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 over to Daniel Halleck, President and CEO of Total Energy Services Inc. Please go ahead, sir.

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.

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.