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spk03: 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.
spk05: 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.
spk00: 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.
spk05: Thank you, Yuliya. 2023 was a solid year for Total. Continued investment in expanding North American LNG export capacity provided tailwinds during the year. particularly for our CPS segment, which has significant exposure to the global natural gas infrastructure build currently underway. Targeted investments and equipment upgrades over the past two years also contributed to our strong financial performance in 2023. Our employees were diligent in conducting operations in a safe and efficient manner over the past year. Notably, our rental and transportation services segment recorded a zero TRIF in Canada for 2023, a significant achievement given the nature of their operations and the harsh environments they often find themselves working in. At a corporate level, Total remained committed to providing our owners with industry-leading shareholder returns. During 2023, $52.7 million of cash flow was directed towards $27 million of debt repayment, $13.6 million of share repurchases, and $12.1 million of dividends. Total exited 2023 in a very strong financial position, with bank debt less cash on hand of only $45.1 million. While oil prices remain relatively stable, North American natural gas prices have weakened considerably over the past few months, and certain producers have begun to curtail their natural gas capital budgets. In this environment, Total Energy remains focused on operating in a safe and efficient manner and exercising discipline in the investment of our owner's capital. Our previously announced 2024 capital expenditure budget of $46.5 million maintains our current operating levels and provides our business segments with capital to pursue compelling growth opportunities backstopped by long-term contracts. As announced yesterday, we are pleased to have completed the acquisition of Saxon Energy Services Australia. This acquisition significantly increases our presence in the Australian land drilling market and is expected to provide a competitive return on invested capital. On behalf of the board and management, I extend a warm welcome to all Saxon and Schlumberger employees joining our Australian team, as well as to Mr. Yassir Nasir, who has joined our corporate executive team. We look forward to working with all of you as we continue to grow our global drilling business in a safe and prosperous manner. Finally, we are pleased with our board's decision to increase totals dividend Not only does this decision align with Total's long-standing commitment to providing our owners with industry-leading shareholder returns, but it also demonstrates our confidence in the future prospects of our company. I would now like to open the phone lines up for any questions.
spk03: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will 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, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Tim on a channel of ATB Capital Markets. Please go ahead.
spk04: Congrats on getting this action deal closed. I'm just curious, can you give an operations update on how that's going, you know, it's just closed, I guess, yesterday, but how many rigs are you running in Australia today? Good morning, Tim.
spk05: Yesterday was a pretty busy day, particularly given the time zone differences, so I'm still in a bit of a fog. Fair enough. Yeah, in terms of active rigs in Australia today, we would have, I believe, 10 rigs. There's a bit of movement. Some rigs are currently in between campaigns, but it effectively doubled our rig count in Australia yesterday, and we're looking forward to continuing to grow our active rig count there, so stay tuned.
spk04: Now that the deal's closed, are you able to provide any further details on valuation on the deal?
spk05: No, we've never given forecasts. What I would say is we expect the acquisition to be accretive.
spk04: Are the additional rigs that you're running in Australia, the Saxon ones that you've acquired, are they running at similar economics to your legacy fleet?
spk05: I would say we expect the deal to be accretive on a per share basis. We're pleased with it. Obviously, that acquisition competed for capital with other opportunities, and it met our requirements. I believe it's a win-win for both SLB and Total in the sense that it was a business SLB had been looking to exit, and it's come into strong hands with a company that wants to grow its global drilling operations. You know, the Saxon employees, we're very pleased to have them join our team. We're quite pleased to have Mr. Nazar join us at a corporate level. He will bring tremendous technical and global operating experience into our corporate executive ranks. And, you know, that'll be useful as we continue to try and operate, you know, a world-class drilling business as well as grow that. So... Again, day one of ownership, we'll be in a better position to provide an update here with Q1, but we're quite happy with the deal and looking forward to expanding our presence in Australia.
spk04: That's fantastic. Maybe building off that, 2024 has started with a couple significant capital outlays, one being Sachs and the other being the amendments of that capital to the CRA. Now that, you know, you have those under that sort of behind you and you're digesting that, can you just talk about how you think about capital allocation in 2024, specific to return on shareholders, you know, share purchases, and then also, you know, how you think about M&A on a go-forward basis?
spk05: Sure. So our views have not changed in terms of fundamental principles. You know, on the share buybacks, that remains an extremely compelling opportunity. The reality is we've been prevented from purchasing under a normal course since September. You know, a combination of the blackout for the extended blackout relating to Saxon, which by the time that was announced, we were then into our year end. restrictions, so we were not able to buy any stock back in the fourth quarter. Going forward, that's right at the top of the list of opportunities, particularly given the addition of Saxon here that obviously we haven't issued any shares in respect to that acquisition. Again, We continue to – in terms of our current announced capital budget, the growth portion of that are compelling opportunities that are expected to exceed our cost of capital, and they're backstopped by long-term contracts. And so a bunch of that is earmarked for Australia, including three service rigs. that the first was deployed here in late February. The remaining two will be deployed in Q2 and Q3, respectively. That will rejuvenate our service rig business in Australia significantly. We obviously have the sixth Savannah rig. Parts have landed already in Australia, and that rig's expected to advance drilling in July under a long-term contract. With that addition, we'll be up to 17 rigs in Australia. We're also examining and in the middle of potential reactivation of certain Saxon rigs that, you know, if those work out, it'll be quite attractive opportunities as well. You know, domestically, a bunch of our carry forward capital relates to compression rigs. rentals, long-term contracts bound for the U.S., and our maintenance capital will ensure that we continue to operate at the activity levels we experienced last year. In terms of new capital, we're very nimble. Over the years, we react to opportunities as they're presented. We don't try and force investment. We're also quite interested in continued consolidation and we'll look to identify and pursue opportunities that make sense for our current shareholders. We'll continue to work hard, but stay disciplined on that front.
spk04: Okay, got it. Looking at the CPS segment, I've just noticed that the Canadian horsepower on rent at the end of the period has come down significantly through the year in 2023, in Canada specifically. Your utilization has gone up, so I would suggest maybe the fleet size is shrinking. Are you selling equipment out of the Canadian rental fleet or moving to the US? How should we think about that?
spk05: Yes. There's always some movement below the surface, and it's one of the challenges. It's a point in time. I think what we would expect to see over the course of 2024 is continued uptrend in our rental fleet utilization. Barring some material change, but given some of the investment we've made combined with our Nomad fleet continues to be a very solid piece of our rental business in North America. But we also don't build rental equipment on spec. So obviously existing idle equipment's available at all times, but we do not build new units for a rental fleet on spec.
spk04: Got it. Then this last one for me, just wanted to circle up on your comment on gas prices. Are you seeing any immediate impact demand specifically for CPS related to lower gas?
spk05: No, I would say we expect CPS We expect to see more of an impact on the front-end drilling, and what we're seeing is a rotation from gas to oil. Some of our high-spec rigs in Canada transitioning from gas to oil. On the CPS segment, honestly, it's been a solid, steady core demand driven by infrastructure, but my take, just by the nature of the customers, is this is all about building infrastructure. It's not about putting on new gas wells.
spk04: Yeah, that's kind of what I would have expected. I appreciate it. I'll turn it back. Thanks, Porter.
spk03: Thanks, Tim. The next question comes from Joseph Schachter of Schachter Energy Research. Please go ahead.
spk02: Good morning, Dan. Good morning, Julia. Dan, can you go a little bit more into the dynamics of what's going on in Australia? How many rigs are there? How many are active and working? Is it more of an oil or a gas market? And what, you know, where do you see the growth longer term? Is it going to be for one or the other? And have there been any big discoveries like, you know, excitement like our Modney or our Clearwater going on in Australia that are increasing the activity there and you're wanting to build a business?
spk05: Yeah, so In terms of the overall active rig fleet, Joseph, it's hard to get a super accurate number. They don't have the same reporting processes as we do in Canada, for example, with the CODC fleet disclosures and active reporting count. Our guess is there's probably 25, roughly, rigs. drilling onshore there, of which we're definitely, if not the biggest, certainly Wright Post being the biggest now in terms of active rig count. It's a gas-driven business or basin, but there's also oil there. Pre-Saxon, most of our, if not all of our exposure was to coal seam gas, the shallow end. We also, though, have been involved in hydrogen drilling in Australia recently, and that's an interesting opportunity. Again, it's not going to put five rigs to work steady on hydrogen, but it's certainly a niche market that we tend to, I believe, have a front-end lead on. What the Saxon acquisition does for us is it increases our exposure to the medium and deeper parts of Australia. That's significant, and I think that's the opportunity we see really to grow our businesses pursuing some of the deeper gas and oil basins in Australia. The gas market over there is quite healthy. It's driven by LNG exports to Asia. And that market has been solid and strong. And, you know, we continue to expect that market to be relatively stable here over the medium to longer term. And, you know, the other thing Saxon does for us is further diversify our customer base. We are now working for all the major onshore producers pretty much in the country. And like I said, we're excited to – you know, bring, I think, a desire to grow that business to the Saxon asset base. And there's definitely some opportunities to do some rig upgrades there that will further activate that fleet. So stay tuned on that front.
spk02: Is there any specific play that's really doing anything as I, you know, is there something that we, to be watching in the news of a, discoveries of, you know, as I mentioned earlier, Montney, Clearwater, is there anything to be specifically keeping an eye on?
spk05: Not particularly. I think obviously, you know, we're going to be learning a bit about some of the more deeper basins there. So that's new to us. You know, I know there's some excitement up in the Northern Territory. H&P brought in a big triple. you know, last year to drill some of that. We, interestingly, were involved with the service rig work on some of those wells, you know, with our heavier service rigs. You know, I think it's a vast country. It has not, my general sense would be, there's a lot of drilling opportunities within existing known reservoirs. as opposed to, say, Western Canada, where some of our mature basins have been drilled out and are kind of looking for new. So I would say generally it's probably a less mature basin. Again, that's just my anecdotal perception. But certainly, you know, our focus now is to learn more about the opportunities in the deeper part of the market there.
spk02: You mentioned that there could be more consolidation. So are we looking from here – Not a big deal, but maybe companies with one or two rigs. Is that the consolidation potential there?
spk05: In Australia?
spk02: Yeah.
spk05: No, I would say our focus would be North America and elsewhere. Australia is fairly, I would say, we've got a good position there. I think our focus will be on Australia. upgrading existing equipment of Saxons as opposed to looking to buy in that market. Never say never, but we've only owned it for a day, so I think my impression is there's some good opportunities to take that asset base and enhance the utilization.
spk02: Last one for me. With the consolidation by precision of you know, High Arctic and then CWC. Are you seeing the competitive pressures in wealth servicing in Canada not as intense? And is pricing power looking like they might be the price leader and then everybody benefits from their consolidation move?
spk05: Yeah, precision certainly has done a good job in bringing some discipline there. It's still a very competitive market. And so... you know, relative to the drilling rig market, it's still quite fragmented. But it's definitely going in the right decision. You know, it comes down, Joseph, every company's got to make their own decisions on balancing utilization with price. And, you know, I think generally our approach, and there's no absolute right or wrong answer, but our approach has been, you know, rather than, you know, working too cheap and wearing your equipment out, we'll stand back. I would say we're not in that zone within the well servicing. But, you know, in terms of is the market consolidated to the point that it's not competitive, absolutely not. It's still a competitive market there.
spk02: Okay. That's it for me. Thanks very much, and congratulations on a very nice year.
spk05: Thanks, Joseph.
spk02: Thank you.
spk03: Once again, if you have a question, please press star, then 1. The next question comes from Cole Pereira of Stifel.
spk01: Please go ahead. Hi. Good morning, all, and congrats on closing the acquisition. Dan, you talked about it a little bit earlier, but can you just talk about how you're thinking about the strategy in that market? You know, it sounds like there's an opportunity to grow utilization. Is that through market share capture or maybe the broader market increasing? And is there – also an opportunity to kind of raise prices across the board, just given you have a much higher market share now.
spk05: So in response to your first question, I believe it's a combination of gaining market share and an expanding market. You know, really where we see some opportunity there is with the heavier rigs and some potential upgrade opportunities that exist. And so That'll be our focus. Obviously, bringing the two companies together, integrating, realizing realistic synergies is a prime focus as well. I expect we're prepared to invest in good upgrade opportunities that's consistent with our desire to continue to grow the drilling business where obviously Schlumberger you know, is looking to exit. So there's some good opportunities there. I think, you know, my sense is the SACs and employee base will thrive under our ownership where we want to get more rigs to work. And, you know, it's a base in that I think there's some room for us to capture some market share in as well as... expand into the deeper part, which is partly organic, just by upgrading rigs. In terms of pricing, it's a competitive market, too. It's kind of similar to Canada in that regard, so I wouldn't see any significant material pricing gain simply by bringing these two companies together. The reality is we really only overlapped with two rigs. And so, you know, we had no involvement in the deeper end of the basin, and Saxons, for the most part, didn't compete with us in the shallow part. So it really doesn't change the market dynamics a whole bunch.
spk01: Gotcha. That makes sense. And then thinking about, you know, the Canadian side of the business on drilling and well servicing, commodity price has been a bit volatile. We've seen Some modest capex cuts from a few gas-focused producers. How are you thinking about the activity outlook for those businesses compared to 2023?
spk05: Again, we're not going to give specific forecasts. What I would say is when you watch our rig count here over the next while, you can expect to see some migration of our bigger rigs from gas to oil. Not a huge thing, but I think you're going to see a bit of that migration of some of our high spec deeper rigs. Most of our, pretty much all of our super singles are, you know, oil focused already. So there's not a lot of change there, but I think on the deeper end, you'll see some migration.
spk01: Gotcha. That's all for me. Thanks. I'll turn it back. Thanks, Cole.
spk03: There are no more questions on the phones. This concludes the question and answer session. I would like to turn the conference back over to Mr. Halleck for any closing remarks.
spk05: Thanks everyone for participating and we look forward to speaking with you after our first quarter. Have a great weekend.
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