Total Energy Services Inc.

Thank you for standing by. This is the conference operator. Welcome to the Total Energy Services second 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Daniel Halleck, President and CEO. Please go ahead.

Thank you. Good morning and welcome to Total Energy Services' second quarter 2020 conference call. Present with me is Julia Gorbache, Total's Vice President of Finance and CFO. We will review with you Total's financial and operating highlights for the three and six months into June 30, 2020. We will then provide an outlook for our business and open up the phone lines for questions. Julia, 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. At your event for results, may differ materially from those reflected in TOTAL's forward-looking statements due to a number of risks, uncertainties, and other factors affecting TOTAL's businesses and the oil and gas services industry in general. These risks, uncertainties, and other factors are described under the heading Risk Factors and elsewhere in TOTAL's most recently filed annual information form and other documents filed by Canadian Provincial Securities Authority that are available to the public at www.sira.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-month sentence June 30, 2020, reflect a historic collapse in economic and industry activity as a result of the COVID-19 pandemic and the implementation of quarantines and other restrictions on economic activities intended to contain the virus. North American drilling and completion activity began to decline in March of 2020, which declined and accelerated in April. Drilling and completion activity in Canada came to a virtual halt during the second quarter, with grid counts reaching all-time lows. U.S. drilling activity continues to grind lower during the quarter, with grid counts also reaching historical lows. Revenue in the compression and process services segment decreased materially year over year, with a low production activity. Industry activity in Australia began to moderate, but did not have material impact on the company's second quarter results. Our strategy to diversify geographically and operationally paid off during a tremendously challenging period. Reductions in North American revenues were somewhat offset by relatively stable revenues from Australia during the second quarter of 2020. Geographically, revenue generated in Australia during the second quarter of 2020 relative to 2019 increased by 28 percentage points to 44% of Consolidated Revenue, while North American contributions to Consolidated Revenue declined to 56%. By business segment, compression and process services contributed 43% of 2020 second quarter Consolidated Revenues, while services in 31%, concept-driven services 20%, and rentals and transportation services 7%. This compares to the second quarter of 2019 when CPS contributed 62% of consolidated revenue, content-driven services 16%, well-servicing 14%, and RTS segment 7%. When the COVID-19 outbreak was declared a pandemic in March of 2020, total energy took immediate and decisive action to protect its financial strength and liquidity. This included cost reductions and fiscal strategy changes, including the suspension of this dividend and reduction in the federal budget. As a result, despite a 67% year-over-year decline in quarterly revenue, consolidated EBITDA only declined 27%. The receipt of $4.5 million of Canadian Emergency Wage Subsidy, or QS, during the second quarter reduced cost of services by $3.6 million and SGMA by $0.9 million. Consolidated gross margin percentage for the second quarter of 2020 was 26% as compared to 15% during the second quarter of 2019. Excluded youth gross margin percentage was 21%, which represented a 40% increase as compared to the second quarter of 2019. This improvement was primarily due to a relatively greater contribution of high margin percentage service lines to the overall revenues and extensive cost savings measures implemented during the quarter. Selling general administration expenses for the second quarter of 2020 decreased by $6.5 million or 53% compared to Q2 of 2019. Excluding youth, second quarter GMA declined by 46% on a year-over-year basis. Within our CDS segment, our true youth dreaming days decreased by 67% during the second quarter of 2020, while revenues decreased by 58%, the EBITDA decreased only by 7%. The smaller proportionate decrease in EBITDA compared to revenue was primarily due to North American cost control measures combined with the increased relative revenue contribution from Australia as well as receipt of Qs. For the first half of 2020, CDS EBITDA increased 32% as a result of the completion of various North American equipment specialization projects. During 2019, increased relative contribution from Australia and ongoing cost control measures in all jurisdictions. Effective April 1, 2020, CDS segments revised its depreciation estimates for drilling equipment. As a result, this segment recorded $26.3 million of non-recurring depreciation expense related to non-fully depreciated assets and additional incremental depreciation expense of $4.2 million. This prospective change in depreciation estimates had no impact on EBITDA or cash flow. During the second quarter of 2020, RTS segments experienced a 62% decrease in rental utilization and a 20% decrease in revenue per utilized piece as compared to the same quarter of 2019. The decrease in revenue per utilized piece was primarily as a result of the mix of equipment operating. This resulted in a 69% year-over-year decline in revenue and 67% decrease in EBITDA. Total Energy continues to identify and pursue opportunities to rationalize operations in this segment to reflect the reality of current industry conditions. For example, during the second quarter of 2020, a substantial portion of heavy traffic fleet was taken out of service through use of rain costs and equipment wear until such time as North American industry conditions warrant placing such units back into service. While the compression process services segment continued to experience reduced demand for new product orders, the fabrication sales backlog stabilized after several quarters of decline. At June 30, 2020, This segment had a $43.8 million sales backlog, which was consistent with a $44.5 million backlog at March 31, 2020, but lower than the $77.2 million backlog at June 30, 2019. While coding activity remains active, project awards are being delayed as customers await more visibility. Despite a 77% year-over-year decline in CPS, second quarter revenue segment EBITDA for the quarter declined only by 44%. The lower rate of EBITDA decline was primarily due to a lower proportion of revenues being derived from lower margin fabrication sales as well as cost management as well as receipt of queues. Second quarter service hours and revenue in our well-servicing segment with 31% and 29% lower respectively, while segment EBITDA decreased by 10% as compared to the same period of 2019. Of the same 67% year-over-year decline in Canadian second quarter utilization and a similar 71% decline in the United States, with relatively stable utilization in Australia of 64%. While industry activity and drilling began to moderate in Australia, such decline did not materially impact our Australian operations during the second quarter. While substantial government funding has been announced to accelerate well-abandonment activity in Western Canada, to date, no significant incremental service risk activity has resulted from such announcements, although current expectations that such activity will commence in the near future, and we expect that our well-servicing segment to begin from such, to benefit from such activity. During the second quarter of 2020, total energy generated $13.8 million of cash flow and $36.2 million of cash from operating activities. as compared to $22.4 million and $4.1 million, respectively, in the second quarter of 2019. Contributing to the increase in cash generated from operating activities was $6.7 million of inventory online during the quarter, as well as $3.3 million increase in deferred revenue, as deposits were received during the quarter from new publication sales orders and gas compression rental contracts. Following the refinancing of $40.2 million term debt that matured in April 2020 with a $50 million five-year term loan bearing interest at a fixed annual rate of 3.1%, our net working capital position increased from the end of 2019 by 27% to $181 million. Net debt decreased 14%. to $124.6 million from December 31, 2019, with a repayment of $28.5 million of long-term debt, including $27 million of voluntary repayments of the month outstanding on total energy's $295 million of revolving credit facilities. At June 30, 2020, our weighted average interest rates on outstanding long-term debt was 2.96% as compared to 4.34% at June 30, 2019. This lower interest rate, combined with lower outstanding long-term debt balances, contributed to a $0.8 million year-over-year reduction in quarterly interest costs. Total energy bank covenants consist of maximum senior debt to trailing 12 months, bank defied defined EBITDA three times and the minimum bank defined EBITDA to interest expenses three times. At June 30th, 2020, the company senior bank EBITDA to bank EBITDA ratio, bank debt to bank EBITDA ratio was 1.95 and the bank interest coverage ratio was 9.5 times.