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Operator
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.
Daniel Halleck
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.
Yulia Gorbache
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.
Daniel Halleck
Thank you, Yulia. 2022 saw a return to profitability following two years of challenging industry conditions, Entering the year, the global economy continued to recover from the devastation caused by the COVID-19 pandemic, which in turn contributed to relatively strong oil and natural gas prices. While producers increased their capital expenditure programs in response to higher prices, budgets remained constrained relative to prior periods of similar prices. Offsetting this muted response to higher prices was a reduction in energy service industry capacity, following several years of industry contraction and consolidation. In this environment, Total Energy was able to substantially improve its financial performance and increase shareholder returns through significant debt repayment, share buybacks, and the restoration of a dividend. Of note is the fact that for the first time in our history, during the fourth quarter, Total Energy generated more revenue in the United States than in Canada. The United States represents a tremendous opportunity for future growth, and we are focused on opportunities to continue to expand our U.S. presence in all business segments. We are optimistic as we enter our 27th year in business. While we certainly cannot predict the future, we remain committed to Total's core values that have served us well in a highly cyclical industry. This includes taking seriously our role of stewards of our owner's capital, which in turn drives us to only pursue investments that offer appropriate risk-adjusted returns. Absent such opportunities, we will look to return capital to our owners through debt repayment, share buybacks and dividends. As we currently anticipate operating cash flow and cash on hand will be sufficient to fund debt and capital lease obligations and anticipated capital expenditures for the foreseeable future, With this perspective in mind, our board of directors approved a 33% increase to totals dividend. As we look forward to what appears to be better times for our industry, on behalf of our board of directors and our many employees throughout North America and Australia, I would like to thank our shareholders for supporting us through some very difficult times. We will continue to work hard to ensure your trust and confidence is warranted. I would now like to open up the phone lines for any questions.
Operator
Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. To join the question queue, please press star, then 1 now. Our first question comes from Ernest Wong of Baskin Wealth Management. Please go ahead.
Ernest Wong
Good morning. Good morning, everyone. How are you? Well, thanks. How are you this morning? Doing well. So I just wanted to ask, you guys spent a lot of time talking about how you expect industry conditions to be better going forward. So I was thinking what you think an appropriate return on invested capital is. would be going for the next couple of years?
Daniel Halleck
So we have our weighted average cost of capital calculated every year. We don't publish that, but I can certainly say over the years, we expect to receive a minimum 15% pre-tax return on invested capital over the life of the investment earnest. If we can't see that with some reasonable certainty, we're not interested. Obviously, you're looking at future cash flows. There'll be some years where it's zero. Other years, it's got to be much higher, but on average, over the length of investment, if we can't see 15%, and that's pre-tax, not a depreciation, we're not interested.
Ernest Wong
Got it. You mentioned that you were interested in continuing your expansion in the U.S. Given where your stock is, roughly, I think, 70% of book value, how do you balance your ongoing investments to grow in the U.S. with buybacks and things like special dividends and debt reduction?
Daniel Halleck
So we look at... Buybacks is just another opportunity to invest capital. And what we're seeing in the United States, I just came back from a visit to our operations in Texas and New Mexico, is there's a huge opportunity. I think the underinvestment within the industry over the past number of years has really caught up, and I think there's a great opportunity for well-run service companies to invest gain some significant market share you know so part of our growth strategy is is certainly relocation of underutilized equipment um you know m a uh organic new equipment builds um but again we balance uh that against um you know share buybacks you know everything else being equal though uh we would prefer growth over uh contraction and so um In the event of a tie, we prefer to grow as opposed to shrink. But again, that's the lens through which we look at all of these opportunities.
Ernest Wong
And will your primary use of cash, apart from the dividend, be focused on debt reduction again in 2023? Yes.
Daniel Halleck
Yeah, you know, we have, there's two components to our debt. One is our revolving credit facilities, which as we mentioned in the release are currently drawn at $70 million. You know, that will take that to zero. The other component is a fixed term debt, it's mortgage debt. That's always been kind of our permanent component of debt. And that's secured by a portion of our real estate. We've been rolling that typically it's been 50 million, uh, initial, uh, uh, debt that after five years is down to 40. We've rolled that now, I think three, three consecutive times or two, um, to us, that's sort of our permanent debt. Um, you know, the other, the way we look at the real estate is we're sitting on, you know, real estate that's substantially, uh, worth substantially more than the net book value. And, and, um, A fraction of it is used to secure fixed rate mortgage debt. And so we use our real estate to lower our overall cost of capital. And the flip side, we could turn around and sell that real estate, do a sale, lease back. The negative would be our operating costs would go up materially. If we sold at market, obviously the buyer would want market rent. So we've tended to use our real estate to basically backstop what we see as kind of permanent fixed portion of debt on our balance sheet, and that will likely continue.
Ernest Wong
Got it. That's all from me. Thank you. Thanks.
Operator
Our next question comes from Joseph Schachter of Schachter Energy Research. Please go ahead.
Joseph Schachter
Good morning, Dan and Julia, and congratulations on a great quarter and the dividend increases. I have three areas I wanted to talk about. First one is when the E&P companies have been talking, they've been saying that the price increases for rigs, fracking, et cetera, kind of peaked in Q4, Q1, and they thought they'd be steady going forward. How do you see things from the point of view of your operations, drilling, service rigs, et cetera? Do you see more price upside in the near term? Or would you have to wait until the summer and see where natural gas prices are and then maybe, based on activity levels, look at price increases?
Daniel Halleck
You know, it really depends on the business line and the geographical area and, frankly, the specific piece of equipment. I think there's a lot of different sub-markets within this. I would say, overall, you're probably not going to see the – the rate of price increases that you saw last year. But that said, there's many areas within our business that supply currently is less than demand. So there's going to be areas where we're going to continue to see good pricing momentum. There's other areas that'll be flattened out for sure. I think it really depends on the specific market and the specific product or service we're talking about. I'm hesitant to get too specific there for competitive reasons, but overall I think we see all the markets we're operating in right now as relatively healthy markets that are working for both the customer and the supplier, but there's probably some further room for growth on price. In other words, we're not at a point where There's new build economics in a lot of our business areas.
Joseph Schachter
The second question is Australia. Can you talk about what's going on there, weather-related? Is this just something that happens over the winter months here and summer months there? Do you see an improvement in the months ahead? How do you perceive what's going on in Australia now? Profitability will go for you going forward.
Daniel Halleck
What we saw last year was basically the back half of the year was extremely wet. Now, typically, historically, the first quarter is actually their wet season, and we're talking primarily in the Queensland area. Interestingly, it's been a lot drier so far in 2023, which is a positive, but literally through the back half of last year, We had rigs sitting for weeks, just couldn't move. It was wet. And so the wet weather has actually abated during what's typically the rainy season. So it looks like the rainy season came early. And so far in Q1, weather's been more cooperative. But it was definitely a material impact on the business.
Joseph Schachter
Are you already seeing activity in terms of people trying to book equipment for the next month or in the next few months? Are you seeing a pickup there?
Daniel Halleck
Yeah, we currently have five drilling rigs in Australia, all of which are drilling. And our service rigs, I'm not sure on the daily count, but our drilling rigs today are operating at 100%. which they were pretty on and off during Q4. But as we announced in our preliminary CapEx budget, we're in the process of Australianizing a Canadian rig to bring over to Australia for first quarter next year. So we'll be up to six next year.
Joseph Schachter
Okay, good. My last question is, you mentioned about M&A... in the United States. Are you looking at M&A in all business lines and how much traffic is there? Is this something that you're giving us a heads up to look at that we might see some announcements in the months ahead?
Daniel Halleck
No, I wouldn't. I think we're open to growing. The biggest challenge we have to complete M&A is our cost of capital right now. notably our cost of equity. It's a real limitation. But what I'm saying is we see the U.S. as a significant growth market for us. We're just scratching the surface. We're open to all segments. The reality is where we tend to see most of the opportunities is in the capital asset heavy businesses. But it's got to work for us, and so I wouldn't say you need to lay awake at night waiting for press releases. The flip side is we can move when we need to move and when it makes sense and certainly it's a massive market and we're just scratching the surface and certainly you tend to spend your time focusing on jurisdictions where you believe you've got good opportunity, you're able to differentiate yourself and there's room to take market share.
Joseph Schachter
Do you have one or two core areas where you're working in the States now where you might try to infill in that area? Are we looking at the Permian, the Eagleford? Are there certain basins that you have a structure in there now that you could build upon that we should be watching?
Daniel Halleck
Certainly, my recent visit to West Texas and New Mexico, what I saw, and the focus in part was our rental business, and what I saw was our rental equipment down there is heads and tails better than most competitors in terms of quality, and there's certain equipment lines where we were completely sold out, and there's opportunities to continue to relocate equipment from Canada, and And there's also opportunities to probably introduce new equipment, which will help pull demand for other equipment that we have plenty of. And so I'm quite excited about what that market offers for us. And in large part, just again, the quality of the industry fleet in general is quite poor. And, you know, these are big capital investments where I think a lot of the private players have – it's been a tough few years, both in Canada and the U.S., and I think there's a real hesitation, you know, for those privates that have survived to, you know, put a whole bunch more money into a sector that hasn't been kind.
Joseph Schachter
Super. Well, I look forward to seeing – keeping up with the quarterly notes and then also – hopefully any announcements on growth in the state. So congratulations on the good quarter and the dividend increase, and look forward to more good news.
Daniel Halleck
Thanks, Joseph.
Operator
Our next question comes from Jonathan Orford of BMO Capital Markets. Please go ahead.
Jonathan Orford
Hi, guys. Thanks for taking my call. I might have missed it in the prepared remarks, but I was just wondering if you could provide the color on what impacted the RTS margins, quarter over quarter.
Daniel Halleck
So one thing we had, frankly, both in the drilling and the RTS was a lot of equipment reactivation. And so on the negative was like literally we were pulling equipment off the fence that hadn't worked for years. A prime example would be a heavy truck and simple things that one wouldn't think about. But, for example, heavy trucks in Canada, there's regulatory requirements that tires can't be more than five years old. So you've got to change out all the tires. We expensed all that, but there were some significant equipment reactivation costs that were all expensed. to basically get ready for Q1. The flip side on the positive side is what you can see is a relatively, not a huge increase in year-over-year equipment utilization translates into a pretty significant increase in EBITDA margin. Again, that reflects the fixed cost structure within that division. So again, a lot of Q4, particularly in Canada, was getting ready for Q1.
Jonathan Orford
Okay, that's helpful. I was also just wondering about U.S. gas prices. Are you seeing any impact from the weak gas prices on any business lines in the U.S.?
Daniel Halleck
In the U.S. or generally?
Jonathan Orford
Okay.
Daniel Halleck
No, sorry, your question, did you say in the U.S. or is this just a general question? Okay.
Jonathan Orford
More of a general, are you seeing any impact from the weak gas prices for activity or anything like that?
Daniel Halleck
The reality is most of our, the vast, vast majority of our drilling rigs in North America are drilling for oil. Australia is all gas. What drives Australia is LNG. Frankly, what we're seeing and probably our most gas-exposed business would be our compression process services. You saw another meaningful increase in the backlog, and we continue to see very, very strong bid activity and quoting activity. My sense is a lot of the driver behind that is more an infrastructure bill. These are you know, projects, capital projects that are looking beyond short-term gas prices. And so we have not seen any, I would call it, fallout from, you know, the weakness in gas here over the last couple months.
Jonathan Orford
Okay, perfect.
Daniel Halleck
It's probably impacting gas drilling per se, but again, not a lot of our Rig activity is tied to dry gas drilling.
Jonathan Orford
Awesome. Thanks for the call. That was it for me. I'll turn it back.
Operator
Once again, if you have a question, please press star, then one. Our next question comes from John of Canaccord Genuity. Please go ahead.
John
Yeah. Thanks, and good morning, everybody.
Daniel Halleck
Good morning, John.
John
I just want to pick up on the comments you're making about what you're seeing in Canada versus the U.S. I know at least one major producer has indicated they're seeing maybe less cost inflation in Canada versus the Permian and whatnot. Just wondering if that kind of correlates with what you're seeing. And more generally, can you give us any color on what you're seeing with producer sentiment on either side of the border where you operate?
Daniel Halleck
You know, I would say cost inflation is an issue everywhere. You know, there's supply chain bottlenecks are, I would say, generally easing, but they're still, in certain instances, fairly significant. You know, we're continuing to see really long lead times on, for example, you know, Caterpillar drivers. And, you know, we're having to plan a year in advance in terms of, you know, the CPS segment issues. major component inventory management. So in terms of sentiment within the customer field, I think it's, again, fairly uniform. You know, the reality is none of the producers have been drilling for the past two years like there's been $100 oil. And so... we didn't see the craziness that you'd normally see with $100 oil when oil was $100, and correspondingly, we haven't seen any material changes when oil settles in at $75 or $80. Same thing with gas. When gas was $8, we didn't see a drilling response to that. Again, gas historically in Canada has been a much larger part of the drilling piece. It's certainly not what it was 10, 15 years ago, but it's going to be interesting, John, and you'd have as good or better idea than I. As we continue to build out North American LNG export capacity, I'm bullish on gas. I just think for many, many reasons, Gas, apart from becoming a global commodity, is going to be a desired fuel energy source. With energy security becoming an increasing problem, I'm bullish on gas in the medium to long term. I think what we're seeing on the infrastructure build supports that.
John
That's great color, Dan. I appreciate it. Related to that, on the heels of the blueberry announcement, Historically, you've always had a strong presence in BC. Can you give us a little bit of a feel for what you might see on the ground there as we move through 2023?
Daniel Halleck
Well, we finally saw some licenses issued this week, a big number. Honestly, I think the biggest question, John, is going to be where are the rigs going to come from? Right now, to get... you know, deep capacity, high hook load, high pressure rigs to substantially increase drilling activity in northeast BC. I don't know where they're going to come from.
John
Interesting. That's good color.
Daniel Halleck
And also the collateral equipment surrounding those rigs, you know, key pieces on solids control, all that kind of stuff. I don't know where it's going to come from.
John
Okay. No, that's helpful. And just one last one, just given the performance of CPS and Q4, is it reasonable to assume that, you know, the legacy mandates you were doing that were kind of dragging on margins are in the rearview mirror now?
Daniel Halleck
Yes.
John
Okay. That's helpful, Dan. Appreciate the color. That's all for me. Thanks, John.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Mr. Halleck for any closing remarks.
Daniel Halleck
Thank you all for joining us this morning, and we look forward to speaking with you after our first quarter. Have a great weekend.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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