Total Energy Services Inc.

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

Thank you. Good morning and welcome to Total Energy Services' first quarter 2021 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 months ended March 31st, 2021, provide an outlook for our business, and then 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'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 statements due to a number of risks, uncertainties, and other factors affecting TOTAL's business and 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 March 31, 2021, reflect continued difficult industry conditions in North America and lower activity levels in Australia. Despite the challenging environment, Total continued to generate significant free cash flow during the quarter, generating $11.4 million of cash from operating activities after funding $3.7 million of net capital expenditures and $1.8 million of interest expense. Total geographical diversification continues to be a stabilizing factor for our financial performance. Geographically, as activity levels in Australia declined due to several factors, activity levels in North America continue to improve from historic lows experienced during the second quarter of 2020. This is evident by North America contributing 64% of consolidated revenue in the first quarter of 2021 as compared to 52% in the first quarter of 2020. Within North America, Canada continued to recover more quickly compared to United States, with a relative contribution from Canada to consolidated first quarter revenue increasing 12 percentage points compared to Q1 2020. First quarter revenue contribution from the United States decreased by three percentage points on a year-over-year basis, but Australia's first quarter 2021 revenue contribution decreased in eight percentage points as compared to 2020 first quarter. By business segment, compression and process services was the largest contributor to consolidated revenue, generating 37% of 2021 first quarter consolidated revenues, followed by contract drilling services at 31%, wealth servicing at 24%, and rentals and transportation services contributing 8%. This compares to Q1 2020 when CPS contributed 30% of consolidated revenue, contract drilling 32%, wealth servicing 25%, and RTS segment 13%. With first quarter consolidated revenue declining 31% on a year-over-year basis, consolidated EBITDA adjusted to exclude unrealized foreign exchange gains on translation of intercompany working capital balances decreased by 32%, resulting in relatively flat adjusted quarterly EBITDA margin of 17% on a year-over-year basis. Ofsetting the negative impact on our consolidated EBITDA margin from the increased revenue contribution from the lower margin CPS segment in 2021 relative to 2020 was continued cost management efforts and the receipt of COVID-19 funds. The $5.9 million received under various COVID-19 relief programs during the first quarter of 2021 reduced cost of services by $5.3 million NSG&E by $0.6 million. Consolidated gross margin percentage for the first quarter of 2021 was 24% as compared to 25% in Q1 of 2020. Excluding COVID-19 funds received in Q1 2021, the gross margin percentage for Q1 2021 was 18%. This decrease was due to lower activity levels in all jurisdictions and competitive pricing, particularly in North America, as well as year-over-year change in the segment revenue mix. Selling, general, and administration expenses for the first quarter of 2021 decreased by $4 million, or 38%, compared to Q1 of 2020. Excluding Code 19 relief funds, First quarter's G&A declined by 33% on a year-over-year basis. Within our CDS segment, despite a substantial year-over-year decline in activity in all geographies, this segment EBITDA margin increased by 16%, or 300 basis points. This increase in EBITDA margin was primarily due to cost control measures and receipt of COVID-19 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 $2.9 million was recorded during the first quarter of 2021. This prospective change in depreciation estimate had no impact on EBITDA or cash flow. The RTEF segment similarly experienced a substantial year-over-year decline in the 2021 first quarter rental equipment utilization. While this resulted in a 54% year-over-year decline in revenue, first quarter segmented time margin increased 9% compared to 2020 due to previous overhead rationalization in Canada, ongoing cost management, and COVID-19 funds. First quarter revenue for RTEF segment was negatively impacted by at least $1 million with the delay of several major projects in Canada due to COVID-19 restrictions and other issues unrelated to RTS segments operations. Mobilization costs incurred during the quarter in respect of such delayed projects also had a material negative impact on segments EBITDA. These projects are scheduled to resume as COVID restrictions are lifted and ground conditions permit. Despite a continued hesitancy of customers to award new equipment orders, our compression and process services segment saw a second consecutive quarterly increase in its fabrication sales backlog as improving global economic and natural gas fundamentals began to stimulate capital investment. Compared to December 31, 2020, The backlog increased 7%, or $3.2 million, to $47.7 million at March 31, 2021. Relatively strong natural gas prices in North America during the quarter also provided support for CPS parts and service and retrofit business lines. Quarterly utilization of the compression rental equipment fleet decreased in 2021 compared to 2020, due to declining Canadian utilization during 2020 and the return of 6,500 horsepower of compression rental units following the bankruptcy of US customer at the end of Q4 2020. Compared to Q1 2020, first quarter 2021 service hours and revenue in our well servicing segment decreased 30% and 32% respectively as utilization in the United States and Australia was impacted by lower activity levels and prolonged wet weather conditions in Australia during their normal rainy season. Activity levels improved slightly in Canada due to the increased well abandonment activity with federally funded abandonment work representing approximately 13% of Canadian well servicing revenue. Despite a 32% year-over-year decrease in revenue, this segment's first quarter EBITDA margin remains stable on a year-over-year basis at 23% as a result of cost management efforts and receipt of COVID-19 funds. Total energy financial and liquidity position continued to strengthen during the first quarter of 2021. At March 31st, 2021, The weighted average interest rate on our outstanding bank debt was 2.73% as compared to 4.29% at March 31, 2020. This lower interest rate, combined with lower outstanding debt balances, contributed to $1.6 million, or 47%, year-over-year decrease in the first quarter finance costs. Total net debt position at March 31st, 2021 is the lowest since we completed acquisition of Savannah in June of 2017, and we expect to continue to aggressively pay down our revolving credit facility. Total Energy's bank covenants consist of maximum senior debt to trailing 12-month bank-defined EBITDA of three times and a minimum bank-defined EBITDA to interest expense of three times. At March 31, 2021, the company's senior bank debt to bank-defined EBITDA ratio was 2.48, and the bank interest coverage ratio was 9.87 times.