Total Energy Services Inc.

This is the conference operator. Welcome to Total Energy's fourth quarter results 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. If 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, sir.

Thank you and good morning, everyone. Welcome to Total's fourth 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 that ended December 31st, 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 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.cdrplus.ca. 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 December 31st, 2023 reflect continued stable industry conditions. For the year, total energy generated record annual EBITDA and cash flow. Adjusting for $26.8 million of non-recurring income tax and related interest and penalties recorded in the fourth quarter of 2023, following the court ruling upholding reassessment related to the company's 2009 income trust conversion, net income for 2023 also represents a record. Fourth quarter consolidated revenue was consistent with Q4 2022, while EBITDA increased by 26% as a result of modestly improved pricing, in part arising from equipment upgrades and the moderation of cost inflation as global supply chain challenges continue to ease. Our CDS segment was the largest contributor to the year-over-year increase in the fourth quarter revenue and EBITDA. Geographically, 54% of fourth quarter revenue was generated in Canada, 36% in the United States, and 10% in Australia as compared to the fourth quarter of 2022 when 42% of consolidated revenue was generated in Canada, 46% in the United States, and 12% in Australia. By business segment, Compression process servicing generated 45% of fourth quarter consolidated revenue, followed by contract drilling services at 35%, well servicing at 11%, and rentals and transportation at 9%. In comparison, for the fourth quarter of 2022, the CPS segment contributed 44% of consolidated revenue, contract drilling services 33%, well servicing 14%. excuse me, and the RTS segment contributed to nine. Fourth quarter consolidated gross margin was 27% as compared to the prior year at 23%. Margin improvement in our CDS, RTS, and CPS segments upset weakness in the well servicing segment. Relatively stable drilling activity in Canada and Australia upset a decline in U.S. activity and resulted in consistent operating days in the fourth quarter of 2023 compared to Q4 2022. Price increases and the mix of equipment operating contributed to an 8% increase in revenue per operating day. This resulted in an 8% year-over-year increase in the fourth quarter CDS segment revenue and a 33% increase in segment EBITDA. In Canada, Market gains were primary reasons for a 19% year-over-year increase in the fourth quarter operating days. Price increases, in part due to rig upgrades, resulted in a 10% year-over-year increase in the fourth quarter Canadian drilling revenue per day, which in turn gave rise to a 31% year-over-year increase in Canadian drilling revenue. In the United States, fourth quarter revenue declined by 44% as lower U.S. drilling activity and the transfer of one triple drilling rig to Canada contributed to a 48% decrease in operating days. The decrease in operating days was partially offset by an 8% increase in revenue per operating day. In Australia, operating days increased as one drilling rig returned to service in October following its recertification and upgrade. Increased operating days contributed, combined with 14% increase in revenue per operating day, arising primarily from rig upgrades, resulted in a 20% year-over-year increase in fourth quarter Australian drilling revenue. Partially upsetting the positive impact of higher day rates and operating days was the weakening Australian dollar relative to Canadian and US dollars. Moving to our RTS segment, the deferral of several projects in Canada offset market share gains in the United States and resulted in a 2% year-over-year decrease in fourth quarter segment revenue. Despite lower revenue, fourth quarter EBITDA and EBITDA margin increased 12% and 13% respectively as compared to 2022 due primarily to improved pricing and low equipment reactivation costs. Fourth quarter revenue in total CPS segment increased by 2% as compared to 2022, driven by continued strength in U.S. fabrication sales, increased parts and service activity, and improved utilization of Canadian rental fleet. Fourth quarter EBITDA and EBITDA margin increased 31% and 36% respectively as compared to 2022, due primarily to improved fabrication sales margins. The year-end fabrication sales backlog decreased to $162.8 million, compared to the $219.5 million backlog at December 31st, 2022. Sequentially, the quarter-end backlog increased by $9.9 million during the fourth quarter of 2023, after declining during the previous two quarters. Fourth quarter wealth servicing segment consolidated revenue decreased by 16% compared to 2022, as a modest 1% increase in segment revenue per service hour was outweighed by 17% year-over-year decrease in consolidated service hours. Lower activity in all jurisdictions and slightly lower North American revenue per service hour resulted in the fourth quarter EBITDA and EBITDA margin decreasing by 36% and 23% respectively as compared to 2022. From a consolidated perspective, Total Energy's financial position remains very strong. At December 31st, 2023, Total Energy had $123.4 million of positive working capital, including $47.9 million of cash and zero net debt. During the fourth quarter of 2023, total reduces bank debt by $10.5 million, or 10%. As mentioned earlier, following a tax court decision issued in February 2024, we fully provided for the certain tax reassessments related to total 2009 conversion from income trust structure in total 2023 fourth quarter results. We also remitted $19.9 million to pay in full all reassessed income tax and associated interest and penalties. Total has appealed the tax court decision and also applied to Canada Revenue Agency for interest abatement due to extensive delay in having the case heard by tax court. Total energy bank covenants consist of muscle and senior debt to trailing 12-month bank-defined EBITDA of three times, and a minimum bank-defined EBITDA to interest expense of three times. At December 31st, 2023, the company's senior bank debt to bank EBITDA ratio was 0.09, and the bank interest coverage ratio was 10.51 times, excluding $10.5 million of interest. one-time interest expense relating to reassessments of certain of the company's income tax filings related to its conversion to its conversion from income trust to corporations on nine. Interest coverage ratio was 32.27 times.