Total Energy Services Inc.

Thank you for standing by. This is the conference operator. Welcome to the Total Energy Services fourth 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 signal an operator by pressing star and zero. I would now like to turn the conference over to Daniel Halleck, President and CEO, for opening remarks. Please go ahead.

Thank you and good morning. Welcome to Total Energy Services' fourth quarter 2020 conference call. Present with me this morning is Yulia Gorbache, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the three and twelve months ended December 31st, 2020. and 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. 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'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.cira.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 December 31, 2020 reflect continued difficult industry conditions in North America, and a moderation of activity levels in Australia. Despite the challenging industry environment, total financial performance for the fourth quarter of 2020 improved from the third quarter of 2020, with quarterly revenue increasing 7%, EBITDA increasing 9%, and the quarterly net loss decreasing by 67%. A modest increase in industry activity levels underpinned by the continued recovery in the commodity prices changes in competitive landscape, and ongoing efforts to manage costs contributed to this sequential quarterly improvement in the financial performance. The ability of Total Energy's geographic and business diversification to provide a measure of fiscal stability was demonstrated in the fourth quarter. Geographically, as activity levels in Australia moderated during the second half of 2020, in part due to removal from service of two drilling rigs for recertification, activity in North America continued to improve from the historic lows experienced during the second quarter. This is evident by the fact that North America contributed 79% of consolidated revenue in the fourth quarter of 2020 as compared to 68% in the third quarter and 56% in the second quarter of 2020. Within North America, Canada continued to recover more quickly compared to the United States with a relative contribution from Canada to consolidated fourth quarter revenue, increasing eight percentage points compared to Q4 2019. Fourth quarter revenue contribution from the United States decreased by eight percentage points on a year-over-year basis, with Australia's fourth quarter revenue contribution remaining relatively consistent with 2019. By business segment, compression and process services was the largest contributor to the consolidated revenue, generating 39% of 2020 fourth quarter consolidated revenues, followed by the contract drilling services at 28%, well servicing at 24%, and rentals and transportation services contributing 8%. This compares to Q4 of 2019, when CPS contributed 27% of consolidated revenue, contract drilling services 39%, well servicing 27%, and RTS segment 10%. In Q4 2019, the CDS segment received a $17.6 million contract termination payment that materially increased that segment's revenue contribution. While fourth quarter consolidated revenue declined 45% on a year-over-year basis, consolidated EBITDA increased by 12% after adjusting $4.8 million unrealized foreign exchange loss on intercompany working capital balances in Q4 of 2020 and excluding non-recurring $17.6 million termination payment received in 2019. This is a result of the measures taken in all business segments at the onset of COVID-19 pandemic to manage costs and receipt of government assistance in Canada, in the United States and Australia. The $9.1 million received on various coordinating relief programs during the fourth quarter reduced cost of services by $8.1 million and SG&A by $1 million. Excluding $17.6 million termination payment received in 2019, consolidated gross margin percentage for the fourth quarter of 2020 was 29% as compared to 24% in Q4 of 2019. Excluding both COVID-19 funds received in Q4 2020 and the termination payment, The gross margin percentage for Q4 2020 was 20%, as compared to 24% for Q4 2019. This decrease was due to lower activity levels in all jurisdictions and competitive pricing, particularly in North America, as well as the year-over-year change in the segmental revenue mix. Selling general administration expenses for the fourth quarter of 2020 decreased by $6.5 million, or 55%, compared to Q4 of 2019. Excluding COVID-19 relief funds, fourth quarter's G&E declined by 47% on a year-over-year basis. Within our CDS segment, despite a substantial year-over-year decline in activity, excluding the $17.6 million termination payment received in 2019. This segment's EBITDA margin increased by 35% or 680 basis points. The increase in EBITDA margin was primarily due to increased relative contributions from Australia, combined with North American cost control measures and the receipt of COVID-19 relief funds. Fourth quarter operating days in Australia were negatively impacted by two rigs haven't been removed from service in the third quarter of 2020 for recertifications and upgrades. Both RIGs have been contracted with one RIG scheduled to return to service next month and the second in July of this year. While our fourth quarter United States RIG utilization was down on a year-over-year basis, utilization increased by 118% or 13 percentage points from 11% in Q3 2020 to 24% in Q4 2020, compared to an approximate 29% increase in the U.S. land rig count during Q4 2020. Similarly, while fourth quarter Canadian drilling activity was lower on a year-over-year basis, our Canadian rig utilization doubled in the fourth quarter of 2020 compared to Q3 of 2020. Effective April 1, 2020, the CDS segment revised its depreciation estimate for the drilling equipment to reflect changing economic and industrial conditions. As a result, additional incremental expense of $3.2 million was recorded during the fourth quarter. This prospective change in depreciation estimate had no impact on EBITDA or cash flow. The RTS segment similarly experienced a substantial year-over-year decline in the fourth quarter rental utilization. While this resulted in a 56% year-over-year decline in revenue, fourth quarter segment EBITDA increased by 9%, and EBITDA margin increased by 148% as compared to 2019. Excluding the receipt of COVID-19 relief funds, The RTS segment saw fourth quarter EBITDA decline at almost half the rate at which revenue declined relative to 2019. And the quarterly operating loss in this segment decreased by 20% on a year-over-year basis as a result of significant cost rationalization actions undertaken over the past two years. Significant increase in equipment utilization in the United States, as well as change in the mix of equipment operating, contributed to a 17% increase in RDS segment revenue for the fourth quarter of 2020, compared to Q3 of 2020. While new equipment demand remains sluggish in the fourth quarter of 2020, our compression and process service segment saw a modest increase in its fabrication sales backlog during the quarter as improving global natural gas fundamentals began to stimulate capital investment. The recovery in North American natural gas prices during the latter part of 2020 also contributed to support for CPS's parts and service and retrofit business lines, which has continued into 2021. Utilization for the compression rental fleet equipment decreased during the fourth quarter due primarily to the return 6,500 horsepower compression rental units following the bankruptcy of a U.S. customer. These units are in the process of being redeployed with the new customers. Despite a 19% year-over-year decline in CPS fourth quarter revenue, segment EBITDA for the quarter increased by 22%, and EBITDA margin increased by 52%, as a result of cost management and the receipt of COVID assistance. Fourth quarter service hours and revenue in our well servicing segment were both 42% lower as compared to Q4 2019, while segment EBITDA decreased by 15% as compared to the same period of 2019. Despite lower activity levels in all jurisdictions, The fourth quarter EBITDA margin in this segment increased to 35% compared to a 23% EBITDA margin in Q4 2019 as a 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 during the fourth quarter of 2020, such activity did not have material impact on this segment's financial performance in 2020. Total Energy's financial and liquidity position continued to strengthen during the fourth quarter of 2020. At December 31st, 2020, the weighted average interest rate on outstanding bank debt was 2.72% as compared to 4.09% at December 31st, 2019. This lower interest rate combined with lower outstanding debt balances contributed to a $2.6 million or 20% year-over-year decrease in annual finance costs. Total net debt position at December 31, 2020 is the lowest since we completed the acquisition of Savannah in June of 2017. Subsequent to the year-end, in addition to regular mortgage payments, Further $10 million of bank debt has been repaid. Total energy bank governance consists of maximum senior debt to trailing 12-month bank EBITDA of three times and minimum bank-defined EBITDA to interest expense of three times. At December 31st, 2020, the company senior bank debt to bank EBITDA ratio was 2.35, and the bank interest coverage ratio was 8.67.