Total Energy Services Inc.

Welcome to Total Energy's first quarter 2024 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. 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, and good morning. Welcome to Total Energy Services' first quarter 2024 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 ended March 31, 2024. We will then provide an outlook for our business and open up the phone lines for questions. Yulia, 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 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.siraplus.ca. Our discussions during this conference call are qualified with a reference to the notes to the financial highlights contained in the news release 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 March 31, 2024, reflect relatively stable industry conditions in Canada, lower drilling activity in the United States, and extended wet weather in Australia that significantly reduced field activity levels compared to the first quarter of 2023, despite stable industry conditions. On March 7, 2024, Total Energy completed acquisition of Saxon Energy Services Australia Pty Ltd. for a total purchase price of approximately $50 million. $47.4 million was paid on completion and $2.7 million less any post-completion adjustments is payable on March 7, 2025. During the first quarter of 2024, the company paid $19.7 million of income taxes and related interests and penalties arising from a Canadian income tax reassessment related to Total Energy's conversion from an income trust in 2009. While Total Energy has appealed the tax court decision, all amounts owing pursuant to such reassessment have been paid in full. Consolidated revenue for the first quarter of 2024 was 14% lower compared to Q1 2023. This was due primarily to lower drilling activity in the United States restricted fuel activity in Australia due to wet weather, and lower fabrication sales in the CPS segment. Modest price increases and cost management mitigated the decline in revenue, such that first quarter consolidated EBITDA decreased by 11% compared to 2023. Geographically, 50% of first quarter revenue was generated in Canada, 39% in the United States, and 11% in Australia, as compared to the first quarter of 2023, when 46% of consolidated revenue was generated in Canada, 44% in the United States, and 10% in Australia. By business segment, contract drilling services generated 40% of first quarter consolidated revenue, followed by the CPS segment at 38%, well servicing at 12%, and RTS segment at 11%. In comparison, for the first quarter of 2023, the CPS segment contributed 41% of consolidated revenue, contract drilling services 35%, and well servicing 14%, followed by RTS segment at 10%. First quarter consolidated growth margin was 28% as compared to 25% from the prior year. Margin improvement in our CDS, RTS, and CPF segments offset a decrease in well-servicing segment. Relatively stable drilling activity in Canada and acquisition of Saxon on March 7, 2024, partially offset an industry-wide decline in U.S. drilling activity and a negative impact of wet weather on Australian activity, with the result that the CDS segment experienced a 3% decline in first quarter operating days as compared to 2023. Despite a modest increase in revenue per operating day, lower activity resulted in a 2% year-over-year decrease in the CDS segment's first quarter revenue. Price increases arising from rig upgrades, a change in the mix of equipment operating, and cost management resulted in a 10% year-over-year increase in the first quarter CDS segment EBITDA. In Canada, market share gains and the relocation of a triple rig from the U.S. in 2023 contributed to a 5% year-over-year increase in the first quarter operating days. Increased operating days combined with a 2% year-over-year increase in Canadian revenue per operating day resulted in a 6% year-over-year increase in first quarter Canadian drilling revenue relative to 2023. In the United States, first quarter revenue declined by 40% as lower U.S. drilling activity and the transfer of the triple drilling rig to Canada in the second quarter of 2023 contributed to a 39% decrease in operating days. Revenue per operating day declined by 1% due primarily to the mix of equipment operating. Efficient operations and cost management more than offset the decrease in revenue, such that the first quarter operating income more than doubled compared to 2023. In Australia, operating days increased with an additional tax on March 7, 2024. Partial offsetting this increase was a general reduction in field activity levels due to extended wet weather conditions. Revenue per operating day increased 2%. as a result of rig upgrades and the addition of heavier stocks and drilling rigs. Revenue in the RTS segment decreased compared to Q1 of 2023, as a result of lower industry activity, particularly in the United States. Modest pricing increases and a mix of equipment operating contributed to a slight year-over-year increase in the first quarter segment in the task. Third quarter revenue in total CPS segment decreased by 21% as compared to 2023 due primarily to lower fabrication sales and the impact of lower natural gas prices on parking service activity. The decrease in fabrication sales was primarily due to a significant portion of fabrication activity in the CPS segment directed towards the construction of new compression rental units. rather than fabrication sales, as evidenced by a 35% increase in compression horsepower and rent in the United States during the first quarter of 2024. Utilization of the rental fleet was slightly lower on a year-over-year basis due to the deployment of several newly constructed rental units late in the first quarter of 2024. Improved fabrication sales margins and increased rental revenue contributed to an 8% year-over-year increase in the first quarter CPS segment EBITDA margin. This increased margin partially offset the 21% decrease in revenue, such that segment EBITDA declined by 13%. The quarter end fabrication sales backlog decreased to $185.7 million compared to the $227.4 million backlog at March 31, 2023. Sequentially, the quarter end sales backlog increased by $22.9 million during the first quarter of 2024. First quarter wealth servicing segment revenue decreased by 28% compared to 2023 as utilization and revenue per service hour decreased 26% and 2% respectively. This was due to lower activity in all jurisdictions. Australian activity was impacted by extended wet weather conditions while lower well abandonment activity contributed to low Canadian activity. Segment EBITDA and EBITDA margin declined as a result of lower activity, as well as lower pricing in the United States. From a consolidated perspective, Total Energy's financial position remains very strong. At March 31, 2024, Total Energy had $124.4 million of positive working capital, including $45 million of cash. During the first quarter, Total Energy borrowed $50 million to complete Saxon acquisition and pay $19.7 million arising from a Canadian income tax reassessment, which resulted in a $25.4 million of net debt at March 31, 2024. Total Energy Bank Covenants consist of maximum senior debt to trillion 12-month bank-defined EBITDA of three times and a minimum bank-defined EBITDA to interest expense of three times. At March 31, 2024, the company's senior bank debt to bank EBITDA ratio was 0.41, and the bank interest coverage ratio was 10.05 times. Excluding $10.5 million of non-recurring interest expense relating to the income tax reassessment, the interest coverage ratio was 30.77 times. Thank you, Yulia.