Total Energy Services Inc.

Welcome to the Total Energy's third 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. 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' third 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 September 30th, 2022. and then provide an outlook for our business and open up the phone lines for questions. Yulia, 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 service industry in general. These risks, uncertainties, and other factors are described under heading risk factors and elsewhere in total most recently filed annual information form and other documents filed with Canadian Provincial Securities Authorities that are available to the public at www.cedar.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 September 30, 2022, reflect the continued recovery of the global energy industry particularly in North America, Total Energy's third quarter results saw all business segments in all geographic areas return to profitability, which in turn contributed to record quarterly consolidated EBITDA, cash flow, and net income being achieved. Third quarter net income of $17.2 million represents Total's fifth consecutive profitable quarter, and a substantial improvement compared to $4.3 million net income in the third quarter of 2021. While reported 2022 third quarter consolidated EBITDA increased 57% as compared to 2021, EBITDA increased by 90% after adjusting to exclude $4.5 million of COVID relief funds received in 2021 and unrealized foreign exchange gains on translation of intercompany working capital balances, resulting in an adjusted quarterly EBITDA margin of 20% as compared to 19% in third quarter of 2021. By business segment, compression and process servicing generated 42% of 2022 third quarter consolidated revenue, followed by contract drilling services at 36%, while servicing at 14%, and grand trials and transportation services at 9%. In comparison, for the third quarter of 2021, the CPS segment contributed 32% of consolidated revenue, contract drilling services 36%, well servicing 21%, and RDS segment contributed 10%. Consolidated third quarter gross margin was four percentage points lower as compared to Q3 of 2021. This was primarily due to the increased CPS contribution to consolidated revenue, which historically has lowered gross margin percentages and no COVID-19 relief funds received in Q3 of 2022. Excluding COVID-19 relief funds, gross margin as a percentage of revenue was 24% for the third quarter of 2022. as compared to 25% in Q3 of 2021. Selling general and administration expenses for the third quarter of 2022 increased by $2.4 million, or 34%, compared to Q3 of 2021, as employee compensation was reinstated to pre-COVID levels, higher profit-based employee compensation was recognized in certain segments, and no COVID-19 funds were recorded during the third quarter of 2022, compared to 0.5 million of COVID-19 relief funds being received in Q3 of 2021. The improvement in North American drilling activity and pricing contributed to 39% year-over-year increase in third quarter total operating drilling days in the CDS segment. This, combined with 22% increase in revenue per operating day, resulted in a 71% year-over-year increase in third quarter CDS segment revenue. The increase in revenue per operating day in North America was somewhat upset by decrease in revenue per operating day in Australia as a result of lower standby rates being received during extended wet weather conditions. The year-over-year increase in operating days and revenue per operating day was somewhat offset the set cost inflation, and despite the lack of COVID-19 relief funds, resulted in the third quarter of CDS segment EBITDA increasing by 91% as compared to 2021. Increased industry activity, rig upgrades, and market share gains contributed to a 55% year-over-year increase in third-quarter Canadian operating days. Price increases and the mix of equipment operating contributed to a 40% year-over-year increase in third-quarter Canadian drilling revenue per day, which underpinned a 117% year-over-year increase in CDSS third-quarter Canadian revenue. Modestly improving industry conditions and market share gains in the United States contributed to 6% year-over-year increase in third quarter operating days and 37% increase in drilling revenue per day, which in turn drove a 45% year-over-year increase in third quarter drilling revenue. Third quarter operating days in Australia increased by 39% as compared to 2021 as two drilling rigs returned to service following the completion of recertification and upgrades. This contributed to a 4% increase in Australian third quarter drilling revenue, although revenue per operating day decreased year over year due to continued wet weather conditions that resulted in lower standby rates being received on several rigs. The RTS segment also benefited from improving North American industry conditions. A 31% year-over-year improvement in third quarter equipment utilization combined with a 19% increase in the revenue per utilized piece of equipment drove a 47% increase in third quarter revenue in RTS segment. This segment's leverage to high activity levels, given its relatively high fixed cost structure, was demonstrated by a 75% year-over-year increase in segment EBITDA and a 7 percentage point increase in EBITDA margin despite significant inflationary cost pressures and the absence of COVID-19 relief funds in 2022. Third quarter revenue in total CPS segment increased by 127% as compared to 2021. This segment saw an eight consecutive quarterly increase to its fabrication sales backlog, which was 107% higher on a year-over-year basis and 9% higher on a sequential quarterly basis. Strong natural gas prices provided tailwinds for CPS segment parts and service and rental business lines, with the third quarter utilization of the compression rental equipment fleet increasing by 19% as compared to 2021. CPS segment EBITDA for the third quarter of 2022 increased by 36% on a year-over-year basis. The absence of COVID-19 relief assistance and general operating cost inflation contributed to a 40% year-over-year decrease in the CPS segment's third-quarter EBITDA margin. Third-quarter revenue increased by 16% in our wealth servicing segment. as compared to 2021, underpinned by a 3% increase in service hours and a 12% increase in revenue per service hour. Increased activity in pricing contributed to a 6% year-over-year increase in third quarter segment EBITDA. Increases in activity and revenue per service hour in North America were partially offset by decreases in Australia as extended wet weather conditions negatively impacted utilization and resulted in lower standby rates being received for several rigs. Third quarter EBITDA margin decreased slightly in the well servicing segment on a year-over-year basis as price increases were offset by cost inflation and the absence of COVID-19 relief in 2022. Total Energy's financial position remains very strong. During the third quarter of 2022, Total repaid $10.7 million, or 7% of bank debt, and repurchased 304,652 common shares under the company's normal course, issued a bid at total cost of $2.2 million. Total net debt position at September 30, 2022 was $26.1 million and is the lowest since we completed the acquisition of Savannah in June of 2017. Total net debt decreased further in October when we used $13.3 million of cash on hand to voluntarily repay mortgage loan taken out by Savannah early 2017. Total currently has $135 million of credit available under its $225 million of available credit facilities. Total Energy's bank governance consists of maximum senior debt to trailing 12 months bank-defined EBITDA three times and a minimum bank-defined EBITDA to interest expense At September 30, 2022, the company's senior bank debt to bank EBITDA ratio was 0.61 and the bank interest coverage ratio was 24.82 times. Thank you, Yuliya.