Total Energy Services Inc.

Welcome to Total Energy's third 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. Good morning and welcome to Total Energy Services' third quarter 2023 conference call. Present with me is Yulia Gorbache, Total's Vice President, Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended September 30th, 2023. We will then provide an outlook for our business and open up the phone lines for any questions. Yuliya, please proceed.

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's businesses and the oil and gas service industry in general. These risks, uncertainties, and other factors are described under heading risk factors and also 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 a 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 September 30th, 2023 reflect relatively stable industry conditions. Despite lower year-over-year North American industry activity levels, market share gains resulting from equipment upgrades and improved results from our compression and process services segment contributed to modestly higher third quarter results in 2023 as compared to 2022. Third quarter Australian activity levels were lower compared to prior year as one drilling rig and one service rig were out of service during the third quarter of 2023. for recertifications and upgrades. Third quarter consolidated revenue increased 12% on a year-over-year basis, while EBITDA increased by 6%. Our CPS segment was the largest contributor to year-over-year increase in third quarter revenue in EBITDA. Geographically, 48% of third quarter revenue was generated in Canada, 43% in the United States, and 9% in Australia. as compared to third quarter of 2022, when 47% of consolidated revenue was generated in Canada, 37% in the United States, and 16% in Australia. By business segment compression, process servicing generated 48% of third quarter consolidated revenue, followed by contract drilling services at 33%, while servicing at 10%. and rentals and transportation at 9%. In comparison, for the third quarter of 2022, the CPS segment contributed 42% of consolidated revenue, contract drilling services 36%, well servicing 13%, and the RTS segment contributed 9%. Third quarter consolidated gross margin was consistent with the prior year 24%, Margin strength in our CPS segment as well as our Canadian drilling, U.S. rentals and U.S. well servicing businesses offset year-over-year margin contraction in other businesses. Decreased drilling activity in all geographies resulted in a 7% year-over-year decrease in third quarter consolidated operating days in CDS segment. Offsetting lower activity was a 10% increase in consolidated segment revenue per operating day. This resulted in a 2% year-over-year increase in the third quarter of CDS segment revenue and flat EBITDA. In Canada, lower industry activity resulted in a 2% year-over-year decrease in third quarter operating days. Price increases in part due to rig upgrades resulted in an 8% year-over-year increase in third quarter Canadian drilling revenue per day. which in turn gave rise to a 7% year-over-year increase in Canadian drilling revenue. In the United States, third quarter revenue decreased by 11%. The 9% year-over-year increase in revenue per operating day was offset by 17% decrease in operating days due to lower industry activity and the transfer of a triple drilling rig to Canada in the second quarter of 2023. Lower revenue and crew retention costs resulted in a 50% decrease in operating income. In Australia, operating days decreased as one drilling rig was taken out of service for recertifications and upgrades. This rig returned to operations in mid-October. Reduced operating days were partially offset by a 29% increase in revenue per day, resulting in a 6% increase in revenue. Ofsetting higher revenue were crew retention and equipment relocation expenses associated with rigorous rectifications and upgrades. Also negatively impacting Australian operating income was the weakening of Australian dollar relative to Canadian and US dollars. In RTS segment, a rationalized equipment fleet in Canada and market share gains in the United States contributed to a 12% year-over-year increase in third quarter equipment utilization and a 14% increase in the revenue per utilized piece of equipment, which in turn resulted in a 17% increase in third quarter revenue. Third quarter EBITDA and EBITDA margins were 10% and 24% lower respectively as compared to 2022 due primarily to additional costs incurred in Canada to mobilize equipment and personnel for upcoming winter season. Third quarter revenue in total CPS segment increased by 28% 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 segment revenue was increased equipment overhaul activity and a 10% increase in utilization of compression rental fleet. Third quarter EBITDA and EBITDA margin increased 81% and 44% respectively for 2023 as compared to 2022. The fabrication sales backlog decreased to $152.9 million compared to the one $197.8 million backlog at September 30, 2022. Sequentially, the quarter end backlog decreased $32.7 million due to a moderation of component activity converting to sales during the third quarter of 2023 with no corresponding decrease in production activity, as well as the shift in customer demand towards renting compression equipment. Third quarter well servicing segment. Consolidated service hours decreased 16% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs, and an Australian service rig was taken out of service in the second quarter for recertifications and upgrades. A 1% decrease in revenue per service hour and decreased activity resulted in a 17% decrease in while servicing segment revenue. Lower revenue and operating hours in Canada and Australia were partially offset by 26% increase in service hours and a 30% increase in revenue in the United States as our U.S. service rig business expanded its customer base during 2023. Third quarter segment EBITDA and EBITDA margin decreased by 27% and 13% respectively as compared to 2022 due to lower activity and competitive pricing in Canada and Australia. From a consolidated perspective, Total Energy's financial position remains very strong. At September 30, 2023, Total Energy had $127.6 million of positive working capital including $29.9 million of cash and zero net debt. During the third quarter, we repurchased 252,804 common shares under our normal course issuer bid at a cost of $2.3 million. Total currently has $115 million of credit available under 175 million of existing credit facilities. Total Energy's bank covenants consist of maximum senior debt to trailing 12-month bank-defined EBITDA, and three times, or three times in the minimum bank-defined EBITDA to interest expense of three times. At September 30, 2023, the company's senior bank debt to bank-defined EBITDA ratio was 0.27, and bank interest coverage ratio was 29.04 times.