Total Energy Services Inc.

Welcome to Total Energy's second quarter conference call and webcast. 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' second quarter 2022 conference call. Present with me this morning 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 June 30th, 2022, and then provide an outlook for our business and open up the phone lines for questions. Yuliya, please proceed.

Thank you, Dan. During this 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 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.cita.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 June 30th, 2022 reflect the continued recovery of global energy industry, particularly North America. High North American activity and the reactivation in late 2021 of two Australian drilling rigs that were out of service during Q2 2021 for recertifications and upgrades contributed to a significant year-over-year improvement in total second quarter financial results. Net income of $6.1 million represents total fourth consecutive profitable quarter and a substantial improvement. from the $2.1 million net loss incurred in Q2 of 2021. Second quarter consolidated EBITDA increased 46% from $19.7 million in Q2 of 2021 to $28.8 million in the second quarter of 2022, excluding $8.1 million of COVID-19 relief funds received in 2021 Second quarter EBITDA increased 148% on a year-over-year basis. By business segment, compression and process servicing generated 52% of 2022 second quarter consolidated revenue, followed by contract drilling services at 28%, well servicing at 13%, and rentals and transportation services at 7%. In comparison, for the second quarter of 2021, the CPS segment contributed 40% of consolidated revenue, contract drilling services 30%, well servicing 23%, and the RDS segment contributed 7%. While reported second quarter consolidated EBITDA increased 46% in 2022 as compared to 2021, EBITDA increased by 170% after adjusting to exclude COVID-19 relief funds and unrealized foreign exchange gains on translation of intercompany working capital balances, resulting in an adjusted quarterly beta margin of 16% as compared to 12% in the second quarter of 2021. Consolidated second quarter gross margin excluding COVID-19 funds was four percentage points lower as compared to Q2 2021. This was primarily due to increased CPS contribution to consolidated revenue, which historically had low margin percentages. Excluding COVID-19 relief funds, gross margin as a percentage of revenue improved to 21% for the second quarter of 2022, as compared to 17% in Q2 of 2021. Sale in general and administration expenses for the second quarter of 2022 increased by $4 million or 67% compared to Q2 of 2021 as employee compensation was reinstated to pre-COVID levels. Higher profit-based employee compensation was recognized in a certain segment and no COVID-19 funds were recorded during the quarter compared to 0.8 million of COVID-19 relief funds received in Q2 of 2021. The improvement in North American drilling activity and the reactivation of two Australian drilling rigs contributed to a 70% year-over-year increase in the second quarter total operating drilling days in CDS segment. This combined with a 13% increase in revenue per operating day resulted in a 92% year-over-year increase in second quarter CDS segment revenue. This increase in revenue was partially offset by cost inflation and a lack of COVID-19 relief funds in 2022, resulting in second quarter CDF segment EBITDA increasing by 87% as compared to 2021. Increased industry activity and market share gains contributed to a 79% increase in second quarter Canadian operating days. Price increases and the mix of equipment operating contributed to a 36% year-over-year increase in second quarter Canadian drilling revenue per day, which underpinned a 144% year-over-year increase in CDS's second quarter Canadian revenue. Improving industry conditions and market share gains in the United States contributed to a 49% year-over-year increase in second quarter operating days, and 25% increase in drilling revenue per day, which in turn drove 86% year-over-year increase in second quarter U.S. drilling revenue. Second quarter operating days in Australia increased by 95% compared to 2021, as two rigs returned to service following completion of recertifications and upgrades. This contributed to a 41% increase in Australian second quarter drilling revenue although revenue per day decreased due to extended wet weather conditions in 2022 that resulted in lower standby rates being received on several rigs. Improving North American industry conditions contributed to a 75% increase in second quarter equipment utilization and a 122% increase in second quarter revenue in RDS segment. Segment EBITDA increased at a lower rate than revenue due to equipment reactivation costs and operating cost inflation. The absence of COVID-19 relief funds in 2022 also contributed to a lower year-over-year second quarter EBITDA margin in the RTS segment. Second quarter revenue in total CPS segment increased by 176% as compared to 2021. This segment saw a seventh consecutive quarterly increase to its fabrication sales backlog, which was 216 high on a year-over-year basis and marginally higher on a sequential quarterly basis. Strong natural gas prices provided tailwinds for the CPS's segment parts and service and rental business lines, with second quarter utilization of the compression rental equipment fleet increasing by 15% as compared to 2021. CPS segment EBITDA for the second quarter of 2022 increased by 95% on a year-over-year basis. With high production levels and improved pricing with a substantial completion in prior quarters of legacy orders received when industry conditions were less favorable, CPS segment operating income margins improved significantly in the second quarter of 2022. However, the absence of COVID relief funds in 2022 resulted in a year-over-year decrease in the second quarter CPSS segment's EBITDA margin. Second quarter revenue increased by 21% in our well servicing segment as compared to 2021, underpinned by a 17% increase in service hours and a 3% increase in revenue per service hour. The increases in revenue per service hour in Canada and the United States were said by decrease in Australia as extended weather conditions resulted in a lower standby rates being received for several rigs. Second quarter EBITDA and EBITDA margin decreased in well servicing segment as compared to 2022 as price increases were offset by cost inflation and the absence of COVID-19 relief funds in 2022. Total energies, financial and liquidity positions remains very strong During the second quarter of 2022, Total repaid $10.7 million or 6% of bank debt and repurchased 290,334 common shares under company's normal course issuer bid at a total cost of $2.4 million. Total net debt position at June 30, 2022 was $43.7 million and is the lowest since we completed the acquisition of Savannah in June of 2017. Total currently has 125 million of credit available under its 225 million of available credit facilities. Total Energy's bank covenants consist of a 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, 2022, company senior bank debt to bank EBITDA ratio was 0.72, and the bank interest coverage ratio was 22.74 times.