Total Energy Services Inc.

Welcome to the Total Energy's fourth quarter and year-end results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll 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 of Total Energy Services, Inc. Please go ahead.

Thank you. Good morning and welcome to Total Energy Services' fourth 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 December 31st, 2021, and then provide an outlook for our business. We will then open up the phone lines for any questions. Yuliya, 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 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 businesses and the oil and gas industry in general. These risks, uncertainties, and other factors are described under the heading Risk Factors, and Elfrin totals most recently filed a new 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 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 31st, 2021 reflect improving industry conditions primarily in North America as compared to the fourth quarter of 2020. High North American activity and the reactivation of two drilling rigs in Australia contributed to a significant year-over-year improvement in total fourth quarter financial results and the return to profitability with fourth quarter net income of $1 million as compared to a net loss of $1.7 million in 2020. Fourth quarter consolidated EBITDA increased 15% from $19.5 million in Q4 2020 to $22.6 million in the fourth quarter of 2021. Excluding COVID-19 relief funds, fourth quarter EBITDA increased 103% on a year-over-year basis. Total geographical diversification continued to be a stabilizing factor for our financial performance. Geographically, a significant increase in North American industry activity from the historic lows experienced during the second quarter of 2020 resulted in North America contributing 81% of consolidated revenue in 2021 as compared to 72% in 2020. By business segment, compression in process services generated 37% of 2021 fourth quarter consolidated revenue, followed by contract drilling services at 36%, well servicing at 19%, and rental and transportation services contributing 8%. This compares to Q4 of 2020, when the CPS segment contributed 39% of consolidated revenue, contract drilling services 28%, well servicing 24%, and the RDS segment 8%. While fourth quarter 2021 consolidated revenue increased 61% as compared to Q4 2020, EBITDA increased by 91% after adjusting to exclude COVID-19 relief funds and unrealized foreign exchange losses on translation of intercompany working capital balances, resulting in an adjusted quarterly bid-tower margin of 16% as compared to 14% in the fourth quarter of 2020. The $1.4 million of COVID-19 relief funds recorded in the fourth quarter of 2021 reduced cost of services by $1.3 million, NSG&A by $0.1 million, This compares to $9.1 million of COVID-19 relief funds in Q4 of 2020, which reduced cost of services by $8 million and its G&A by $1.1 million. Consolidated fourth quarter gross margin excluding COVID-19 funds was two percentage points higher as compared to 2020. This was primarily due to modest price increases in North America necessary to offset rising labor and material costs. Excluding COVID-19 relief funds, gross margin as a percentage of revenue improved to 22% for the fourth quarter of 2021 as compared to 20% in Q4 of 2020. Selling, general, and administration expenses for the fourth quarter of 2021 increased by $3.1 million, or 59%, compared to Q4 of 2020, as employee compensation was reinstated to pre-COVID levels and the contribution of COVID-19 funds decreased by $1 million, or 91%, as compared to prior year comparable quarter. The improvement in North American drilling activity and the reactivation of two Australian drilling rigs contributed to a 93% increase in total operating drilling days in total CDS segment, which resulted in a 108% increase in consolidated drilling utilization during the fourth quarter of 2021 as compared to the prior year, an 8% increase in revenue per operating day. Changes in geographic revenue mix and high activity resulted in 109% year-over-year increase in the fourth quarter CDS segment revenue. Fourth quarter CDS segment EBITDA increased 102% compared to 2020 as a result of high activity and changes in the mix of equipment operating in North America. An increase in Canadian drilling activity resulted in 80% increase in the fourth quarter operating days in Canada compared to 2020 and 116% increase in CDS's Canadian revenue. Improving industry conditions and market share gains contributed to 132% year-over-year increase in fourth quarter United States operating days, which in turn drove a 173% year-over-year increase in the fourth quarter U.S. drilling revenue. Fourth quarter operating days in Australia increased by 89% compared to 2020 as two rigs returned to service following the completion of recertifications and upgrades. One Australian rig was removed from operations during the third quarter of 2021 for recertification and upgrade and return to service in the first quarter of 2022. Improving North American industry conditions contributed to a 100% increase in the fourth quarter equipment utilization within the RTS segment as compared to 2020. Fourth quarter RTS revenue increased by 56% on a year-over-year basis, which in turn drove a 23% increase in segment EBITDA. EBITDA increased at a lower pace than revenue due to the mixed equipment operating, cost inflation not being fully upset by price increases, and lower year-over-year COVID relief funds being received. Fourth quarter revenue in total CPS segment increased by 50% compared to 2020. This segment saw a fifth consecutive quarterly increase to its fabrication sales backlog last which was 236% higher on a year-over-year basis. Higher natural gas prices also provided support for CPS segments parts and service business and utilization of the compression and rental equipment fleet, increasing 11% from December 31st, 2020. Operating income for the fourth quarter of 2021 decreased 50% on a year-over-year basis, as additional expenses were incurred to prepare for substantially increased production activity in 2022, as well as general cost inflation and reduced COVID-19 relief funds received during the quarter. Operating income margins are expected to improve over the course of 2022 with higher production levels and improved pricing. Fourth quarter revenue increased 26% in our well-servicing segment compared to 2020, while service hours increased 25% during the fourth quarter. Revenue per service hour remained comparable to prior year relevant quarter, as an increase in revenue per service hour in Canada and United States was offset by decrease in Australia. Continuous strength of oil prices and increased well-abundant activity in Canada contributed to an increase in activity in all geographical regions. This segment's EBITDA margin decreased nine percentage points in the fourth quarter of 2021 as compared to the same quarter last year due primarily to cost inflation in North America that was not fully recovered through price increases and lower COVID-19 relief funds receipts. Total energy's financial and liquidity position remains very strong. At December 31st, 2021, the weighted average interest rate on outstanding bank debt was 2.68% as compared to 2.72% at December 31st, 2020. This low interest rate combined with low outstanding debt balances contributed to a 31% year-over-year decrease in fourth quarter finance costs. Total net debt position at December 31st, 2021 is the lowest since we completed the acquisition of Savannah in June of 2017, as we remained focused on a continued repayment of debt. In January of 2022, total extended the maturity of our primary bank credit facility to November 10, 2024. As part of this extension, we requested a $30 million reduction in available credit, such that we now have $225 million of revolving bank credit facility capacity. We haven't made $20 million of voluntary principal repayments thus far in 2022. $115 million of credit is currently available to Total. Total Energy Bank Covenants consist of maximum senior debt to trail in 12 months, bank-defined EBITDA of three times, and a minimum bank-defined EBITDA to interest expense of three times. At December 31, 2020, Twenty-one, the company's senior bank debt to bank EBITDA ratio was 1.40, and the bank interest coverage ratio was 17.35 times.