Total Energy Services Inc.

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 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 Halick, President and CEO. Please go ahead, sir.

Thank you. Good morning and welcome to Total Energy Services' second quarter 2021 conference call. Present with me is Yulia Gorbache, Total's VP Finance and Chief Financial Officer. We will review with you Total's financial and operating highlights for the three months ended June 30th, 2021, and then provide an outlook for our business and open up the phone lines for questions. Yulia, please proceed.

Thank you, Dan. During 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 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.crr.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 information in this conference call is presented in Canadian dollars. Total Energy's financial results for the three months ended June 30, 2021 reflect modestly improving industry conditions in North America and low activity levels in Australia as compared to the second quarter of 2020. Despite the challenging environment, Total reported significant free cash flow during the quarter, generating $16.5 million of cash from operating activities after finding net capital expenditures and $0.7 million of interest expense. Second quarter EBITDA was $19.7 million as compared to $16.7 million of EBITDA in the previous quarter, the first time in total's 25-year history that second quarter EBITDA exceeded first quarter EBITDA. This illustrates not only increasing benefit from geographical diversification of total businesses, but also the improvement in industry conditions, particularly in Canada, given the seasonality of field operations. Total geographical diversification continues to be a stabilizing factor for our financial performance. Geographically, the year-over-year activity levels in Australia declined due to several factors. Activity levels in North America continue to improve from the historic lows experienced during the second quarter of 2020. This is evident by North America contributing 77% of consolidated revenue in the second quarter of 2021 as compared to 60% in the second quarter of 2020. Within North America, the recovery in Canada was more pronounced compared to the United States, with a relative contribution from Canada to consolidated second quarter revenue increasing 12 percentage points compared to Q2 of 2020. Second quarter revenue contributions from the United States increased by 5 percentage points on a year-over-year basis, with Australia's second quarter 2021 revenue contribution decreasing 17 percentage points as compared to 2020. By business segment, compression and process services was the largest contributor to consolidated revenue, generating 40% of 2021 second quarter consolidated revenues, followed by the contract drilling services at 30%, while servicing at 23%, and rental and transportation services contributing 7%. This compares to Q2 of 2020 when CPS contributed 43% of consolidated revenue, while servicing 30%, contract drilling services 20%, and the RDS segment 7%. While second quarter 2021 consolidated revenue increased 20% as compared to Q2 of 2020, EBITDA adjusted to exclude COVID 19 relief funds, and unrealized foreign exchange gains on translational intercompany working capital balances increased by 18%, resulting in higher adjusted quarterly EBITDA margin of 12% as compared to adjusted EBITDA margin of 11% in the second quarter of 2020. Included in Q2, EBITDA was $0.6 million of one-time equipment reactivation costs. The $8.1 million of various COVID relief funds recorded during the second quarter of 2021, including forgiveness of $2.5 million of Patriot Protection Program in the U.S. received in 2020 reduced cost of services by $7.3 million and SG&A by $0.8 million. Consolidated gross margin percentage for the second quarter of 2021 was consistent with Q2 of 2020, 26%. Excluding COVID-19 relief funds and $0.6 million of equipment reactivation costs, the gross margin was 18%, which was consistent with Q2 of 2020. Selling general and administration expenses for the second quarter of 2021 increased by $0.3 million of 5%, compared to Q2 of 2020, as employee compensation was reinstated to pre-COVID levels during the quarter. The improvement in North American drilling activity had a positive impact on the second quarter operating days and utilization in total CDS segment and drove the 82% increase in CDS's second quarter revenue compared to 2020. Market share gains in the United States contributed to tenfold year-over-year increase in the second quarter U.S. operating days, which in turn resulted in the U.S. contributing a majority of the year-over-year increase in CDS segment revenues. Of setting increases in operating days was lower revenue per operating day due to changes in the geographic and equipment mix. While second quarter operating days were lower on a year-over-year basis in Australia, they increased 32% from Q1 of 2021, with a reactivation in late April 2021 of the first of two drilling rigs that were taken out of service in Q3 of 2020 for recertification and upgrade. Adjusting for 0.6 million of one-time rig reactivation costs, the CDS segment realized 185 year-over-year increase in the second quarter EBITDA. With improving industry conditions, and the commencement of several major projects in Canada that were previously delayed, the RTS's equipment utilization increased 60% in the second quarter of 2021 compared to Q2 of 2020, which was partially offset by a 21% decrease in revenue per utilized piece due to changes in the mix of equipment utilized and lower pricing. Second quarter RTS revenue increased 27% on a year-over-year basis, which in turn drove a 102% increase in segments EBITDA after excluding the gain on sale of equipment during the quarter. The RTS segment has significant leverage to high activity levels given its significant fixed cost structure. Second quarter revenue in total compression and process services segment increased 11% compared to 2020-2021. and this segment saw an increase in its fabrication sales backlog for the third consecutive quarter as improving global economic and natural gas fundamentals began to stimulate capital investments. Relatively strong North American natural gas prices also provided the support for CPS's fabrication sales and equipment overhaul activities. Quarterly utilization of the compression rental equipment fleet began to recover in the second quarter, increasing 21% from the first quarter of 2021. Segment EBITDA for the second quarter of 2021 increased 31% on a year-over-year basis as a result of ongoing cost management and the receipt of COVID-19 relief funds. Compared to 2020, second quarter revenue decreased 10% in our wealth servicing segment, While service hours increased 3% during the second quarter, the revenue per service hour decreased 13% due to primarily to the geographic revenue mix and lower pricing in the U.S. The continued recovery in oil prices and increased abandonment activity in Canada contributed to a substantial increase in activity in North America that was partially offset by lower utilization in Australia. This segment's EBITDA margin decreased 3 percentage points in the second quarter of 2021, as compared to the same quarter of last year, due primarily to cost inflation in North America that was not recovered through price increases. Total Energy's financial liquidity positions remain very strong. At June 30, 2021, the weighted average interest rate on outstanding bank debt was 2.75%, as compared to 2.96% at June 30 of 2020. This lower interest rate combined with lower outstanding debt balances contributed to a 30% year-over-year decrease in the second quarter finance costs. Total net debt position at June 30, 2021, is the lowest since we completed the acquisition of Savannah in June of 2017, as we remain focused on the continued repayment of debt. Total energy exited the second quarter of 2021 with over $142 million of liquidity consisting of $29.2 million of cash and $113 million of available credit under companies revolving credit facilities. Total energy Bank governance consists 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 June 30, 2021, the company's senior bank-to-bank EBITDA ratio was 1.87 and the bank interest coverage ratio was 11.93 times. Thank you, Yulia.