Total Energy Services Inc.

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.

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.

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.