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spk00: Thank you for standing by. This is the conference operator. Welcome to Total Energy's second quarter 2023 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 then zero. I would now like to turn the conference over to Daniel Halleck, President and CEO of Total Energy Service, Inc. Please go ahead.
spk02: Thank you and good morning, and welcome to Total Energy Service's second quarter 2023 conference call. Present with me is Julia Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended June 30th, 2023, and then provide an outlook for our business and open up the phone lines for questions. Julia, please go ahead.
spk03: 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's forward-looking statements due to a number of risks, uncertainties, and other factors affecting Total's business 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 securities authorities that are available to the public at www.sira.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 30, 2023, represent record second quarter financial results. Underpinning these results were relatively stable industry conditions in all jurisdictions and the deployment of equipment upgraded pursuant to our 2022 capital expenditure program. Second quarter consolidated revenue increased 17% on a year-over-year basis, while EBITDA increased by 5%. Included in Q2 2022 EBITDA was $7.4 million of contract cancellation revenue in our CPS segment. Excluding such contract cancellation revenue, Q2 EBITDA increased 41% on a year-over-year basis with CPS segment EBITDA adjusted for contract cancellation revenue accounting for 55% of this increase and the RTS segment 40%. Geographically, 47% of second quarter revenue was generated in the United States, 40% in Canada, and 13% in Australia as compared to second quarter of 2022, where 26% of consolidated revenue was generated in the United States, 54% in Canada, and 21% in Australia. By business segment, compression and process servicing generated 54% of second quarter consolidated revenue, followed by contract drilling services at 26%, and mutual wealth servicing and rentals and transportation services contributing 10%. In comparison, for the second quarter of 2022, CPS segment contributed 52% of consolidated revenue, contract drilling servicing 28%, wealth servicing 13%, and the RTS segment contributed 7%. Consolidated second quarter gross margin of 19% was two percentage points lower than Q2 of 2022. Excluding the $7.4 million of CPS contract cancellation revenue received in Q2 of 2022, second quarter gross margin improved by two percentage points compared to 2022. This improvement was driven by improved pricing in all business segments that more than offset cost inflation and the drag on consolidated gross margin due to the increased year-over-year relative revenue contribution of the lower margin CPS segment. Increased drilling activity in Canada was offset with lower activity in Australia and the United States, resulting in 6% year-over-year decrease in second quarter consolidated operating days in CDS segment. Offsetting lower activity was a 17% increase in consolidated segment revenue per operating day. This resulted in a 10% year-over-year increase in second quarter CDS segment revenue and 12% increase in segment EBITDA. In Canada, increased activity and market share gains contributed to an 8% year-over-year increase in second quarter operating days. Price increases in part due to rig upgrades, resulted in a 19% year-over-year increase in second quarter Canadian drilling revenue per day, which in turn gave rise to a 29% year-over-year increase in Canadian drilling revenue. In the United States, second quarter revenue decreased by 7%, as a 13% year-over-year increase in revenue per operating day was offset by an 18% decrease in operating days arising from modest slowdown in industry activity, and the transfer of one triple drilling rig to Canada. Despite the revenue decrease, second quarter U.S. CDS operating income increased by 312% as a result of increased pricing and cost efficiencies. In Australia, operating days decreased as one drilling rig was taken out of service for recertifications and upgrades. This rig returned to operation in July. Reduced operating days were partially offset by a 27% increase in revenue per day, resulting in a 2% decrease in revenue. Lower revenue combined with crew retention and other costs associated with recertification of one drilling rig contributed to a 79% decrease in operating income. In the RTS segment, improved Canadian industry conditions and meaningful market share gains in the United States contributed to a 7% year-over-year increase in utilization and a 48% increase in revenue per utilized piece of equipment, which in turn resulted in a 47% increase in revenue. This segment's leverage to high activity levels, given its relatively high fixed cost structure, was demonstrated by a 102% year-over-year increase in segments EBITDA and a 10 percentage points increase in EBITDA margin, despite significant year-over-year cost inflation. Second quarter revenue in total CPS segment increased by 22% as compared to 2022. This was due to a significant increase in U.S. fabrication sales that more than offset lower sales in Canada. Also contributing to the year-over-year increase in segments revenue was increased equipment overhaul activity and a 44% increase in utilization of compression rental fleet. CPS segment EBITDA for the second quarter of 2022 included $7.4 million of contract cancellation revenue, Excluding this contract cancellation revenue, second quarter EBITDA and EBITDA margin increased 64% and 22% respectively for 2023 as compared to 2022. The fabrication sales backlog increased to $185.6 million compared to $181.7 million backlog at June 30, 2022. Sequentially, the quarter end backlog decreased by $41.8 million as conversion of cloning activity to sales moderated somewhat during the second quarter with no corresponding decrease in production activity. Second quarter well servicing segment service hours decreased 13% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs. Partially offsetting reduced activity was a 6% increase in revenue per service hour, resulted in an 8% decrease in well servicing revenue. Lower revenue and operating hours in Canada and Australia were partially offset by 27% increase in service hours and a 41% increase in revenue in the United States as our U.S. service rig business expanded its customer base during the second quarter of 2023. Negatively impacting second quarter activity in Australia was the removal of service rig from operations for recertifications and upgrades. Lower activity, additional maintenance costs following the busy winter season in Canada, and operating cost inflation that exceeded price increases contributed to a 23% decrease in second quarter segment EBITDA and a 19% decrease in EBITDA margins. From a consolidated perspective, Total Energy's financial position remains very strong. During the second quarter of 2023, Total reduces bank debt by $10.5 million on 9%, bringing its net debt position to $2.7 million at June 30, 2023. During the second quarter, we repurchased 375,000 common shares under our normal course issuer bid at a cost of $3.3 million, and we currently have $115 million of credit available under $175 million of existing credit facilities. Total Energy's bank covenants consist of maximum senior debt to training 12-month bank-defined EBITDA of three times, and a minimum bank-defined EBITDA to interest expense of three times. At June 30, 2023, The company's seedroom bank debt to bank EBITDA ratio was 0.27, and the bank interest coverage ratio was 29.59 times.
spk02: Thank you, Yulia. We are pleased with our record second quarter results. Such results reflect the continued investment in upgrading our equipment fleet, as well as a significant increase in the relative contribution of our RTS segment following several years of restructuring that segment in response to challenging industry conditions in Canada. Despite a moderation in US and Australian activity and the normal seasonal slowdown in Canada that was exacerbated by lower well abandonment activity, total generated $43.9 million of cash flow after changes in non-cash working capital items during the second quarter that was used to fund $12.7 million of capital expenditures, repay $10.5 million of bank debt, reduce the number of outstanding common shares by 1% with $3.3 million of share repurchases, and pay $3.2 million of dividends to our owners. Canadian activity levels gained momentum as we entered the third quarter, and we currently expect continued favorable market conditions in North America and Australia, for the remainder of the year provided commodity prices remain relatively stable. Contributing to our constructive outlook for the remainder of 2023 is the reactivation of equipment being upgraded and recertified pursuant to our 2023 capital expenditure budget. Such equipment includes a triple drilling rig relocated to Canada from the US and an Australian drilling rig that both returned to service in July following recertification upgrades completed during the second quarter. That said, an Australian drilling rig that came off contract in July is currently undergoing routine inspection and maintenance and is expected to return to service in the fourth quarter of 2023. In direct response to customer demand, we have modestly increased our 2023 capital budget by $6 million to $72.1 million. This increase will be directed towards continued equipment recertification and upgrades. With $42.5 million of our 2023 capital budget funded to June 30th, the remaining $29.6 million will be funded with cash on hand and cash flow. While industry conditions remain stable and positive, global economic uncertainty and commodity price volatility give rise to caution. In such an environment, we will continue to prudently manage our operations and exercise discipline in the deployment of capital. We continue to be presented with numerous growth opportunities, but necessarily weigh such opportunities against the economics of continuing to pay down debt and repurchasing shares. I would now like to open up the phone lines for any questions.
spk00: Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. Our first question is from Tim Monticello with ATB Capital Markets. Please go ahead.
spk01: Hey, good morning.
spk02: Hey, good morning, Tim.
spk01: I was just curious. We saw some margin compression, you know, particularly in the CDS segment. And there were some rigs that were sidelined. Obviously, you've got some impacts in Canada just given seasonality. I'm curious how much you think the margin was impacted by, you know, rig mobilization and other sort of one-time items that might have hit the cost line.
spk02: So certainly relative to the first quarter, you're going to have some contraction in Canada with the absence of boiler revenue. But overall, the margins were fairly stable on a year-over-year basis. Definitely we had some costs. associated with relocating the triple from the U.S. to Canada, and obviously no corresponding revenue off that rig. And then typically, spring break up in all divisions, you tend to have increased maintenance costs, particularly after Q1, which was a fairly busy quarter. So you definitely have some of that seasonal revenue pickup and maintenance expenses. But, you know, year over year, margins were relatively stable. And, you know, so we didn't see anything unusual there. I don't know, Yuli, anything?
spk03: Yeah, it's 21% last year, 21% this year in the second quarter. But definitely a little lower than Q1, for sure.
spk01: Yeah, but rates have moved a lot higher over the last year, have they not?
spk02: Yeah, rates and costs.
spk03: Yeah.
spk02: Certainly, you know, lower activity in Australia and the U.S. You know, U.S. was more macro. Australia was, you know, when you pull one out of five rigs out of service, that hits your activity reasonably hard. But, yeah, there wasn't definitely cost inflation, but... reasonably stable margins, so rate increases have been offsetting costs, but that's a constant battle.
spk03: And definitely utilization in Q1 of 23 was higher than Q1 of 22, so that brings a bit relatively more cost for maintenance in break-up season.
spk02: So yeah, no, we don't see anything particularly unusual with the margins in Q2 in CDS.
spk01: Okay. I guess on the margin, what are you seeing from a pricing perspective in the North American rig markets?
spk02: I think pricing is stabilized. You know, there's select areas where you've got some upward bias, but I would say relative to a year ago, you've definitely got the market more stable and I would say more balanced.
spk01: Okay. And then in the CPS segment, this is the first quarter in a long time that we've seen the backlog come down sequentially. Are you seeing a slowing or tempering of demand from your customers? Or is it more just, you know, a higher consumption level in the second quarter? And perhaps like an elongation of the period to actually sign up new orders? I think that was mentioned. or alluded to in the MDNAC?
spk02: Yeah, so typically summertime you tend to get a bit of a breather, you know, just a function of summer holidays, that sort of thing. You know, again, we had a pretty significant ramp up over the past, you know, four, five quarters. You can't go up every quarter. I think part of it was normal seasonality where a year ago, you know, we're coming off such a slow period that it was hard not to increase your backlog. You know, the other thing is you build up a backlog, your delivery times start going out and you lose some bids on delivery, you lose some bids on pricing. You know, we certainly, when you've got a strong backlog, you're not going to, cut your pricing just to get work. Bid activity remains strong. So we see a pretty healthy market there.
spk01: So no, you haven't noticed any fundamental change in demand? No. Okay. I think that's all for me. I'll turn it back.
spk02: Thanks, Tim.
spk00: Once again, if you have a question, please press star then one. This concludes the question and answer session. I'd like to turn the conference back over to Mr. Halleck for any closing remarks.
spk02: Thank you, everyone, for participating in our conference call. I hope you have a great summer and look forward to speaking with you after our third quarter. Have a nice weekend.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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