Total Energy Services Inc.

Thank you for standing by. This is the conference operator. Welcome to the Total Energy's first quarter results conference call. 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 one on your telephone keypad. Should you need assistance during the conference call, you may call an operator by pressing star and zero. I would now like to turn the conference over to Mr. Daniel Hollis, President and CEO. Please go ahead. Thank you, Operator. Good morning and welcome to Total Energy Services' first quarter 2020 conference call. Present with me this morning is Julia Gorbach, Total's VC, Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended March 31st, 2020, and then provide an outlook for our business and open up the phone lines for questions. Yuliya, please proceed.

Thank you, Dan. During the course of this conference call, information may be provided containing forward-looking information concerning total projected operating results, anticipated capital expenditure trends, and projected drilling activity in the oil and gas industry. Actual events or results may differ materially from those reflected in total forward-looking statements due to a number of risks uncertainties, and other factors affecting total businesses and the oil and gas service industry in general. These risks, uncertainties, and other factors are described under headings Risk Factors and Elsewhere in Totals Most Recently Filed, Annual Information Form, and Other Documents Filed with Canadian Provincial Security Authorities and are available to the public at www.cedar.com. Our discussions during this conference call are qualified with reference to the notes to the financial highlights contained in the news release issued yesterday. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars. Total Energy's financial results for the three months ended March 31, 2020, reflect a relatively strong track to the year as compared to 2019 that was short-lived when oil prices collapsed as a result of the COVID-19 pandemic and the Saudi-Russian battle for share in the global oil market. The impact of the decline in oil prices was felt in all of Total Energy's business segments. North American drilling and completion activity began to decline materially in March, and revenue in the compression and process services segments decreased materially on a year-over-year basis with a low production activity. Drilling and service rig activity remained stable in Australia during the first quarter, although increased wet weather conditions resulted in a greater rig standby time. Revenues for the quarter were $134.3 million, which was 40% lower than prior year comparable quarters. By business segment, Contract drilling services contributed 32% of 2020 first quarter consolidated revenues. Compression and process services, 30%. Well servicing, 25%. And rentals and transportation services, 13%. This compares to 55% in CPS segment, 21% in CDS segment, 17% in well servicing, and 8% in RDS segment. in the first quarter of 2019. Geographically, 52% of first quarter reported revenue was generated in Canada, 23% in the United States, and 25% in Australia. In the first quarter of 2019, 43% of revenues came from Canada, 34% from the United States, and 23% from Australia. Within our CDS segment, 57% of first quarter revenue came from Canada, 27% from Australia, and 16% from the United States. While operating days for the first quarter of 2020 were 7% higher than 2019, segments revenue for the quarter declined 6% on a year-over-year basis. This decrease alone arose from 12% decline in revenue per spot release, which was due primarily to the mix of equipment operating. Despite lower revenue, efficiency gains and cost management gave rise to $2.9 million improvement in quarterly segments operating income. The most significant year-over-year financial improvement within our CDF segment came from our U.S. drilling operations. Despite 37% year-over-year decline in operating days, and 16% decline in revenue for spark release days during the first quarter of 2020. The operating loss within our U.S. drilling business decreased by 45%, following efforts over the past several quarters to consolidate operations and improve efficiency. Underlying year-over-year decrease in the first quarter revenue for our U.S. drilling operations was a substantial reduction in operating days for our CEE triple rigs, as the market for bigger rigs began to soften. While first quarter utilization in our Australian driven operation on 1% percentage point lower and revenue per day was $1,970 lower than 2019, operating income was 45% higher in Q1 2020 as compared to Q1 2019. This was due to reduction in lower margin camp and other ancillary revenue, as well as strong cost management while rigs were on a paid standby due to prolonged wet weather conditions. Continuous competitive industry conditions in Canada was a primary driver for a 9% year-over-year decline in first quarter segment revenue within our rentals and transportation services segment. somewhat offsetting a 17% year-over-year decline in revenue in Canada was a 6% increase in the first quarter revenue from our U.S. RDS operation. 41% of first quarter RDS segment revenue was generated in the U.S. as compared to 35% during Q1 of 2019. The RDS segment incurred an operating loss of $2.4 million for the first quarter of 2020 as compared to $1.6 million loss in Q1 2019. The primary reason for this $0.8 million increase in quarterly operating loss was a $1.6 million year-over-year increase in depreciation expense following the change in accounting estimates that was effective July 1, 2019. Within our compression and process services segment, First quarter revenue for 2020 was $40.7 million, a 66% decrease compared to first quarter 2019. Substantially lower year-over-year fabrication sales was the primary driver of reduced segment revenue. Despite cost management efforts, first quarter operating income decreased 76% from Q1 2019 to $2.8 million, as lower production activity results in lower fixed cost absorption. Compression horsepower and rent at March 31, 2020 increased by 11% compared to March 31, 2019. The CPS segment exited the first quarter of 2020 with a fabrication sales backlog of $44.5 million, a $4.1 million decrease. from December 31st, 2019. First quarter revenue for our wealth servicing segment was $33.7 million, a 9% decrease from Q1 2019. This was due primarily to modestly lower pricing in North America, lower camp and not anti-liver revenue in Australia, and the weakening of Australian dollar relative to the Canadian dollar over past year. Total service hours for the first quarter were 41,530, of which 47% were in Australia, 40% in Canada, and 13% in the United States. This compares to 42,649 service hours during the first quarter of 2019, of which 49% were in Canada, 42% in Australia, and 9% in the United States. Despite lower quarterly segments revenues compared to 2019, operating income for the well servicing segments increased 6% on a year-over-year basis, primarily as a result of improved performance in our Australian operations. Consolidated gross margin for the first quarter of 2020 was $33.6 million, or 25% of revenue, as compared to $42 million, or 19% of revenue, in the first quarter of 2019. Increase in gross margin was due primarily to proportional increase in contribution from higher margin segments to total consolidated revenue for Q1 2020 compared to Q1 2019. Consolidated cash flow before changes in non-cash working capital items was $31.9 million for the first quarter of 2020 as compared to $28.5 million of cash flow generated in the first quarter of 2019. During the quarter, our investment in inventory grew by $7.4 million as we continue to take delivery of long lead time major components previously on order within our CTA segment. Remaining purchase obligations at March 31st, 2020 were approximately $7.9 million, a $6.3 million reduction from December 31st, 2019. We estimate our investment in inventory at March 31st, 2020 is near peak levels and is going forward. We would expect such investments to decline as existing inventories are consumed. Consolidated EBITDA for the first quarter of 2020 was $30.9 million as compared to $29.4 million of EBITDA realized in Q1 2019. Excluding $7.9 million of unrealized foreign exchange gains and $0.4 million provisioned for doubtful accounts, first quarter 2020 EBITDA was $23.4 million. During the first quarter of 2020, Total Energy generated income attributable to shareholders of $4.7 million, or $0.10 per share, which was consistent with Q1 2019 net income and earnings per share. Total Energy's financial conditions remain strong, with $124 million of positive working capital after reclassifying $40.4 million of mortgage debt as current at March 31, 2020. On April 29, 2020, the company renewed this loan in the principal amount of $50 million for a five-year term at a fixed annual rate of interest of 3.1% per annum. Total bank and mortgage debt was $282.2 million at March 31, 2020. Our bank debt and at a working capital was $117.1 million at the quarter end, a 12% decrease from December 31, 2019. Our bank covenants consist of maximum senior debt to trailing 12-month bank-to-fine EBITDA of three times and minimum bank-to-fine EBITDA to interest expense of three times. At March 31, 2020, the company's senior banks debt-to-bank capital ratio was 2.18, and the bank interest coverage ratio was 8.66 times.

Thank you, Yulia. 2020 began on a relatively positive note compared to 2019. However, as everyone knows, things rapidly changed with the outbreak of COVID-19, particularly after March 11th. when the World Health Organization declared COVID-19 to be a global pandemic. Measures taken in response to the pandemic gave rise to a sudden and substantial decline in economic activity and, consequently, global oil consumption. At the same time, Saudi Arabia and Russia engaged in a battle for market share in global oil markets with devastating consequences for near-term oil prices. The Canadian energy industry was particularly vulnerable to the dual shocks of the COVID-19 pandemic and oil price war, given structural price discounts due to the lack of oil pipeline capacity necessary for Canadian oil to reach Eastern Canadian and global markets. COVID-19 has arguably resulted in the most challenging operating environment ever experienced by Total Energy. North American drilling and completion activity has decreased significantly since March. While Australian activity has not yet been materially impacted, we are monitoring industry conditions there closely. As we navigate through uncharted waters, our top priority is the health and safety of our employees, other stakeholders, and the public at large. We were quick to implement protocols throughout our global operations to mitigate the spread of the virus. and I'm pleased to advise that we have had no reported cases of COVID-19 infection in any of our operations to date. As summarized in our first quarter news release, Total Energy has made unprecedented adjustments to its North American cost structure in order to protect our balance sheet and financial liquidity. These adjustments, which will take full effect during the second quarter, will substantially lower our cost structure and preserve our equipment fleet until such time as industry conditions begin to recover. We recently announced the refinancing of a $40.2 million term loan that matured at the end of April with the new $50 million five-year term loan bearing interest of 3.1%. Such loan is secured by approximately 45% of total's real estate based on net book values at the end of 2019. and illustrates not only the confidence our banks have in total, but also our ability to leverage our significant real estate portfolio to enhance our liquidity and lower our cost of capital. Given the severity of the current downturn, we expect a substantial increase in bankruptcies and insolvencies in the energy service industry, as such industry goes through what we believe will be a historic process of rationalization and consolidation. The basic economic laws of supply and demand are driving this process, and while it will be brutal and negatively impact many stakeholders, it is also necessary to ensure the future sustainability and economic viability of the industry. Total would not be successful without the efforts and support of our employees, owners, and other stakeholders. While we regret the job losses and the suspension of our dividend, we're grateful to our remaining employees who are working harder for less pay and without complaint. The understanding and support of our owners and bankers has allowed management to remain focused on running our business and the established relationships we have with our many customers and suppliers are critical as we work together to get through these challenging times for our industry. Total Energy has demonstrated over its 24 year history its ability to successfully navigate through industry downturns. The current downturn has once again put our company to the test. Our discipline during better times, together with the focus measures we have taken thus far to adjust our cost structure, our geographic and business diversification, and the strength of our relationships with key stakeholders gives us confidence that Total will not only pass its latest test, but emerge as a stronger and more significant player in the global energy services industry. I would now like to open up the phone lines for any questions. We will now begin the question and answer session. To join the question queue, you may press star then 1 and a cell phone keypad. You will hear a tone that's on your request. If you do not speak the phone, please pick up your handset before pressing any key. If you would like to ask a question, please press star then 2. We will pause for a moment as callers join the queue. The first question is from John Brzezinski with California Genuity. Please go ahead. Hey, good morning, everybody. Good morning, Mr. Bears, Nicky. Hey, just looking at CPS, you know, it looked like sequentially revenue was pretty flat, but the margins were up. Was that a function of revenue mix or cost containment, maybe a bit of both? Definitely revenue mix. I think, you know, you had – Increase in rental revenue obviously is evidenced by the increase in horsepower on rent, which tends to be higher margin. You know, an element of cost control, but, you know, as I mentioned, a lot of our cost control impact will be felt in Q2. There is some within Q1 for sure, though, but revenue mix with some cost control. Got it. And still within CPS, looking at your overall inventory at the end of the quarter, $913 million, is the majority of that still within CPS, and do you think you can convert some of that into cash during the coming quarters? Yes. As Julia mentioned, we believe that Q1, March 31 inventories will be at or near peak, and we expect that to begin unwinding beginning Q2 over the balance of the year. Got it. And then just lastly on the Orphan Well Fund, I know I think there was some mention of it in MD&A. Can you give us a little more color on how you think it could touch your businesses here going forward? So there's two kind of components to abandonment. There's the Orphan Well Association, the OWA, which our well servicing group has done a lot of work for historically. They're receiving... $200 million from the federal government as part of that $1.7 billion abandonment program, plus the Alberta government had announced about a month or two earlier an extra $100 million. So that's separate from the billion dollars that has been given to the provincial government by the feds for abandonment activity, which will be non-OWA work. And then there's $400 million to the Saskatchewan government and $120 million to the D.C. government. We expect that to be a pretty significant driver of well service rig activity over the next several quarters. And, you know, being a fairly large well service company in Western Canada, we expect to, you know, benefit from that activity. We also are seeing good opportunities for our rental and transportation services group to participate in those activities as well. So, you know, tough to give forecasts, but I would simply say we have no reason to believe that we wouldn't get our fair share of activity there. Really, I think the limitation for use of those funds will be more service provider capacity than demand from operators to complete abandonment work. Got it. That's great color, Dan. Thank you. That's it for me. Thanks. Thanks, John. The next question is from Jim Monticello with Altacorp Capital.