This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: 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 over to Daniel Halleck, President and CEO of Total Energy Services Inc. Please go ahead, sir.
spk03: Thank you. Good morning and welcome to Total Energy Services' first quarter 2022 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 31, 2022, and then provide an outlook for our business. and open up the phone lines for any questions. Yuliya, please proceed.
spk04: 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'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 Security 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, 2022 reflect improved industry conditions as compared to the first quarter of 2021. Higher North American activity and the reactivation of two drilling rigs in Australia contributed to a significant year-over-year improvement in total first quarter financial results. Net income of $2.5 million represents total third consecutive profitable quarter and a substantial improvement from the $3.6 million net loss incurred in Q1 of 2021. first quarter consolidated EBITDA increased 45% from $16.7 million in Q1 of 2021 to $24.3 million in the first quarter of 2020. Excluding $5.9 million of COVID relief funds received in 2021, first quarter EBITDA increased 125% on a year-over-year basis. By business segment, contract drilling services generated 37% of 2022 first quarter consolidated revenue, followed by the compression and process servicing at 36%, well servicing at 17%, and rentals and transportation services at 10%. In comparison, for the first quarter of 2021, the CPS segment contributed 37% of consolidated revenue, contract drilling and services 31%, well servicing 24%, and the RTS segment contributed 8%. While first quarter consolidated EBITDA increased 45% in 2022 as compared to 2021, EBITDA increased by 148% after adjusting to exclude COVID-19 relief funds and unrealized foreign exchange gains on translation of intercompany working capital balance, resulting in the adjusted quarterly EBITDA margin of 15% as compared to 10% in the first quarter of 2021. Consolidated first quarter gross margin, excluding COVID-19 funds, was two percentage points higher as compared to Q1 2021. This was primarily due to modest price increases in North America that were partially offset by cost inflation. Excluding COVID-19 relief funds, gross margin as a percentage of revenue improved to 20% for the first quarter of 2022 as compared to 18% in Q1 of 2021. Selling, general, and administration expenses for the first quarter of 2022 increased by $2.2 million, or 34%, as compared to Q1 2021, as employee compensation was reinstated to pre-COVID levels and no COVID-19 funds were accorded. during the quarter compared to $0.6 million of COVID-19 relief funds received in Q1 2021. The improvement in North American drilling activity and the reactivation of two Australian drilling rigs contributed to a 74% increase in total operating drilling days in total CDS segment, which resulted in an 82% increase in consolidated drilling utilization during the first quarter of 2022. as compared to the prior year quarter. A 21% increase in revenue per operating day, changes in geographic revenue mix, and high activity resulted in 110% year-over-year increase in the first quarter CDS segments revenue. The increase in revenue was somewhat upset by cost inflation and a lack of COVID relief in 2022. resulting in a CDS segment EBITDA increase of 83% in Q1 2022 as compared to Q1 2021. An increase in Canadian drilling industry activity resulted in a 50% increase in the first quarter operating days in Canada compared to 2021 and an 85% increase in CDS as Canadian revenue. Improving industry conditions and market share gains contributed to a 133% year-over-year increase in the first quarter United States operating days, which in turn drove 174% year-over-year increase in the first quarter U.S. drilling revenue. First quarter operating days in Australia increased by 133% compared to 2021 as two drilling rigs returned to service following the completion of recertifications and upgrades which contributed to a 128% increase in Australian drilling revenue. Improving North American industry conditions contributed to an 89% increase in the first quarter equipment utilization within the RTS segment as compared to 2021. First quarter RTS revenue increased by 99% on a year-over-year basis, which in turn drove 184% increase in segment EBITDA. EBITDA increased at a higher pace than revenue due to improved pricing, and this segment leveraged to high equipment utilization levels given its relatively high fixed cost structure. First quarter 2022 revenue in total CPS segment increased by 71%, compared to 2021. This segment saw a six-consecutive quarterly increase to its fabrication sales backlog, which was 279% higher on a year-over-year basis and 23% higher on a sequential quarterly basis. Strong natural gas prices provided support for CPS segments, parts and service, and rental businesses. With utilization of the compression rental equipment fleet increasing 30%, as compared to March 31st, 2021. Operating income for the first quarter of 2022 decreased 51% on a year-over-year basis as fixed price contracts entered during the mid-2021 were completed in an inflationary cost environment and additional expenses were incurred to prepare for substantially high production activity in 2022. The absence of COVID-19 relief in 2022 also contributed to a decrease in operating income for the first quarter as compared to 2021. With high production levels, improved pricing, and the completion of legacy orders received when industry conditions were less favorable, CPS segment operating income margins are expected to improve over the remainder of 2022. First quarter of 2022 revenue increased 21% in our well servicing segment compared to 2021. While service hours increased 7% during the first quarter, revenue per service hour increased by 13% on a year-over-year basis. The increase in revenue per service hour in Canada and United States was partially offset by decrease in Australia. Continuous strengthening of oil prices contributed to increase in activity. in the United States and Australia. In Canada, an earlier spring breakup contributed to a 4% lower operating hours as compared to prior year quarter. This segment's EBITDA margin increased one percentage point in the first quarter of 2022 as compared to the same quarter last year. Increases in revenue per service hour was partially offset by cost inflation and the absence of COVID-19 relief in 2022. Total Energy's financial liquidity position remains very strong. During the first quarter of 2022, Total repaid $20.7 million, or 11% of debt, and repurchased 530,000 common shares under the company's normal course issuer bid at a total cost of $3.5 million. Total's net debt position at March 31, 2022, was $48.5 million and is the lowest since we completed the acquisition of Savannah in June of 2017. In January of 2022, the maturity of our primary bank credit facility was extended to November 10, 2024, and we requested a $30 million reduction in the facility. Having made an additional $10 million of voluntary principal repayment subsequent to March 31st, 2022. Total currently has $125 million of credit available under its $225 million of available credit facilities. Total energies bank covenants consist of maximum senior debt to trailing 12-month bank-defined EBITDA of three times and the minimum bank-defined EBITDA to interest expense of three times. At March 31st, 2022, the company's senior bank debt to bank EBITDA ratio was 0.91, and the bank interest coverage ratio was 19.32 tons.
spk03: Thank you, Yulia. Entering 2022, Total Energy remained focused on the safe and efficient operation of its business, improving the financial performance of all business segments, and prudently deploying capital in order to achieve profitability, maximize free cash flow and enhance shareholder returns. An improving macro industry environment underpinned by rising commodity prices has finally provided some tailwinds for our businesses, as opposed to the severe headwinds we faced following the outbreak of the COVID-19 pandemic in March of 2020. Since the beginning of 2020 to March 31st, 2022, Total has reduced bank debt by $108 million, or 39%, and net of cash, which was $44.2 million at March 31st, 2022, total's bank debt was reduced by 51%. Total energy has also returned $14 million to our shareholders during this period with the repurchase of 2.7 million shares under the company's normal course issuer bid. thereby reducing the outstanding share count by 6%. Oil and natural gas prices have remained strong thus far in 2022, and Total's diversified business model and efficient cost structure provides us with significant leverage to increasing energy industry activity levels. Demand for the company's products and services continues to strengthen, and that current commodity prices we expect market conditions will continue to improve in all business segments. In direct response to increased customer demand, Total's Board of Directors has approved a $16 million increase to the company's 2022 capital expenditure budget. $13 million is being directed towards equipment recertifications and upgrades, as well as the purchase of new drill pipes. The remaining $3 million is earmarked for additions to the compression rental fleet. In the context of an improving industry outlook, a strong corporate financial position, and Total Energy's commitment to delivering industry-leading shareholder returns, the Board of Directors has determined to reinstate a quarterly dividend of $0.06 per share beginning for the second quarter of 2022. Finally, I would encourage all shareholders and other interested persons to join us at our upcoming Annual General Shareholders Meeting, which will be held at 10 a.m. on May 17th at the Calgary Petroleum Club. I would also like to take this opportunity to thank our board chair, Bruce Bukowski, for his 25 years of service on our board of directors. Bruce will be retiring as a director following our AGM, and as a founding director of Total, Bruce has been a key part of our growth and success since we incorporated Total in November of 1996. We wish Bruce and his family the very best. I would now like to open up the phone lines for any questions.
spk05: Thank you. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. Our first question is from Tom Monicello with ATB Capital Markets. Please go ahead.
spk00: I apologize, that's Tim Monicello with ATB Capital Markets. Please go ahead.
spk01: Oh, hey, can you guys hear me? Yes, we can. Good morning, Tim.
spk06: Okay. Sorry about that. I guess I was on mute. My question is just on the margins. It seems like in the drilling segment, especially, that costs are a little bit ahead of the trend line. And I mentioned in the report that there's some inflation implications in that quarter. But it also... it seemed to me there must have been some reactivation costs or things that were sort of one-time in nature. Was there anything in the quarter that you can speak to around that?
spk03: Yeah, certainly, Tim. You know, a lot of our rates for Q1 were set in the fall of 2021 when market conditions weren't as tight. And so, you know, we went into Q1 with pricing pretty much fixed in the fall and, yeah, Obviously, we've seen some pretty significant cost inflation in the past few months, and that caught up with us. The other thing is we did pull rigs off the fence in Canada. We generally try not to make excuses, so we haven't carved that out. But going forward, our active rig count, we expect, will increase. you know, at this point exceed what we had in Q1, you know, as we go into the back half of 2022 here. So, you know, those costs will not be recurring. But I think more importantly, it's just our pricing now is catching up to inflation. And, you know, we have not got any long-term contracts on any North American rigs. And so, you know, you can't just turn the price around overnight. It takes a little bit of time, but I'm pretty comfortable that our North American drilling group will have better pricing that will improve margins.
spk06: Okay. I guess the larger drilling contractors in North America have had some pretty good detail on, I guess, where leading edge rates are going, especially for the triples drilling market. I'm wondering if you could provide any market color on where things are going for doubles. And then just maybe some thoughts around your strategy in terms of term contracts as we go through the rest of the year and where we can see rates and margins potentially going.
spk03: So certainly when the big rigs rates go up, That's a positive thing. It tends to pull the heavier end of our fleet up. Today, if you wanted to get an AC double from us, you couldn't. We're sold out. Our higher spec mechanical doubles are practically sold out as well. Part of our 2022 capital program, including the original budget we announced in January and the increase here, we announced yesterday, will go to continued capacity upgrades within our drilling fleet. And so, you know, again, we're not doing those if margins are shrinking. And so, you know, the pricing for our heavier end of the fleet is definitely improved. And I would say the pricing, pardon me, on the shallower end is approved as well. You know, we're beginning to see, I call it our front end business, which is our rigs and rentals literally equipment shortages. And I'm not going to comment on specifics for competitive reasons, but there's lines of equipment in North America that are simply sold out. And what we've seen is the devastation to the service capacity over the past few years starting to manifest itself. And again, we're not at new build economics, but certainly you're going to see some interesting dynamics in various markets that we play in over the next few months, provided commodity prices hold. On the shallower end of the rig side, we're seeing good, strong interest. Again, we're far from new-build economics, but the singles market has been devastated. It really hasn't been a strong market for years. The other limiting factor is going to be labour. And the reality that we face is labor is a pinch point. And where do you allocate your crews? You're going to allocate them to the rigs that are generating your best returns. And so that's the reality that we have to communicate to our customers that it's not just equipment availability, it's rigs. And so if the economics don't warrant putting a rig on a certain class of, or a crew on a certain class of rigs, we won't deploy the rig. And that's why you know, you're generally getting price inflation across the board. And so it's an interesting environment. Again, you know, it's very dynamic, which is why we're not inclined to sign long-term contracts. And, you know, we'll see how the market plays out here, you know, post-breakup. But right now, we expect our rig count to exceed Q1 levels as we come out of breakup.
spk06: Okay, that's really helpful. Next, I just want to talk a little bit about the CPS segment margins. We were pretty weak in the first quarter, but you commented a little bit about, again, cost, inflation, and then processing of projects that were booked through the downturn at lower margins. Now, the backlog's been expanding pretty rapidly, and my estimate is to suggest you guys are probably outperforming your competition in terms of bookings. Can you talk a little bit about you know, the margin progression in that business that you expect through the year. And secondly, your biggest competitor in Canada noted some, you know, maybe market headwinds in the Canadian market around egress capacity constraints. And I'm just curious if you're seeing any of that in the CPS segment.
spk03: So first of all, you know, early to mid last year, we made a concerted, you know, a deliberate decision to, you know, bid some work pretty thin, largely to keep our core capacity intact. And we weighed that against reducing core capacity, which our ramp-up costs would have been significantly higher than they were. And so I think we totally expected margin contraction in Q4 and Q1. Later on, the inflationary environment we're in, plus the fact that we completed the transition from one shop to a new shop. We had a lease expire last year on our sole lease facility in Calgary, and we ended up finding a more desirable location. So there's some cost to transitioning from one shop to another, but that's behind us. Going forward, My expectation is our CPS segment sales are increasing margins, not decreasing. And certainly, you know, they're taking steps to ensure that we're protected against cost inflation. And, you know, given the levels of activity and, you know, we're continuing to see strong bidding activity and strong realization of bids post March 31, we're not in an environment where we're going to be bidding shrinking margins. I expect that you'll see CPS segment margins improve over the course of the year. We came through a tough time, but they remain profitable, which again, we're seeing across the industry. That's not always the case. We run a pretty lean, focused group there, and I'm confident they'll continue to deliver industry-leading results.
spk06: Okay. And then you mentioned that bidding activity was strong, so I might say that you're not seeing any real headwinds in the Canadian market?
spk03: We're seeing very strong bidding activity and very strong bid success. I would say in Canada and internationally.
spk06: Okay. That's really helpful. And then well servicing, we saw, especially in Canada, some really good rate improvements. How much room do you think there is to run on well servicing rates?
spk03: Well, finally, all of our businesses for several years have been not sustainable. And we still have some work to do in all divisions. Again, in $105 oil and $750 gas environment, our margins need to go up, not down. And that's the case in all divisions. And so, for the most part, customers understand that. They realize we're facing significant costs, inflation, labor challenges. And at the end of the day, their economics and ours have to be aligned And, you know, certainly what we're seeing is customers are economically incentivized to add service rigs, drilling rigs, and whatever. You know, it's been a relatively disciplined ramp-up, which, again, I think is a good thing for our industry. But I think most reasonable producers realize what was happening for the last several years is not sustainable. And for us to continue to invest and and provide high quality service, rates have to continue to improve. So there's decent margins. So I'm not going to comment on specifically where those are going, but I would hope that and expect that we'll continue to see improvement for the balance of the year.
spk06: Okay, fantastic. Last one for me, just on capital allocation. Good to see that you guys have come back and are now comfortable to reinstate the dividend. So where does that really leave the rest of your capital allocation priorities?
spk03: I think, you know, at the end of the day, we made the difficult decision in 2020 to suspend the dividend. You know, it was partly financial. We wanted to make sure that we had a handle on what we were facing. You know, as it turns out, we got through a very tough time quite well and paid a lot of debt off. You know, we also... shifted more towards share buybacks as we had some clarity again we continue to um hopefully our shareholders appreciate that you know the end of the day i'm paid to manage their money and what we won't do is over invest in our in our uh business um and drive you know subpar returns and so dividends is part of giving money back to our owners uh share buybacks but also you know we're paid to Pursue good investment opportunities, and so we will continue to do that so I don't have any strong You know inclination to anything other than to say you know we're entrusted to take our owners capital and and and deploy it and we won't do that on subpar investments and We'll give it back to shareholders in that case and so I think the reinstitution of a dividend tells you that we have confidence in the future and But we're also not hamstrung and won't pursue good investment opportunities where they exist. So I would just say more of the same. And our dividend will not impair anything that we see as good investment opportunities. Never has, never will, hopefully.
spk06: Okay, good stuff. Appreciate it, Dan and Julia.
spk03: Thanks, Tim.
spk05: The next question is from John Bereznecki with Canaccord Genuity. Please go ahead.
spk02: Yeah, thanks. Good morning, everybody.
spk03: Good morning, John.
spk02: I just want to step back to CPS for a second. If my math is right, your backlog there is as good as it's been since, I think, late 2018. And so I guess my question is, how would you compare the earnings capacity of that business today to what it would have done in 2018?
spk03: From a physical perspective, probably more in the sense that we've expanded our parts and service business significantly in North America. We've also had the opportunity to streamline our production processes and basically understand how to put more through less space. You know, we'll see. I'm quite optimistic about that business over the next couple of years, not just Canada but globally. And, you know, we're seeing good, strong natural gas prices. And, you know, we're going to be a big part of the infrastructure build required to, you know, to grow that industry. And I think, you know, there's a pretty bright future for that business.
spk02: Great colour, great. And you kind of touched on my next question on the international market. Just wondering what you're seeing on the ground in Australia right now, just given the state of the global LNG market.
spk03: Well, it's very wet. They've had a lot of rain there, which is, you know, it's definitely a hampered field activity. I'm actually heading over there next week to visit our operations, so I'll have a better sense. But, you know... Right now, the industry is very healthy there. You can see what Asian and international LNG prices are. We've got a supply challenge, and Australia is a key part to supplying the world with clean natural gas. I'm looking forward to visiting Australia. next week and for a bit and get a good update both from our customers and our people.
spk02: Great. Well, hopefully the rain stops by the time you get there. Last question on RTS. How would you compare kind of the state of the market in Canada and the U.S.? I mean, it sounds like there's been a lot of attrition on both sides of the border. Just curious if you were to allocate more capital, you know, where it might go.
spk03: You know, so we're now starting to see, you know, the damage that's been done. You know, in Canada it's been a long time, you know, six, seven years, really since 2014. There are a lot of tired, a lot of companies that have simply shut down, you know, forced to or otherwise, a lot of equipment that's simply not ever going to work again, and a lot of tired people. and we are seeing a lot of privates want out, and it's been a tough, tough business. You've got a high fixed cost structure, and there's been zero investment generally in that industry, particularly in Canada for many years now. And so we've had to do a significant amount of work in Canada to right-size our footprint, and we're going to be taking a methodical approach pragmatic and cautious approach to expanding. You started to see in Q1 the leverage we have to higher activity levels, but that division in Canada for us is a fraction of what it was 10 years ago. And that's a general reflection of the industry as a whole. In the US, it's a huge market. What we're seeing is a lot of very, very tired equipment that we compete against. Similar to our rig business, we're seeing a good uptick in market share, and we're going to continue to support the steady, methodical, profitable growth of that business. Part of that historically has been supplied by equipment transferred from Canada. Thankfully, with Canadian demand picking up, that won't be as significant, provided Canada stays on a path of recovery here, and we'll look very carefully at any you know, capital spend there. Would like to continue to see consolidation in all business lines, including that one, but the reality is, you know, asset quality is first and foremost in our minds, and then obviously value expectations. And so we'll see what happens.
spk02: That's terrific, Culler, and that's all for me. Thanks so much. Thanks, John.
spk05: Thanks, John. Once again, if you have a question, please press star then one.
spk01: There appear to be no further questions.
spk05: I'd like to turn the conference back over to Mr. Ahalik for any closing remarks.
spk03: Thank you. I'd like to thank everyone for participating in our conference call and hopefully we'll see a few of you at our AGM next week in Calgary. Thanks and have a pleasant day.
spk05: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Disclaimer