitely intend to focus on. On the shareholder return of capital side, our priority is still to build a resilient, sustainable, and differentiated company going forward. It's gone very well over the last few years. We'll look for any blips in the mark to take advantage of any M&A opportunities that present themselves, and other than that, we'll just continue to focus on our strategy and deploy our equipment, particularly into northwest Alberta and northeast BC. We're still very active in our NCIB. We purchased just under 23 million shares last year. We continue to be active every day in the market in 2024, year to date, and we'll continue to go forward with that. On the dividend side, as Scott mentioned, we've had a small increase, which just offsets the share reduction due to the NCIB, and the record date is March 15th, payable at the end of the quarter. I think I'll stop there, and we'll go to 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Aaron McNeil with TD Cohen. Please go ahead.

Hey, morning. Thanks for taking my questions. It's been pretty warm lately, but also pretty dry. I haven't seen anything in terms of road bans on the Alberta website. But how do you think road bans might impact Q1 and Q2 this year? You mentioned the drought conditions. Will that impact the pace of activity? Maybe just an update sort of on external factors that are positive or negative.

Yeah, excuse me. This time of year there's always road ban concerns and certainly, yeah, it's been a warm Q1. There's very little snow up north. And so Yeah, you can have sort of 10 to 10 bands on, but that's quite typical for this time of year. You know, there's certainly a lot of work booked for the rest of February and into March. And the Q2 work, you know, is always dealing with road bands and bonding roads and staging sand and water in advance. I would say the difference now... that you haven't, that we're seeing this year that we haven't seen in prior years is that you're seeing customers actually start to really think about how they're going to be managing water months in advance. And so, you know, they just haven't had to worry about that before. And so you're starting to see, you know, the rentals of on-site sea rings or, you know, the big swimming pools on location that, you know, all of that, that market is extremely active. So it's nothing new I think the industry continues to get better at sort of long-term planning. And, you know, I think with this drought that we've had for the last couple of years, people will just think about water sort of three, four months in advance instead of three or four weeks in advance. And it's really important to note that the activity in northeast BC is mostly It's not, you know, just because there's water restrictions doesn't mean that, you know, the completions activity is severely impacted. You know, there's lots of ways to work around this problem. And of course, you know, if we get a bunch of rain in May and June, like we usually do, you know, that'll alleviate a lot of these concerns.

You mentioned the aggressive pricing in Q4. Has that continued into Q1 and, you know, I know you're not going to participate in competitive bids, but is that starting to impact your utilization as you get undercut on pricing? How should we think about that?

No, our utilization has remained really high with the exception of the first half of January. Every time the market flinches, there seems to be some nervousness that goes around, but we're one of the few companies that has a long-term customer list. And so we're fortunate, right? It's a 28-year-old company. We've had many of our customers for 10 plus years now. So we're not looking for a new customer list every quarter like some of our competitors are. And so we tend to be somewhat insulated by that activity. But yeah, we don't feel the need to chase it. We don't have covenants to meet. You know, we're well ahead of the refurbishment of our equipment into the Tier 4 technology. So, you know, we're in a really fortunate position. You know, we're able to sort of sit back and sort of look at how we're going to take advantage of these kind of times in the market. And if the quarterly results are down a little bit, so be it. We run this business for the long term, not the short term. And fortunately, we're not... sort of impacted by short-term, you know, sort of financial volatility.

Makes sense. I'll turn it back. Thanks, Brad. Thanks, Aaron.

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

Hi, good morning. So, Brad, you mentioned you're going to stick with seven active fleets. and you've still got five potential fleets in the yard that you've talked about historically. How do you think about this excess capacity, given you see the market to be relatively stable in Canada for the next few years, a sentiment we would certainly agree with? How do you think about that excess capacity? Is there any opportunity to rationalize and and use that to improve margins over time, or do you think you'll potentially still need that capacity, or just how are you thinking about it in light of the market of today?

Yeah, it's both. We have been rationalizing our equipment fleet, and that's just the really old equipment that was left. We're sort of fortunate. A lot of the really old, outdated equipment was taken care of a few years ago now, prior to me joining. And so we were in a great position from a selling equipment perspective. So yeah, we've rationalized a little bit of equipment and we will always continue to do that. But we do generally believe that a good majority of that spare capacity will come online. And so we're happy to have it sit there until we're ready to bring it out.

And maybe add one other thought, Keith, that as we went through our Tier 4 refurbishment program over the last few years, we effectively took gear off the fence, upgraded that gear, put it in the field and displaced the existing operating stuff. So the stuff that we've actually got parked, our spare capacity is actually quite fresh and ready to go. So as we look forward a few years as industry activity will likely pick up, we'll be able to easily respond to that incremental demand when it comes. So that capacity is still in pretty good shape and doesn't require CapEx to spend to get it going again.

Yeah, fair enough. And just secondly, we've seen a few budget cuts from Canadian producers recently. What impact do you see, direct or indirect, on your outlook for market fundamentals for your services as a result of some of these cuts Certainly it might change if we continue to see more, but overall things look to be relatively stable or up a little bit from last year in terms of a total capex spending perspective, but we have seen some of those cuts recently. How significant of a risk do you see this as to your business in terms of financial results differing materially year over year or just generally the tightness in the market?

Well, just like I think we said in the comments, we've changed our perspective. On the last call, I would have said we would have expected an increase in activity in 2024. Now, I would say we would expect a decrease in activity compared to 2023. How significantly? I don't think that significantly, but I think it's a little early to tell in the budget cycle for 2024. You know, part of me says this, you know, anytime there's a downturn, it's the perfect time to increase your investment. So, you know, how will it impact us? No, I mean, it could prove to be some great investment opportunities. You know, we've run the company to, you know, not just sort of weather these situations but to take advantage of them, right? We have no sort of concerns about anything other than making sure we don't miss any really good opportunities out there that may come this summer.

Okay, thanks very much. I'll leave it there.

Once again, if you have a question, please press star, then one. The next question comes from Cole Pereira with Stifo. Please go ahead.

Hi, morning all. So thinking about the 2024 outlook, Is it fair to say that you think maybe margins degrading year-over-year are more of a factor than activity? And you talked about a slow January, but are you able to talk about how activity has been year-over-year maybe excluding that? As I'd assume, any CapEx reductions will be more of a second half of 24 event, kind of similar with what Keith said.

Yeah. Anytime you have an activity downturn, even if it's 3%, 5%, it always impacts margins because a lot of our competitors have very different balance sheets than we do. And so they get antsy. So definitely there'll be a margin impact going forward. And I think to your point, that might be more than the overall activity change. I would say activity in the quarter excluding January is pretty much consistent with last year. February, March of this year would be very similar to last year.

Any updates you can provide on how you're thinking about your FRAXAN logistics strategy?

No updates other than I think we will have

sort of investment in the ground and working this year got it thanks and you know obviously you're still active with the buyback but the pace that seems to be slowing a bit compared to last year you know despite having a bunch of cash and significant free cash flow generation shares pulling back a little bit how are you guys kind of thinking about the buyback you know relative to how active you were last year well

You can't compare this year with last year without comparing the stock price and the multiples associated with those stock prices. And so we're very opportunistic in the market. So any time like last year where we had a total disconnect of market price from from cash flow generation will get very aggressive.

Got it. Thanks. That's all for me. I'll turn it back.

The next question comes from Joseph Schachter with Schachter Energy Research. Please go ahead.

Thanks very much, and thanks for taking my questions. Brad, you mentioned that you wanted to grow your coil tubing fleet from 7 to 10. Are there any technology changes going on you know, like we saw in the frac fleet, that building new equipment with all the latest technologies would be better than buying, you know, equipment that's out there that's working now from a competitor that's not as strong balance sheet as yourselves. Just wondering if there's an upgrade cycle in coil tubing like we saw in the frac fleet.

Yeah, good question. You know, any coil that we added will come from our existing idle fleet, so we won't be purchasing any new equipment. There's not so much technology on the coil side, but there's lots of technology on the tool side. And so those go hand in hand, and so we're quite diligent in making sure that we're participating in any new technologies. unit utilization. You know, just the overall frac, I mean, the changes in frac with more stages and more overall sand drives coil utilization as well. So, you know, there's no real shift changes like we've seen with, you know, Tier 4 natural gas engines, but, you know, we're certainly looking at applying that same technology to coil as well. There's no reason why we eventually can't. I mean, there's natural gas tractors that are in the market today. We're always looking for ways to reduce diesel consumption and increase natural gas consumption on location, whether it's with fracking, cementing, or coil.

Okay. Second question for me. When you're having your customer discussions related to later this year and 2025, once LNG Canada comes on, are you finding that they're thinking of waiting until they see a $2.50, $3 kind of handle on ACO, or is it just that they know there's 2 BCF more? There's got to be more. If you don't have the gas, you've got to drill it up. What's your thinking in the kind of conversations you're having, and what's your thought process? Is it price-sensitive, or is it volume-sensitive?

I think the answer to all of those questions is both. We've got the LNG Canada partners that would have some production requirements that need to be filled, but of course other parties, whether they're selling into that or not, we're looking at gas prices and you've got a real differentiated, we've got a summer strip that's consistent with today's prices followed up by a winter strip that's Most of the customers that we talk to expect a much better market in 2025, and certainly the LNG Canada partners, and I in no way speak for them, but I would expect they're trying to design sort of just-in-time inventory as much as they possibly can.

Thanks very much.

Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Fedora for any closing remarks. Please go ahead.

Okay. Thanks, everyone. Thank you for your time and attention to our company. The management team will be available today to answer any questions that you need to follow along with. So thank you very much.

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