Total Energy Services Inc.

Welcome to the Total Energy Services Third 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, sir.

Thank you, and good morning. Welcome to Total Energy Services' third quarter 2020 conference call. Present with me is Yulia Gorbache, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the three and nine months ended September 30, 2020, and then provide an outlook for our business and open up the phone lines for questions. Yulia, please proceed.

Thank you, Den. During the course of this conference call, information may be provided containing forward-looking information concerning Total's 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's forward-looking statement due to a number of risks, uncertainties, and other factors affecting Total's businesses and the oil and gas service 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 with Canadian Provincial Securities Authorities 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 financial results for the three months ended September 30, 2020 reflect continued difficult industry conditions in North America and a moderation of activity levels in Australia. Efforts over past several quarters to right-size our capacity particularly within our rentals and transportation services segment, combined with a more seasonal uptick in Canadian activity levels, contributed to improved financial results as compared to the second quarter of 2020. Total Energy's geographical and business diversification has been of a significant benefit during these challenging times. Geographically, Revenue generated in Australia during the third quarter of 2020 represented 32% of consolidated revenue, a 12 percentage point increase relative to Q3 2019. North America represented 68% of consolidated 2020 third quarter revenue as compared to 76% for Q3 2019. By business segment, compression and process services remains the largest contributor to total consolidated revenues, generating 42% of 2020 third quarter consolidated revenues, followed by the well servicing in 30%, contract drilling services at 21%, and rentals and transportation services contributing 8%. This compares to Q3 2019, when CPS contributed 42% of consolidated revenue, contract drilling, 28%, while servicing, 21%, and RTS segment, 9%. Immediate and decisive actions undertaken at the onset of COVID-19 outbreak to ensure the safe and continued operation of our businesses and protect our financial strength and liquidity have enhanced Total Energy's ability to generate significant free cash flow despite extremely difficult industry conditions While third quarter revenue declined 55% on a year-over-year basis, consolidated EBITDA only declined by 28% before adjusting for $0.6 million unrealized foreign exchange loss on intercompany working capital balances and a $0.3 million increase to our provision for bad debt. The receipt of $7.4 million of funds under various COVID-19 relief programs during the third quarter reduced cost of services by $6.4 million and its GNA by $1 million. Consolidated gross margin percentage for the third quarter of 2020 was 30% as compared to 22% during the same quarter of 2019. Excluding funds received from various COVID-19 relief programs, gross margin percentage was 20% as compared to 22% in the third quarter of 2019. This decrease was due to low activity levels and competitive pricing, particularly in North America, as well as year-over-year change in our segmental revenue mix. Sale in general and administration expenses for the third quarter of 2020 decreased by $6.9 million, or 55%, as compared to Q3 of 2019. Excluding COVID-19 relief funds, Third quarter SG&E declined by 47% on a year-over-year basis. Within our CDS segment, third quarter SPATCH release drilling days decreased by 67% on a year-over-year basis, while revenues decreased by 66%. Segment EBITDA declined by 59%. Despite a substantial year-over-year drop in the segment's revenue and EBITDA, the CDS Segment's EBITDA margin increased by 22% or 340 basis points. The smaller proportionate decrease in revenue compared to a decrease in spot release operating days and increase in EBITDA margin was primarily due to increased relative revenue contribution from Australia combined with North American cost control measures and receipt of COVID-19 relief funds. During the third quarter of 2020, two drilling rigs in Australia were removed from service in order to complete necessary certifications and upgrades that are currently expected to be completed by the second quarter of 2021. Despite a continued decrease in the active U.S. land rig count over the course of third quarter of 2020, utilization in our U.S. drilling operations increased by 267% or 8 percentage points, from 3% in Q2 2020 to 11% in Q3 2020. Canadian activity in drilling segments experienced a modest seasonal increase from the second quarter. For the first nine months of 2020, the CDS segment's EBITDA margin increased 50% as a result of completion of various North American equipment rationalization projects during 2019, increased relative contribution from Australia, ongoing cost control measures in all jurisdictions and the receipt of COVID-19 relief funds. Effective April 1, 2020, the CDS segment revised its depreciation estimates for drilling equipment to reflect changing economic and industry conditions. As a result, additional incremental depreciation expense of $4.2 million was recorded during the third quarter. This prospective change in depreciation estimate has no impact on EBITDA or cash flow. The RTS segment experienced a 50% decrease in rental utilization and 23% reduction in revenue per utilized piece as compared to the third quarter of 2019. The decrease in revenue per utilized piece was primarily a result of a mix of equipment operating as well as competitive pricing. While this resulted in a 62% year-over-year decline in revenue, third-quarter segment EBITDA increased by 34%, and the EBITDA margin increased by 250% as compared to 2019. Excluding receipt of COVID-19 relief funds, the RTF segment saw its third-quarter EBITDA decline at half the rate at which revenue declined relative to 2019. and the quarterly operating loss in this segment decreased by 70% on a year-over-year basis as a result of significant cost rationalization actions taken over the past two years. While our compression and process services segment continued to experience reduced demand for new product orders, its fabrication sales backlog remained relatively stable. At September 30, 2020, This segment has $37 million sales backlog compared to $43.8 million backlog at June 30, 2020, and $39.8 million at September 30, 2019. Higher North American natural gas prices in the third quarter of 2020 provided support for the CPS as parts and service and retrofit business lines. Despite a 55% year-over-year decline, in CPS's third quarter revenue, segment EBITDA for the quarter declined only by 33%. The lower rate of EBITDA decline was primarily due to lower proportion of revenue being derived from lower margin fabrication sales, effective cost management, and the receipt of queues. Third quarter service hours and revenue in our well servicing segment were 38% and 36% lower, respectively, while segment EBITDA decreased by 12% as compared to the same period of 2019. Despite low activity levels in all jurisdictions, the third quarter EBITDA margin in this segment increased by nine percentage points to 33% as compared to 24% EBITDA margin in Q3 of 2019. This was the result of cost management efforts and the receipt of COVID-19 relief funds. While our Canadian well servicing segment began to receive some federal government-funded well abandonment work towards the end of the third quarter, such activity was not significant. During the third quarter of 2020, total energy generated $19.8 million of cash flow and $14.4 million of cash from operating activities as compared to $24 million of cash flow and $21.8 million million of cash used in operating activities in the third quarter of 2019. Contributing to the increase in cash generated from operating activities was the monetization of $4.2 million of inventory during the third quarter of 2020, as well as lower working capital requirements compared to 2019. Total Energy's financial position continued to strengthen during the third quarter of and our liquidity position remains strong. At September 30, 2020, the weighted average interest rate on outstanding bank debt was 2.85% as compared to 3.92% at September 30, 2019. This lower interest rate, combined with lower outstanding debt balances, contributed to $1 million, or 34%, year-over-year decrease in quarterly interest costs. On November 10, 2020, at our request, Total Energy's primary revolving credit facility was reduced by $40 million to $250 million, and the maturity date extended to November 10, 2023. Subsequent to September 30, 2020, an additional $5 million of debt was repaid such that the current amount drawn on this facility is $175 million. The remaining $75 million of undrawn facility is currently fully available as is an additional $5 million on an undrawn revolving credit facility maintained by a subsidiary of Total. Total Energy's bank covenants consist of a maximum senior debt to trailing 12 months of three times, and the minimum bank-defined EBITDA to interest expense of three times. At September 30, the company's senior bank debt to bank-defined EBITDA ratio was 1.96 times, and the bank interest coverage ratio was 9.82 times.