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Operator
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.
Daniel Halleck
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.
Yulia Gorbache
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.
Daniel Halleck
We are pleased with our first quarter results. Despite a significant year-over-year decline in U.S. industry activity levels, our U.S. businesses performed reasonably well, particularly our U.S. drilling group, which did an excellent job managing their operations in a slower environment. In the context of relatively stable industry conditions and our strong financial position and having regard to our future prospects, The Board of Directors of Total approved a 13% increase to our dividend during the first quarter, as earlier press released. As Julia mentioned, our CPF segment made a significant investment in growing its compression rental fleet during the first quarter. This is the most significant growth of the fleet in many years and is a result of improving market conditions, in part likely due to higher interest rates. Will this investment reduce first quarter CPS segment revenue and EBITDA? The return on such investment will be realized over the next several years. We are excited about the addition of Saxon to our Australian drilling business. The addition of the 11 Saxon rigs substantially increases the operational capacity of our Australian drilling fleet. For example, during the first quarter Saxon rig 185 drilled the longest horizontal coal seam gas well ever drilled in Queensland at a total measured depth of 5,020 meters. The rig requirements to drill this well were beyond the capacity of our pre-Saxon Australian drilling rig fleet. Saxon had no significant bottom line impact during the first quarter given the timing of closing and the expenses incurred to complete the acquisition. Rather, the impact of the Saxon acquisition will begin to be realized in the second quarter, particularly should recently improved weather conditions continue. The full impact won't be realized until we complete the integration and realize the efficiencies of the combined operation, which we expect to complete by the end of this year. In addition to Saxon, our Australian operations expect a newly constructed drilling rig to commence operations in the third quarter and two upgraded service rigs in late Q2 and Q4, respectively. All three rigs will be operating under long-term contracts. As such, we expect the income statement contribution from our significant investment in Australia will increase substantially over the next several quarters. As such investment was made without the issuance of any new equity, the impact will be amplified on a per share basis. Investment opportunities also exist in North America as evidenced by the $19.8 million increase to Total Energy's 2024 capital expenditure budget announced yesterday. $8.3 million of this increase is targeting North American growth opportunities, including $6.4 million allocated to purchasing new rental equipment for the RTF segment. Total Energy's investment in upgrading its equipment fleet over the past few years has not only provided a reasonable return for our owners, but it has also increased the capacity and performance of our equipment for the benefit of our customers. A highlight occurred in April when we drilled the longest Montney well ever drilled in Canada at a total measured depth of 8,006 meters. The well was drilled by Savannah Rig 653, an AC electric telescopic double rig, in just 19.2 days. Our safety performance during the first quarter was commendable, and I would like to thank all of our employees for their continued commitment to operating in a safe and efficient manner. Several of our operating segments achieved a zero total recordable injury frequency in the first quarter, which resulted in a 0.90 consolidated trip for the quarter and a 12-month rolling trip of 1.34. A special shout-out goes to the employees of Total Oilfield Rentals, who achieved a zero trip for the past 12 months in respect of our entire North American RTS segment operations. Congratulations on a job well done. Finally, I'd like to invite you to attend our annual general meeting that is being held this coming Tuesday, May 14th at 10 a.m. at the Calgary Petroleum Club. I would now like to open up the phone lines for any questions.
Operator
Thank you. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. And our first question today comes from Cole Piero with Stifel. Please go ahead.
Stifel
Hi. Good morning, all. Dan, you provided a few comments on the facts and the acquisitions thus far. I mean, wondering if you could just add any color on, you know, how things are progressing, you know, relative to your expectations, any surprises, positive or negative, et cetera.
Daniel Halleck
So things are progressing well. I would say we're very happy with the acquisition. I think the fit is good. In terms of the equipment and personnel, I would say generally what we're finding is more positive relative to expectations. And what I'm seeing is a group that's happy to be part of our company. We're excited to be in the land drilling business. you know, we're excited to grow the business. And I think, you know, that excitement is shared by, you know, the Saxon employees that are now part of our company. And so, you know, I'm quite excited to see where our Australian business will go over the next several quarters.
Stifel
Great. That's helpful. Thanks. And Can you just provide an outlook on how you're thinking about the wealth servicing segments and what the outlook is there, call it for the next few quarters?
Daniel Halleck
So Canada, you know, we had a bit of a flat line, less abandonment work certainly impacted. You know, there was some customer consolidation that impacted programs a bit in Q1, although, you know, our sales group there is working to broaden the customer base You know, with healthy oil prices, the differential in heavy oil tightening here, you know, we're reasonably optimistic on the Canadian business. The U.S. side had a tough quarter. I think industry consolidation, there were a number of significant consolidation events. You know, those always are preceded by a drop in activity. I think the group, you know, struggled to... manage their labor force, keeping employees in anticipation of activity, and that didn't materialize. Again, the focus is on broadening the customer base, and with healthy oil prices, we expect that business to improve going forward. Australia was really about weather, and as I mentioned, as part of our 2024 capital budget, we are deploying three service rigs, one of which was deployed here about a month ago. And I commented on the other two that'll be in late Q2 and the other one in Q4. We'll see a nice pickup in our service rig activity in Australia over the balance of the year here. So as long as oil prices remain stable, that business should be okay.
Stifel
Okay, great. That's helpful. Thanks. And, Yulia, just outside of, you know, anything from the CRA, how should we be thinking about total cash taxes going forward?
Yulia Gorbache
Well, you know, like this is binary problem. It's good when you don't pay taxes, have enough losses, and it's bad when you're actually paying taxes. But when you're profitable enough to be paying taxes, so I guess we're going to deal with that problem as we go. We have disclosed our available losses in the U.S. and Canada, so our income won't be translated into cash taxes in the near future, but some of it will. So just the way you look at it, you look at the year-end disclosure, and you can project the cash based on that.
Daniel Halleck
The one comment I would... Because the $10 million plus of interest that was paid on the reassessment was not tax deductible, which is why a bit of a strange anomaly here the past couple of quarters.
Yulia Gorbache
So you're going to see the rate is looking a bit higher because that $10 million wasn't deductible. A couple of things to think about U.S. is that in U.S. You can only apply 80% of your income to available losses. So that will definitely factor into what amount will be cash taxable.
Stifel
Got it. Okay, great. That's all for me. Thanks. I'll turn it back. Thanks, Cole.
Operator
Thank you. And as a reminder, to ask a question, please press star then 1. Our next question comes from Tom Modenguello with ATB Capital. Please go ahead.
Tom Modenguello
Hey, good morning. Good morning, Tim. Tim calling in for Tom. So in Australia, I'm just curious, like weather was a big impact. How much – I don't know how you want to quantify it, revenue or activity you think you lost because of weather in Australia, both on the drilling and well servicing side?
Daniel Halleck
You know, there was a lot of standby with crew, standby without crew. You know, we haven't done the exact math. And even if we did, we probably, you know, I hate blaming weather too much, but literally Q1 is always the slow time in Australia due to their wet weather season. You know, this year was exceptionally wet. Literally, we had helicopters having to retrieve crews off of rigs because you could not access them by ground. You know, when I think things are bad, though, I was reminded by two of our directors who were founders of Savannah that when they first moved to Australia, they literally lost two rigs, were totally destroyed by flooding, so it could be worse. So like I said, Q1 there is always the wet season. That's kind of their breakup season, but the weather's improved and hopefully that continues. And if it does, we expect to have a pretty solid operation there.
Tom Modenguello
Can you speak to how many rigs are running in Australia today?
Daniel Halleck
Drilling rig wise, I think we're in that nine range. Yeah, it is, yeah.
Tom Modenguello
Okay, and servicers?
Daniel Halleck
Probably four or five, four.
Tom Modenguello
Four? Yeah. Okay, that's helpful. Were there any one-time costs in Q1 just related to the integration of Saxon that weren't called out in the MD&A?
Daniel Halleck
Acquisition, about a half a million dollars.
Tom Modenguello
Okay. And then I was curious about the CPS segment. Good to see that utilization taken up alongside higher fleet size. Are you through that build now for 2024? Are you going to continue to be utilizing floor space for internal building?
Daniel Halleck
There's always rental activity. What we saw beginning in Q4, culminating in Q1, was the largest build we've seen in quite a few years. And it's literally a timing issue where we had a couple of large rental orders that were deployed to the U.S. And so that was definitely a bit of an exceptional situation. We normally wouldn't comment too much on the break period. down in terms of production activity. But it was meaningful enough to highlight that. And going forward, that's really dependent on customer preference at any point in time. And so we're not going to try and forecast that. But what I would say generally is the rental business has improved, I think, in large part due to a higher cost of capital, which is now taken some of the financial players out of the market. We offer a true operating lease, which means we take residual risk at the end of the lease term as opposed to a finance lease. So the asset stays in our balance sheet and we take residual risk and we expect to be compensated for that risk. For quite a few years, likely due to low interest rates, the market in our judgment, was under pricing risk. That's normalized a little bit. And if there's good opportunities to deploy capital in growing the rental fleet, we'll pursue it. If there's not, we won't.
Tom Modenguello
Okay. Just in terms of like the capital budget that's been allocated to that and, you know, there's some carryover from 23 and the 2024 budget, how far are you through the allocation? Yes, rentals.
Daniel Halleck
A lot of that 2023 carry forward was the compression rental build. You can see in Q1, there was about $10.5 million of capital expenditures within this CPS segment. That's virtually all rental fleet additions, keeping in mind the Q4 would have also been, and I don't have that number in front of me, the setup for that build. Anyways, we don't build compression rental units on spec, and typically what we will do is increase our rental budget for any major new projects. We did allocate $5 million in our preliminary budget this year to the rental fleet. A lot of that's simply when units come back off rent, you've got to do some retrofit, and modifications to make them suitable for new projects. Basically you modify the equipment in response to new rental opportunities. So that would not be kind of net new additions to the fleet. We don't approve those until we have opportunities that are acceptable.
Tom Modenguello
Okay. And can you speak to the level of demand that you're seeing in terms of third-party orders for compression process services?
Daniel Halleck
I would say right now North America is all about infrastructure build. And so what we're seeing is a... I would say the demand is primarily driven by pipeline and midstream companies.
Tom Modenguello
Is... Or can you give us an indication of the direction that you're seeing that? Is it improving?
Daniel Halleck
I would say it's pretty steady. Obviously, the backlog went up during Q1, so that speaks for itself.
Tom Modenguello
Okay. And then I'm curious if you're getting a sense that your customers are planning more or less growth than they would have been planning for the back half of the year in Canada. relative to, you know, three months ago?
Daniel Halleck
You know, I think it's a, I would call it a stable market. You know, we're in breakup right now, which is always a difficult time to kind of assess. You know, it's really going to depend on, you know, oil price stability, recovery in gas prices. Obviously, we're going into 2025 when LNG Canada will fire up. You know, you get different views on what that means exactly. But I would say generally, we expect and we're planning for a relatively stable market.
Tom Modenguello
Okay. Great. I'll turn it back. Thanks for the details.
Daniel Halleck
Thank you.
Operator
And as a final reminder, please press start if you have a question. Our next question comes from Joseph Schachter. Please go ahead.
Joseph Schachter
Good morning, Dan and Julio. Thanks for taking my question. I'm just wondering, Dan, if you're seeing, you know, for the latter part of this year and into 2025, in each of your business lines, a pickup for orders related to build-out drilling and build-out for LNG projects, you know, between LNG Canada and we're seeing Rockies moving ahead. Are you starting to see discussions and orders And is the size of the equipment, let's say for compression, getting bigger? And of course, are they more complicated and therefore potentially more profitable for you?
Daniel Halleck
So definitely, as I mentioned earlier, Joseph, infrastructure build is driving North American demand, the material demand for compression process equipment. And so definitely the answer to your question Are we seeing continued demand there? It's yes. It is bigger horsepower equipment. Some of it's electric. And depending, again, on the location, we expect that demand to be relatively stable over the next couple of years. And it's, again, driven by demand. the requirements to feed all of these LNG plants that are coming online in North America. I would say most of it is tied to the gathering system level at this point. What I would expect to see as we get closer to in-service dates would be more field compression, which would likely mean a bit smaller horsepower and more from the producer level. That remains to be seen, but that's typically how these things go. As we get closer to in-service dates, again, you'd expect gas drilling to pick up and completion activity. Clearly, right now, there's a lot of gas in North America. We've definitely seen some shifts away from gas towards oil. Again, the next couple quarters will be interesting as we get closer to in-service dates on LNG And you can hear different numbers about how much is needed to fill these things. But I would say kind of what's driving the drilling business in Canada right now is certainly the recent commissioning and in-service of Trans Mountain. We're seeing some pretty strong demand for our AC doubles and super single class of rigs for trans. you know, liquids directed activity. And that'll pull our rental business as well as our service rate business with it.
Joseph Schachter
Just to follow up on that, are you, do you have enough capacity across the system, let's say for compression, or is it going to be, are you going to have to do some major construction once you start seeing more contracts coming your way?
Daniel Halleck
You know, we've... I would be hesitant to add more capacity. I think we've always found a way to increase throughput and there's different ways to do it both by, you know, being creative in the way you use your physical floor space, adding shifts, night shifts. So I would say within the CPS segment, we're fine for physical capacity. You know, it'd be labor ramp ups primarily. You know, in the drilling business, If you want an AC double and a high-spec single today, good luck post-breakup. Those are tight markets in Canada. The U.S., I think we've seen, hopefully, knock on wood, our rig count bottom. And again, our guys have done a wonderful job down there managing their business. And, you know, with oil prices holding and some of this LNG kicking in, hopefully that'll... see a ramp up in U.S. drilling over the back half of the year. Our rental group is obviously short certain lines of equipment. I won't give specifics for competitive reasons, but we just made a significant investment to add some brand new equipment there. Again, the type of equipment will tend to pull other lines of equipment that we have ample now. So, like I said, all in all, I think we're reasonably optimistic. Again, you know, it's a strange macro environment, so I don't take things for granted, but we'll enjoy the activity as it plays out, and we're not going to put ourselves in a position that if things slow down materially, you know, we're going to be at risk.
Joseph Schachter
Super. Thanks for the comment. I appreciate that. Thank you. You're welcome.
Operator
And our next question comes from Ernest Wong with Baskin Wealth Management. Please go ahead.
Ernest Wong
Hi. Good morning, Dan and Julia. Good morning, Ernest. I just want to stay on the topic of LNG. So maybe on a big picture, how do you think about the ability of the industry overall in Canada to meet the upcoming demand and expected production increase in gas
Daniel Halleck
Well, there's going to have to be more investment both in infrastructure and drilling and completion. We're seeing that play out on a steady basis within the CPS segment, but there's more to go. And on the drilling front, we expect you've seen a pretty significant uptick in BC drilling over the past year. Some of that was related to restrictions on drilling due to some aboriginal issues there that have now been resolved. But we think there's a relatively healthy demand for infrastructure and gas supply that'll play out here over the next couple of years as Canada gets ready to finally start exporting LNG. The global LNG market is generally fairly healthy. pricing is moderated somewhat from the extreme levels over the past year or so. Honestly, we see that as a good thing. Extremely high pricing discourages investment in future infrastructure built around using natural gas. I think our kind of general view is pricing today is sufficient to see investment in developing and producing LNG You know, Australia is a prime example. Their national government just issued a policy here earlier this week that's very pro-natural gas and pro-LNG development, which is, you know, we see that as reassuring, given it's typically been seen as somewhat of a hostile regime towards natural gas development. You know, so you're seeing the reality of physics and economics always dictate Outcomes and the reality is the world needs more energy, and they're increasingly turning to natural gas to supply that. And so I tend to be a relatively bullish person on natural gas in the medium to long term, whether it's North America, Australia, or elsewhere.
Ernest Wong
Got it. And have you – you guys raise CapEx, obviously, but is there any change in terms of how you think about excess – capital deployment, whether it be for capital returns or M&A? Or is that pay down?
Daniel Halleck
We continue to take a balanced approach. I don't like hard and fast rules. We use our balance sheet when it makes sense and we pay down debt at any time in between. You know, we used our balance sheet to do what we see as an attractive acquisition with Saxon. Effectively, the rest of our capex is paid with cash. And, you know, given kind of how we're trending here, you know, I expect debt repayment will not take too long to deal with. And, you know, we increased our dividend to effective Q1. We'll continue to... look at share buybacks and our board reviews our dividends on a quarterly basis, but we also don't like to, we like sustainability and a balanced approach to shareholder returns, but we've given a lot of capital back to our owners over the years. In fact, we've given more back through dividends and share buybacks than we've raised. So, we'll continue You know, I think anyone who's followed the company and been a shareholder for a long time knows that we don't talk about shareholder returns. We just do it. Sounds good. Thank you. You're welcome.
Operator
And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Halle for closing remarks.
Daniel Halleck
Thank you, everyone, for participating. And we look forward to hopefully seeing some of you at our AGM and, again, speaking with you after our second quarter. Have a good weekend.
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