Trican Well Service Ltd.

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Third Quarter 2024 Earnings Results Conference Call and Webcast. As a reminder, this conference is being recorded. I would now like to turn the meeting over to Mr. Brad Fedora, President and Chief Executive Officer of Trican Well Service Limited. Please go ahead, Mr. Fedora.

Good morning, everyone. Thank you for joining our Q3 call. First, instead of Scott Matson, who's traveling today, Desmond Ho, our director of corporate finance, will give an overview of the quarterly results. And then as usual, I will provide some comments with respect to the corridor, the current operating conditions, and our outlook for the rest of this year and next year. And then we'll open the call for questions. We have several members of our executive team in the room today, and everybody will be available to answer questions, not only during this call, but for the remainder of the day. I'll now turn the call over to Desmond.

Thanks, Brad. 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 Q3 2024. 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 31, 2023 for a more complete description of business risks and uncertainties facing Trican. This document is 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 Q3 2024 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, I'll provide a brief summary of our quarter. My comments will draw comparisons mostly to the third quarter of last year and I will also provide some commentary about our quarterly activity and our expectations going forward. Trican's results for the quarter compared to last year's Q3 were solid, but not quite as strong as last year as certain customers delayed portions of their capital programs. Programs were delayed for various reasons, including water restrictions in some specific cases, well-licensing requirements, and customers generally managing their capital programs through the last half of the year in the face of challenging commodity price environments, particularly natural gas pricing. Revenue for the quarter was $221.6 million, with adjusted EBITDA of $50.2 million, or 23% of revenues. Not quite as strong as adjusted EBITDA of $65.7 million, or 26% of revenues we generated in Q3 2023, but still solid. Adjusted EBITDA for the quarter came in at $53.1 million, or 24% of revenues. To arrive at EBITDA, we add back the effects of cash-settled share-based compensation, recognizing 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 market these items. On a consolidated basis, we continue to generate positive earnings, producing $24.5 million in the quarter, which translates to $0.12 per share on both a basic and fully diluted basis. Trican generated free cash flow of $32.4 million during the quarter. Our definition of free cash flow is essentially EBITDA less non-discretionary cash expenditures, which include maintenance capital, interest, current tax, and cash settled stock-based compensation. You can see more details on this in the non-GAAP measures section of our MD&A. CapEx for the quarter totaled $15.2 million, split between maintenance capital of about $10.4 million and upgrade capital of $4.8 million. Our upgrade capital is dedicated mainly to the electrification of ancillary frac equipment and ongoing investments to maintain the productive capability of our active equipment. The balance sheet remains in great shape. We exited the quarter with positive working capital of approximately $136.5 million and expect to release a bit of working capital as we move through Q4 and exit the year in a similar strong position. With respect to our return on capital strategy, we repurchased and cancelled 7.5 million shares under our NCIB program in the quarter. Subsequent to Q3 2024, we'll purchase and cancel an additional 1 million shares and continue to be active with our buyback program. The 2023-2024 NCIB program was successfully completed on October 2nd, 2024, resulting in the purchase of 21 million common shares, the full 10% of our public float allowable under the program, at a weighted average price of $4.51 per share. On October 2nd, 2024, we announced the renewal of our NCIB program, which will allow us to purchase up to 19 million common shares. Again, 10% of our public flow to add renewal. The renewed program is scheduled to run from October 5th, 2024 through October 4th, 2025. As noted in our press release, the board of directors approved a dividend of 4.5 cents per share, reflecting approximately 8.5 million in aggregate to shareholders. The distribution is scheduled to be made on December 31st, 2024 to shareholders of record as of close of business on December 13th, 2024. I would like to note that the dividends are designated as eligible dividends for Canadian income tax purposes. With that, I'll turn things back to Brad.

Okay, thanks. My comments will include Q3 and then what we're seeing in the market today. Overall, even though we were happy with the corridor, it was softer than we expected. As you may recall, we talked about this in the summer that certain customers had moved Q3 work forward into Q2 to avoid potential water restriction and drought issues and forest fires, etc. And so that took some of our July, August work and bumped it into Q2. And then we also had some customers move some work from September into Q4. And so overall, The quarter was a little lower than we were hoping for. I mean, considering where gas prices are today, we're still really happy with the activity levels. And as a result of the work moving out of September into Q4, you know, we are expecting a really good Q4. But generally, you know, the rig count remained pretty resilient throughout Q3, you know, given where commodity prices or gas prices were. You know, a lot of those rigs are focused on the oilier plays like the Clearwater and SagD, so they're not very fractionalized. Our frack revenue was down 18% year over year, and EBITDA in that division was down about 25% as well. On the flip side, in general, cost inflation basically had stopped for Q3, and in fact, we actually experienced some cost reductions in certain areas, which helped mitigate the pricing pressure we experienced, and we were able to maintain reasonable margins. We're still running with seven frack crews. Nothing's changed. We remain very disciplined in the market, which means we're only operating about 70% or 60% of our total horsepower, operating seven of 12 frac crews. I think most of our competitors are basically operating at capacity, which means that we possess most, if not all, the spare capacity in this basin. We are going to continue our focus In the Montney, in the Duvernay, in the Deep Basin, nothing's changed there. On the cementing side, the cement division continues to operate at high utilization, generating great results in Q3, and as an indication of the expertise in the market share that we experience in that service line. Our revenue was up 7%, and our EBITDA was up just over 1% in Q3, and that's just a result of the well designs in the areas that we work in, which is generally... places like the Monty and the Deep Basin where we enjoy almost a 50% market share. So very happy with the performance of this division. We expect it to perform well. You know, we do see that division trailing off as Q4 unfolds and everybody finishes their programs and we get into the Christmas slowdown. But overall, we're very happy with the performance of that division and expect it to perform well for the years ahead. On the coil tubing side, you know, we're still trying to build up that division. focused on growing our market share. You know, we, we enjoy good field margins, but you know, the scale of that division is still too low or still too small. Um, revenue was down about 5% in Q3 year over year and the, and the profitability, although good in the field is not great at the, at the bottom line division level just due to its overall scale. So we'll continue to focus on building that out. We're very excited, um, about our partnership with ACOS, which is a specialized tool company, and the oily plays throughout the Western Canadian Basin. We expect our coil division to grow its market share as that tool gets deployed in Canada. So we're all up for Q4 in 2025. And as I said, as a result of work moving out of September into Q4, we actually expect Q4 to be quite busy. As customers complete their programs for this year, we're very happy with our results quarter to date, which is the end of October. We actually expect our Q4 to exceed expectations in the market and beat our Q3, which is not typical. It's just based on the fact that we had work move out of September and into October and November. You know, it's fortunate that strip for the winter, the gas strip for the rest of this year and into 2025 remain at very economic levels. So we're expecting, you know, that combined with the financial discipline of our customers, we're expecting activity in 2025 to be basically near 2024. You know, as always, anytime you have periods of lower depending on who your customer list is in Q4. We are experiencing some pricing pressure just from our competitors. That's to be expected. You know, we'll sort of generally sort of soldier through that. You know, everybody is still very focused in the Montigny. I would say the Duvernay, which we've discussed in the past, is working out as good or better than expected. Very fracturing intensive. Very service intensive for coil and cement as well. We're excited about that play as it builds momentum. Our corporate strategy, really, nothing's changed. Our priorities are to build a resilient, sustainable, and differentiated company. We're currently modernizing our systems internally and just getting ready for the next five to ten years. for over 30 years and so you know we're in the phase of the company where we're having to upgrade all of our systems and make sure that we can take advantage of the technology and anything that may happen in with AI going forward making sure that our systems are prepared for that we also want to invest in high quality ensure a value added product and service offering to our customers. That's the bottom line with any service company, making sure that we're providing value to our customers that our competitors cannot add. And with that, that all should lead to a consistent return of capital to our shareholder in the form of dividends and share buybacks and share appreciation. And even though We may be – the market's a little choppier these days just given where gas prices are. We're still very bullish on Canada over the next five years. We view Western Canada as an attractive place to grow our business. We're still focused on being a Canada-only company at this stage. And even though spot gas prices are lower than we would have hoped at this time of year, we expect as LNG comes on that that will correct itself. And we're actually looking forward. with some upside potential in the second half of next year once LNG exports start flowing off the west coast. We're still seeing active drilling in northeast BC, northwest Alberta, which is all feedstock for the LNG facility. We do expect, based on what we're hearing, an investment decision on phase two of LNG Canada next year, and we assume it would be a positive decision, which basically will double the capacity of that facility and then the other facilities along the west coast. continue to work through their various approval processes and FID processes. So we're expecting that LNG off the west coast of Canada will have a significant impact on Canada in the next five to ten years, providing a great backdrop to grow this business. TMX is operational, as everybody knows, which has reduced the differentials there. So I think everything's playing out quite nicely. They're only spending about 50% of their free cash flow and drilling and completions, and their balance sheets are still in great shape. So the volatility of activity from year to year has been greatly reduced, which is great for a service company. It allows us to maintain staffing levels at more consistent levels and provides sort of more of a career opportunity for our employees. We're finding now our voluntary turnovers is down to about 4% in our staff, which is unprecedented in the services sector. We have good free cash flow and importantly, a very clean balance sheet designed to allow us to execute on our plan, take advantage of any volatility or consolidation opportunities as they arise over the next few years. I've discussed sand logistics in the past, and I'm just going to give a brief update on that. Everything's sort of going as planned. You know, we've seen sand volumes grow, particularly in the Montney and the Duvernay on a per well basis. You know, it wasn't that long ago we were pumping five to six million tons of sand in Canada. Now that number is well over eight. So we're not expecting this trend to really change. We're still seeing the length of horizontals grow, the amount of sand per stage grow. to moving ever increasing volumes of sand with a very keen focus on last mile logistics to make sure that we are moving transporting sand profitably our partnership with sources is unfolding nicely the facility will be ready um in in uh before christmas with sand loading um from rail to truck and this is the facility that we're building in taylor bc which is which is Northeast BC, basically in the heart of the Montney. This partnership will benefit Trican from a strategic and cost perspective, and the whole facility should be operational in Q1, which will give us storage facilities as well as loading facilities to service our customers in Northeast BC. And what this does is it allows us to use our trucking fleet more effectively ensure our customers that sand will be delivered to their location in an efficient manner possible. You know, it's not uncommon for us to deliver sort of 40 tons of sand every 12 minutes for days on end. In order to do that, you have to ensure that you have a trucking fleet that's working efficiently and making sure that you have the sand volumes available to those trucks at the transload facility. So we're continuing to work on our logistics and our last mile logistics in particular. And we expect that that'll be a revenue and profit source for this company going forward. On the technology side, we've kind of gone sideways here for the last year. We've been reviewing a few different pumping equipment technologies in our fracturing department with the ultimate goal that we want to have 100% natural gas-fueled operations on location in the future. And, you know, we think this 100% natural gas-fueled operation is the cornerstone of any technology strategy here at Trican. As everybody knows, natural gas is very abundant in Canada, burns cleaner than diesel, and on an energy-equivalent basis is much less expensive than diesel. And, you know, sort of the example that we use, which I think is easy for everybody, is $3 gas is essentially the equivalent of 15-cent diesel on an energy-equivalent basis. So huge cost-saving opportunity if you can get your equipment and to run on natural gas. As you've seen some press releases recently, we're also starting to think about, do our sand logistics trucks run on natural gas instead of diesel? And I'm sure over the next few years, we'll see that evolve as well. There's various pumping technologies available, each with their own pros and cons. We've deployed the tier four over the last couple of years very successfully you know we're also trialing an electric frac pump right now we've deployed the electric ancillary fracturing equipment which is things like the blender and the chem band and sand just sand handling equipment etc and that's gone very well very well received by our customers you're seeing in the marketplace there's also you know turbines 100 natural gas engines so we're reviewing all of that and We have been now for several quarters. Even though we're actively deploying our tier 4 DGB technology and our electric ancillary equipment, we'll continue to evaluate the various technologies that are available and make the most sense going forward with the goal of achieving 100% natural gas fueled operations. We expect that we'll be in a position sometime in the next few quarters to of our Tier 4, we'll see. On the return of capital and just value for shareholders, as everybody knows, Trican continues to generate great free cash flow. We maintain a clean balance sheet. We do subscribe to a diversified return of capital strategy through a combination of our quarterly dividends. and our NCIB when the NCIB represents a good investment for our shareholders in the context of the other growth opportunities and M&A opportunities that are in front of us. You know, we'll basically just rank our investment opportunities and pick the ones that are best for our shareholders over the long term. We're not afraid to dip into our bank lines if we find something attractive or we feel like that our shares are way undervalued. So we maintain a fairly robust bank line of about $150 million, and we won't be afraid to use it when the right opportunity presents itself. I think as Desmond had mentioned, we did complete, we did fully complete our 2023-2024 NCIP program in very early October. We bought the full 10%, which was just over 21 million shares at an average price of about $450 a share. I'm looking at Desmond. He's nodding, so that's good. We did renew our NCIB program for another year, and we've been active in that since we started it on October 5th. We are active in the market every day. We purchased a million shares or so over the last month. And we continue to evaluate this and everything else, and we expect to deploy our capital accordingly. Our dividend program, we do renew it at the end of each year, which I guess is in Q1 of next year. As we've discussed previously, we will adjust our dividend to account for the number of shares that we've bought in the prior year holding that annual aggregate dividend payout in the $36 million range. We'll just make those adjustments based on the math. 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 a 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. We will pause for a moment as callers join the queue. The first question comes from Keith Mackey with RBC Capital Markets. Please go ahead.

Hey, good morning. Just maybe wanted to start out on this 100% natural gas fueled strategy. Just curious, you know, what you'd need to see in order to be comfortable picking a strategy and then maybe what you'd need to see in order to be comfortable putting some of that equipment into the field from a contract perspective. Certainly, the U.S. market's been ahead of Canada, and it seems to have come to a mix of DGB electric and then natural gas reciprocating type engines. So maybe, Brad, can you just kind of walk us through a little bit of that, what you're seeing so far, and then ultimately what you'd need to see to be comfortable picking a strategy and putting some of that equipment into the field? Yeah.

Yeah, I mean, that's the core of the issue because the technology is available for 100% fueled operations today, whether it's electric or 100% natural gas engines. Now, they all have their issues from an operating perspective and from a footprint perspective. What is really great about the Tier 4 technology, it gets you to 80%, but there's very little change in the overall layout of the equipment and the operation. of foolproof because if you have interruptions in gas supply which is an issue um you know you can switch to to diesel so when we look at when we look at the various technologies you know we're looking at how effective is it how reliable is it what's the footprint on location you know how robust is it from with respect to operating in very And then assuming you can work through all of that, you of course have to make sure that you can operate the equipment and most importantly, that you can eventually get a return on that equipment. Like what we're seeing with the electric equipment is it's great to operate, like we have experience now with our ancillary fracturing equipment and the lack of hydraulic hoses, things like that is great, especially in the various, the constantly changing weather So it's great from an operational perspective, but is it a reasonably priced and does it have a reasonable footprint? Because there is a trend for these pads to stop growing and actually get a little bit smaller. And so as an example, one of the challenges with electric equipment is A, it's very expensive. You basically double the cost of a fracturing spread when you buy all the electrical generation equipment. and all that electrical generation equipment which runs on natural gas, you know, it has to go somewhere, right? And so operators, you know, they're not looking to build bigger pads to accommodate all of this. And so, you know, I hope you could sort of sort through the list of things that, you know, we have to think about when we pick a technology. You know, the technology is there. It's really just how practical is it in a Canadian setting And can you get it at a price that you can generate a return from? And there's a lot of things obviously that go into the cost of ownership and we're sort of sorting through that with our trialing of the electric pump because there's very little sort of off the shelf data for any of these technologies with respect to the sort of five year cost of ownership. So it can be challenging at times Typically, customers are never looking to pay more. You have to say, in the context of current pricing environments and what I would call fairly flexible contracts, can you generate a return on this equipment in the first five years? As we all know, with our cost of capital, economic or financial returns in years six to ten aren't that impactful at our discount rate. or 7, 8, 9 because you discount that back to today, it's basically zero at where our cost of capital is given the size of our company in the Canadian market. So there's a lot of things to think about. It's not just does the technology work or not.

Yeah, got it. Now, it seems like the U.S. model and maybe a little bit more of the drilling model as well has actually used somewhat of a take-or-pay contract to fund some of those upgrades Is the market in Canada on the fraction side amenable to that? Is that something you think you could actually do, or is that how the model would look? Or would you have to take some of that to return risk on, do you think?

Yeah, both. There are contracts. I think five years ago I would have said, no, there's no such thing as a contract. And I've softened on that. It's why we've softened on our views of debt as well. But You know, there are contracts available. Taker pay is a strong term. And, you know, I think you've seen better contracts on the drilling side than you've seen on the fracturing side. And I can't comment about the U.S. market. I don't have any first-hand experience there. But, you know, there are contracts available here in Canada. And I would say for the most part, you know, the last few years they've been honored, you know, which is new, frankly. But so you can make, I guess, less risky decisions. But at the end of the day, you know, one customer, you know, really can't drive a technological evolution in your company. I mean, you have to, you really have to evaluate how does it, how does it do, how does it, you know, where does it stand in the context of the market, you know, where you don't have surety. you know, are there operational advantages that it presents that it's going to be employed quite broadly? Because, of course, you know, that's, you know, one spread of a particular technology, you know, that's sort of almost pointless to pursue something like that. So great to have the contract, but, you know, it has to stand on its own two feet in a sort of a competitive bidding situation as well.

Yeah, understood. Okay, well, that's very helpful. Thanks very much.

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

Thank you. Thanks for taking my question. Brad, as your new terminal, London Construction Terminal in British Columbia comes up, how does that affect your operations and both operating efficiencies, logistics, and then really how does it impact the bottom line?

I'm not going to give you that kind of granular information, but I will say this. We have about 85 trucks today in our sand fleet. And they're currently picking up sand in the Grand Prairie area and taking it to, you know, northeast BC. And that is sort of a 8- to 12-hour trip, depending on, you know, where it ends up. And so, you know, the trucks come back empty. And that's in the summer. And in the winter, when there's weather and car accidents, things like that, that that length of time can grow very quickly because it's a single lane highway in each direction or you know double lane highway in each from grand prairie to northeast bc so lots of potential for interruptions there by putting a sand terminal in taylor you know we basically cut that trucking time in half and remember um typical frac companies you know the third party trucking rates so when you can't use your own trucks you have to go into the third party there's no markup on that. And so it's a straight pass through versus when we run our own trucks, we make a bit of margin on delivering sand when we use our own trucks. So it's not, and I understand you're trying to figure out how does this impact the model going forward? I mean, it's not a huge difference percentage wise, but every little bit helps, right? And as the sand volumes grow, in the basin, and customers are moving towards supplying their own sand, you know, thus removing that area of profit for us. You know, we have to figure out how we're going to make money in those conditions. And I think the best way to do that going forward is through logistics. And then, you know, we're at a point now where, you know, we think and into other parts of the economy. So, you know, we're very sort of focused on logistics and, you know, where we fit into the whole value chain.

And where is the Canadian pumping market now with respect to using local sands? Is it still going to be, you know, sand imported from the US or customers increasingly shifting towards locally sourced sand?

I don't know if you can hear us whispering in the background. We're debating whether it's 50-50 or 60-40, but it depends on the quarter. But in general, if you wanted to apply this to the basin, I would say 60% U.S., 40% domestic.

And is that ratio changing?

No, it's been pretty constant at that for a while now. Sometimes you'll see it go up to 70% U.S., customers change their minds. They try different sand to see if it has an impact on production because, of course, domestic sand is less expensive than U.S. sand given the shorter distances that it has to travel. But there is a crush quality difference as well. So you do see customers sort of experiment and So, you know, we would say generally it's 60, 40 going forward, but we wouldn't at all be surprised if that changes.

Sure. And then just one last question from me. Could you maybe talk about the overall supply of fleets in Canada today, or active fleets, and what proportion of that, you know, the fleet count is Tier 4, DGB, or, you know, this next generation fleets? Okay, so we have about 31 fleets in Canada.

Say 22 of those would be sort of deep basin to Montney focused. Out of those 22, say, sort of, you know, big Montney fleets, there would be seven or eight tier four fleets. We would have five of them. And maybe as high as 10. Tier 4 fleets now, it depends. There's a lot of on-the-come equipment, but I would say we're 50% to 70% of the Tier 4 equipment in Canada. All Tier 4s are not created equal either, what we're seeing with cars. Tier 4 engines combined with old pumps and transmissions have a high failure rate. know we we ensured that when we did the tier four upgrades that we had very robust transmissions and pumps upgraded or we had robot you know upgraded transmissions and pumps to make sure that the whole system is very robust so you know we still think even within the tier four world we still think you know we're leading from a from a non-productive time um by quite a margin you know

And just one question, if I may, more. You mentioned that your fuel substitution is close to 90%. That's pretty impressive. Now, is that an average number? And do you know what the average is in the Canadian market? Because in the U.S., we hear about 60%, 65%. That may have to do with the temperature and weather and all that. But 90% seems high if that's the average.

Yeah, I mean, I think max is 85, I would say, with the ancillary equipment. So we would have the highest because we have the electric equipment as well as the Tier 4s. And we have the most experience with the Tier 4 equipment. And so people like Kat would tell us that we have the highest substitution rates in North America. So I would think the Canadian average is similar. But if you play, you know, well to well, pump to pump, so many things can change, you know, the higher the pressures you get. So, you know, you might see lower substitution rates in the Duvernay as you have high pressure where the engines will switch to diesel, you know, trying to get that higher on the torque curve. So it's hard to sort of, you know, Canada is always challenging because you have such differing well conditions, you know, 100 kilometers apart.

Yeah. Well, thank you very much. Appreciate the color. Okay, thanks.

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

Thanks for joining, everyone. We appreciate your time. If there's any more questions, the management team here at TRICAN is available for the next few days, and hope you have a good day.

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