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spk02: 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.
spk03: 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.
spk00: 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.
spk03: Thank you, Yulia. While the industry environment remained difficult during the first quarter, we continued to support our customers by maintaining continuous operations in all jurisdictions. despite ongoing COVID-19 challenges and restrictions, particularly in Canada, where the delay of several major projects had a negative impact on our first quarter financial performance. On a positive note, our health and safety procedures continue to be effective in mitigating the risk of COVID-19 throughout our global operations, and since the outbreak of the pandemic, we have not been required to cease any of our operations due to COVID-19. As Yulia mentioned, despite continued challenging macro industry conditions, we continue to generate significant free cash flow. We retired $10.6 million of bank debt during the first quarter and will continue to methodically pay down our revolving credit facility while maintaining a strong liquidity position. With sustained higher oil prices and continued relatively strong natural gas prices, North American drilling and completion activity has improved from the lows experienced during the second quarter of 2020. Canadian drilling activity began to improve on a year-over-year basis in late March, and that trend continues. Today, Total has 13 drilling rigs operating in North America, compared to one at the same time last year. By the end of the day on May 1, 2021, our U.S. drilling operations generated more operating days than the entire month of May in 2020. In Australia, the recertification upgrade of the first of two drilling rigs was completed, and such rig commenced drilling in late April. The second rig is scheduled to be completed and commenced drilling in July, at which time four of five Australian rigs are expected to be active, which will be double the utilization of Q1 2021. Increased drilling rig activity has historically been a positive leading indicator for business activity in our other business segments. Our well servicing segment experienced modestly higher Canadian activity levels during the first quarter due to increased well abandonment activity resulting from federal funding. We expect continued acceleration of well abandonment activity as we come out of spring break-up. as well as increasing demand for oil production maintenance activities both in Canada and the U.S. Our compression and process services segment continues to see a slow but steady recovery in its fabrication sales backlog. While the absolute sales backlog remains low by historical comparison, coating activity continues to pick up. We also expect to see increasing redeployment of idle rental compression in North America over the course of the year should natural gas prices remain stable. Cost inflation, notably rising steel, fuel, and other material costs, is something we are monitoring closely. While competitive market conditions make the implementation of price increases a challenge, we expect to realize some modest price increases in certain segments of our business over the remainder of 2021 to help offset cost inflation. provided market conditions do not deteriorate materially. From an ESG perspective, our businesses continue to work with our customers and suppliers to develop innovative methods and technologies to reduce the environmental footprint of our collective business activities. Some recent examples include the following. By Dell Gas Compression's patented Nomad mobile high-horsepower gas compression units, have recently been utilized outside of the conventional oil and gas sector by a large U.S.-based consumer goods company for certain temporary compression requirements. Among many other benefits, the Nomad significantly reduces site disturbances compared to traditional skid compression. Total Oilfield Rental's proprietary Odyssey line of high-capacity pumps have seen increasing applications as an alternative to transporting liquids by truck and trailer. Not only does the replacement of trucks result in significant cost savings to oil and gas producers, but it also improves the safety and environmental performance of the operation by reducing road traffic and lowering emissions. OPSCO continues to work with a third party to commercialize its proprietary small-scale LNG plant that could have many interesting potential applications. Savannah Drilling's 2021 capital program includes the continued upgrade of our drilling rig fleet with bi-fuel and walking systems, which reduce the emissions intensity of our drilling operation while at the same time saving our customers money. Our well servicing and RTS segments are becoming increasingly involved in the restoration of old oil and gas well sites to their pre-disturbance condition. Despite the challenging industry conditions, Total and its employees remain committed to conducting our operations in a safe and responsible manner. Our consolidated rolling 12-month TRIF continued to improve during the first quarter and now stands at 1.56%. a historic goal for our company. I would like to thank all of our employees for their continued focus and commitment to safe operations, as without their efforts we would not be celebrating this achievement. Corporately during the first quarter, Total was recognized by the Globe and Mail's Report on Business Women Lead Here program as one of 71 public Canadian companies with a significant number of female executives. We also established a partnership with the Aboriginal Skilled Workers Association in order to increase the effectiveness of our Indigenous recruiting efforts. Apart from dealing with potential future labour shortages, we strongly believe that increased engagement of Indigenous persons in the energy industry is beneficial to all stakeholders. I would encourage our owners to participate in our upcoming annual shareholders meeting on May 18th, 2021. Given recent COVID-19 restrictions that limit public gatherings, as noted in our May 7th news release, shareholders are encouraged to vote their shares online by telephone or by mail. I would now like to open up the phone lines for any questions.
spk02: We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. you will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two.
spk01: We will pause for a moment as callers join the queue. Once again, if you have a question, please press star, then one, There are currently no questions from the phone lines.
spk02: I would like to turn the conference back over to Mr. Halleck for any closing remarks.
spk03: I must say this has been the easiest conference call in many years. So, assuming there's no further questions, we'll carry on and wish everyone a good day. Look forward to speaking with you at our next quarterly conference call. Thanks very much.
spk02: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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