Total Energy Services Inc.

Welcome to Total Energy's fourth 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's fourth 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 December 31st, 2022, and then provide an outlook for our business and open up the phone lines for questions. Julia, please go ahead.

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 oil and gas service industry in general. These risks, uncertainties, and other factors are described on the heading risk factors and ELF rental's most recently filed annual information form and other documents filed with Canadian Provincial Securities 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 financial results for the three months ended December 31st, 2022, reflect the continued recovery of global energy industry, particularly in North America. Fourth quarter net income of $12.3 million was a substantial improvement compared to $1 million of net income in the fourth quarter of 2021. Reported fourth quarter consolidated EBITDA increased 59% as compared to 2021. However, after adjusting to exclude COVID-19 relief funds and unrealized foreign exchange impacts arising from the translational intercompany working capital balances, fourth-quarter EBITDA increased by 76% on a year-over-year basis. By business segment, compression and process servicing generated 44% of 2022 fourth-quarter consolidated revenue, followed by contract drilling services at 33%, well servicing at 14%, and rentals and transportation services at 9%. In comparison, for the fourth quarter of 2021, The CPS segment contributed 37% of consolidated revenue. Contract drilling services 36%, well servicing 19%, and RTS segment contributed 8%. Consolidated 2022 fourth quarter gross margin of 23% was consistent with Q4 2021 as increased prices and economies of scale offset the increased relative contribution of the CPS segment as well as significant cost inflation and the absence of COVID-19 assistance. Excluding COVID-19 relief funds, gross margin as a percentage of revenue was 23% for the fourth quarter of 2022 as compared to 22% in Q4 of 2021. Sale in general and administrative expenses for the fourth quarter of 2022 increased by $2.7 million, or 32% compared to Q4 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 quarter, compared to $0.1 million of COVID-19 relief funds being received in Q4 of 2021. Increased North American drilling activity upset lower Canadian activity due to wet weather conditions. resulting in an 11% year-over-year increase in fourth quarter total operating days in CDS segment. This, combined with a 28% increase in revenue per operating day, resulted in a 42% year-over-year increase in fourth quarter CDS segment revenue. The year-over-year increase in both North American operating days and revenue per operating days in all geographical regions drove a 42% increase in fourth quarter CDS segment EBITDA as compared to 2021, despite significant cost inflation and the absence of COVID-19 assistance. In Canada, increased industry activity and market share gains contributed to a 15% year-over-year increase in fourth quarter Canadian operating days. Price increases in part due to rig upgrades, resulted in a 33% year-over-year increase in fourth quarter Canadian drilling revenue per day, which in turn gave rise to a 57% year-over-year increase in Canadian drilling revenue and a six-fold increase in operating income. In the United States, a 4% year-over-year increase in the fourth quarter operating days combined with a 35% increase in revenue per operating day due to higher pricing resulted in a 40% year-over-year increase in fourth quarter U.S. drilling revenue. After adjusting for a $1.6 million over-realized foreign exchange loss on settlement for venture company balances, fourth quarter operating income in the United States increased by $1 million as compared to 2021. Fourth quarter operating days in Australia decreased by 4% compared to 2021, as wet weather conditions continued to negatively impact Australian activity. Such lower activity was offset by 10% increase in revenue per operating day, such that Australian drilling revenue increased 6% as compared to the fourth quarter of 2021. Australian operating income was significantly and negatively impacted by crude retention and equipment reactivation costs following extended periods of inactivity due to the weather. The RTF segment also benefited from improving North American industry conditions. A 21% year-over-year improvement in fourth quarter equipment utilization combined with a 51% increase in revenue per utilized piece of equipment resulted in an 84% year-over-year increase in fourth quarter revenue in the RTS segment. This segment's leverage to high activity levels, given its relatively high cost structure, was demonstrated by a 128% year-over-year increase in segment EBITDA and a six percentage point increase in EBITDA margin, despite incurring equipment reactivation costs in response to high activity, as well as general cost inflation and the absence of COVID-19 assistance in 2022. Fourth quarter revenue in total CPS segment increased by 90% as compared to 2021. This segment saw a ninth consecutive quarterly increase to its fabrication sales backlog, which was 49% higher on a year-over-year basis and 11% higher on a sequential quarterly basis. Improved natural gas prices provided tailwinds for the CPS's segments, parts and service and rental business lines, with fourth quarter utilization of the compression rental equipment fleet increasing by 50% as compared to 2021. CPS segment EBITDA for the fourth quarter of 2022 increased by 207% on a year-over-year basis, with improved pricing and increased activity driving a 57% year-over-year increase in fourth quarter EBITDA margin, despite cost inflation and the absence of COVID-19 assistance. The wealth servicing segment saw fourth quarter revenue increase by 11% compared to 2021, underpinned by a 15% increase in revenue per service hour. Fourth quarter service hours decreased 3% due to cold weather conditions, and an extended holiday shutdown in Canada and continued wet weather in Australia. A decrease in service hours, crew retention and equipment reactivation costs, general cost inflation in the absence of COVID-19 assistance, more than offset increased North American pricing, with the result that fourth quarter segment EBITDA decreased by 6% compared to 2021. From a consolidated perspective, Total Energy's financial position remains very strong. During the fourth quarter of 2022, Total reduced its bank debt by $28.6 million on 19% and repurchased 525,638 common shares under its normal course issue bid at a cost of $4.5 million. Total's net debt position at December 31, 2022, was $15.5 million and is by far the lowest since we completed the acquisition of Samana in June 2017. Total currently has $155 million of credit available under its $225 million of available credit facilities. Total energy bank governance consists of maximum senior debt to trailing 12-month bank-defined EBITDA of three times. and the minimum bank-defined EBITDA to interest expense was three times. At December 31, 2022, the company's senior bank debt to bank EBITDA ratio was 0.46, and the bank interest coverage ratio was 22.6 times.