Total Energy Services Inc.

Welcome to Total Energy's first 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 will 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 and good morning. Welcome to Total Energy Services' first quarter 2023 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, 2023. and then provide an outlook for our business and open up the phone lines for questions. Yulia, please go ahead.

Thank you, Dan. During the course of this conference call, information may be provided containing forward-looking information concerning totals, projected operating results, anticipated capital expenditure trends, and projected activity in oil and gas industry. Actual events or results may differ materially from those reflected. in Total's forward-looking statements due to 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.sira.com. Our discussions during this conference call are qualified with reference to 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, 2023, represent record quarterly results. Underpinning our first quarter results was improved North American industry conditions in all business segments and the deployment of equipment upgraded pursuant to our 2022 capital expenditure program. First quarter consolidated revenue increased 42% on a year-over-year basis and continued to to substantial year-over-year increases in cash flow, EBITDA, and net income. Geographically, 56% of first quarter revenue was generated in the United States, 33% in Canada, and 11% in Australia. This represents the second consecutive quarter that the United States has surpassed Canada as the largest contributor to consolidated revenue. By business segment, compression and process servicing generated 43% of the first quarter consolidated revenue, followed by contract drilling services at 32%, well servicing at 14%, and rentals and transportation services at 11%. In comparison, for the first quarter of 2022, the CPS segment contributed 36% of consolidated revenue. Contract drilling services 37%, while servicing 17%, and the RTS segment contributed 10%. Consolidated first quarter gross margin of 26% was six percentage points higher than Q1 of 2022. This 30% improvement was driven by improved margins in all business segments that was sufficient to more than offset the drag on consolidated gross margin arising from the increased year-over-year relative revenue contribution of the lower margin CPS segment. Selling, general, and administration expenses for the first quarter of 2023 increased by 2.6 million, or 30%, compared to Q1 2022, as higher profit-based employee compensation was recognized. Increased drilling activity in Canada and stable activity in Australia offset somewhat lower activity in the United States, resulting in a seven year-over-year increase in first quarter consolidated operating days in CDS segment. This, combined with increased pricing in all jurisdictions, resulted in a 22% year-over-year increase in first quarter CDS segment revenue, a 77% increase in segment EBITDA and 47% increase in segment EBITDA margin. In Canada, increased activity and market share gains contributed to an 18% year-over-year increase in first quarter operating days. Price increases in part due to rig upgrades resulted in 10% year-over-year increase in first quarter Canadian drilling revenue per day which in turn gave rise to a 30% year-over-year increase in Canadian drilling revenue and an 11-fold increase in operating income. In the United States, first quarter revenue increased by 12% as 33% year-over-year increase in revenue per operating day, more than offset a 16% decrease in operating days arising from downtime between various customers' drilling programs. Despite the revenue increase, cost inflation and low activity contributed to year-over-year decline in the first quarter U.S. CDS operating income. In Australia, consistent with first quarter drilling reutilization and a 15% increase in revenue per operating day contributed to a 15% year-over-year revenue increase and a 27% increase in operating income. The RTS segment also benefited from improved North American industry conditions. A 12% year-over-year improvement in first-quarter equipment utilization combined with 41% increase in revenue per utilized piece of equipment resulted in a 59% year-over-year increase in first-quarter revenue in the RTS segment. This segment's leverage to high activity levels, given its relatively high fixed cost structure, was demonstrated by a 73% year-over-year increase in segment EBITDA and a 4% point increase in EBITDA margin, despite significant year-over-year cost inflation. First quarter revenue in total CPS segment increased by 68%. as compared to 2022. This segment saw the 10th consecutive quarterly increase to its fabrication sales backlog, which was 26% higher on a year-over-year basis and 4% higher on a sequential quarterly basis. Increased equipment overhaul activity provided tailwinds for CPS segments parts and service and rental businesses lines. with first quarter utilization of the compression equipment fleet increasing by 50% as compared to 2022. CPS segment EBITDA for the first quarter of 2023 increased by 287% on a year-over-year basis, with improved pricing and increased activity driving the 100%, 117% year-over-year increase in first quarter EBITDA margin despite significant cost inflation. The wealth servicing segment, so first quarter revenue, increased by 19% as compared to 2022, underpinned by an 8% increase in consolidated service hours and 11% increase in revenue per service hour. Increased service hours in North America were somewhat upset by a decrease in Australia as one ActiveRig was taken out of service for recertification. Improved North American pricing and utilization drew a 26% year-over-year increase in first quarter segment EBITDA and the modest increase in segment EBITDA margin. From consolidated perspective, Total Energy's financial position remains very strong. During the first quarter of 2023, Total reduced its bank debt by $5.5 million of 5% and repurchased 975,000 common shares under its normal course issue bid at a cost of $8 million. Total net debt position at March 31st, 2023 was $11.4 million. On April 12th, 2023, we extended the term of our syndicated credit facility to November 10, 2026. Given the significant repayment of debt since our last renewal, and in order to reduce costs, we requested a $50 million reduction to the facility limit, which is now $170 million. Including an undrawn $5 million operating facility maintained by a subsidiary, Total currently has $105 million of credit available under its $175 million of existing credit facilities. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bank-defined EBITDA of three times and a minimum bank-defined EBITDA to interest expense of three times. At March 31st, 2023, The company senior bank to bank EBITDA ratio was 0.36, and the bank interest coverage ratio was 30.59 times.