Total Energy Services Inc.

Welcome to Total Energy's fourth 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. 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's fourth 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 December 31st, 2024, and then provide an outlook for our business and open up the phone lines for any 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's 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 ELFAR 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 reference to the notes to the financial highlights contained in the means released 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 31, 2024 reflect relatively stable industry conditions in Canada and Australia. and lower drilling and completion activity levels in the United States. Consolidated revenue for the fourth quarter of 2024 was 15% higher compared to Q4 of 2023, with the addition of Saxon offsetting lower U.S. drilling and completion activity. Fourth quarter consolidated EBITDA was $4.7 million lower than in 2023 due to lower U.S. activity extended holiday shutdowns in Canada, and wet weather conditions in Australia. And the negative impact of foreign exchange translation differences more than offsetting improved CPS and RTS segment margins. Excluding $4.1 million year-over-year negative impact due to foreign exchange translation differences, fourth quarter EBITDA declined by 1 percent compared to 2023. Geographically, 48% of fourth quarter revenue was generated in Canada, 33% in the United States, and 19% in Australia as compared to the fourth quarter of 2023 when 54% of consolidated revenue was generated in Canada, 37% in the United States, and 9% in Australia. By business segment, the CPS segment contributed 47% of fourth quarter consolidated revenue, followed by the contract drilling services segment at 34%, well servicing at 11%, and the RTS segment at 8%. In comparison, for the fourth quarter of 2023, the CPS segment generated 45% of fourth quarter consolidated revenue, followed by the contract drilling services at 35%, while servicing at 11%, and rentals and transportation services contributing 9%. Fourth quarter gross margin was 23% as compared to 27% for the prior year. The primary reason for the decrease in the fourth quarter consolidated gross margin was a year-over-year decrease in operating margin in the CDS and while servicing segments. Delays in deploying upgraded rigs and reduced activity in Australia due to wet weather conditions, lower U.S. activity levels, and a $4.1 million negative impact on Canadian CDS segment operating income arising from foreign exchange translation differences were primary reasons for such lower CDS and well-servicing segments operating margins. Partially upsetting, the lower CDS and well-servicing improved operating margins in the CDS and RTS segments. As compared to 2023, the CDS segment saw consolidated fourth quarter revenue increase by 12%, a 17% increase in revenue for operating day, more than of said, say, 4% decrease in operating day. Median CDS revenue was 12% lower in Q4 of 2024, as compared to the same quarter of 2023, as a 1% increase in revenue per operating day was offset by 13% decrease in operating day. Canadian operating days were negatively impacted by extended holiday shutdowns in December. In the United States, 17% increase in revenue per operating day was offset by 66% decrease in operating days resulting in a 60 percent decrease in USCDS revenue and the realization of an operating law. In Australia, first quarter operating days increased by 110 percent following the acquisition of Saxon in March of 2024. Higher day rates on Saxon's drilling rig fleet and the newly constructed drilling rig that was deployed in the third quarter resulted in 173 percent year-over-year increase in Australian Q4 revenue and a 30 percent increase in fourth quarter Australian CDS segment revenue per operating day. Costs to reactivate several upgraded rigs and accrued retention costs incurred during extended wet weather conditions resulted in a slight operating loss for the fourth quarter. RTS segment revenue for the fourth quarter decreased compared to 2023 due to lower activity in the U.S. Effective cost management and change in the mix of equipment operating contributed to a 13% year-over-year increase in fourth quarter segment EBITDA and a 17% increase in EBITDA margin. Fourth quarter revenue in the total CPS segment was 22% higher as compared to 2023. Increased rental imports and service activity combined with improved fabrication sales margin resulted in a 23% year-over-year increase in the fourth quarter CPF segmenting staff. The quarter-end fabrication sales backlog increased to $189 million compared to $162.8 million backlog at December 31, 2023. Sequentially, the quarter-end sales backlog remained consistent with $189 million at September 30, 2024. In well servicing, a 10% increase in revenue per operating hour combined with a 4% increase in operating hours resulted in a 15% year-over-year increase in the fourth quarter consolidated well servicing revenue. Increased Canadian and Australian service utilization was partially upset by a substantial decline in U.S. activity. Price increases in Canada and Australia Following the completion of RIC upgrades, more than offset weaker pricing in the United States, resulting in a 10% increase in the segment's revenue for operating power. Increased utilization and pricing in Canada contributed to a 41% increase in Canadian World Servicing operating income. This increase was offset by operating losses in the US and Australia. The U.S. operating loss was due to substantially lower duty levels. In Australia, cost to reactivate several upgraded rigs and accrued retention costs incurred during extended wet weather conditions resulted in a fourth quarter operating loss. Overall, the wealth servicing segment experienced a 20% year-over-year decrease in the fourth quarter EBITDA and a 29% decrease in segment EBITDA margins. From a consolidated perspective, Total Energy's financial position remains very strong. At December 31, 2024, Total Energy had $78.7 million of positive working capital, including $38.4 million of cash. Working capital decreased from December 31, 2023, as $42 million of mortgage debt during April of 2025 became current during the second quarter of 2024. During the fourth quarter, Total Energy repaid $25.5 million of bank debt, such that total bank debt less cash was $72.5 million at December 31, 2024. Total Energy's bank covenants consist of a maximum senior debt to $3.12 bank-defined EBITDA of three times and a minimum bank-defined EBITDA to interest expense of three times. At December 31, 2024, the Company Senior Bank Debt to Bank Defunding Retire Ratio was 0.25 times, and the Bank Interest Coverage Ratio was 25.81 times. Thank you, Yuliya.

2024 represented a record year for Total Energy. Despite some challenges towards year-end, Total Energy was able to generate significant free cash flow during the fourth quarter that was directed towards a $25.5 million reduction of bank debt and the return of $7.1 million to our shareholders through dividends and share buybacks. For 2024, a total of $35.2 million, or $0.92 per share outstanding at year-end, was returned to our owners by way of dividends and share buybacks. Relatively strong oil prices and improving natural gas prices due in part to increasing LNG export capacity are supportive of stable North American industry conditions. Strong Asian demand for LNG and a tight domestic natural gas market provide tailwinds for the Australian market. However, recent downward pressure on oil prices combined with continued global political and economic uncertainty and recent trade tensions give rise to caution. In such an environment, Total remains focused on operating in a safe and efficient manner and exercising discipline in the deployment of capital. Total's preliminary 2025 capital budget of $61.9 million includes $27.6 million of maintenance capital that is required to sustain current operating levels. An additional $34.3 million is being directed towards equipment upgrades and other compelling growth opportunities within our existing business segments. The full impact of our growth investments are expected to be realized by the fourth quarter of 2025. Despite the ongoing tariff uncertainty, North American demand for compression and process equipment remains strong and current bid activity is high, such that visibility for our CPS segment is reasonably clear well into the back half of this year. Notwithstanding current market uncertainty, Total's strong financial position allows us to continue to provide our owners with stable and industry-leading returns. In that regard, our board of directors approved an 11% increase to our dividend commensurate with the declaration of our first quarter dividend, which is payable on April 15th to shareholders of record on March 31st, 2025. Finally, I'd like to welcome Gurmeet Bhatia to Total Energy. Ms. Battia joined us in January as corporate controller following a successful 20-year career at ATCO and replaced Ashley Ting, who left to pursue another opportunity. I would like to thank Ashley for her excellent service since she joined Total in 2017 with the acquisition of Savannah and wish her the very best in her new endeavor. I would now like to open up the phone lines for any questions.

Thank you. We will now begin the question and answer session. 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 are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Today's first question comes from Tim Monatello with ATV Capital Markets. Please go ahead.

Hey, good morning.

Hey, good morning, Tim.

Curious, could you guys help me understand the quantum of reactivation costs and one-time costs that you saw in the well servicing and CDS segments in Q4?

We're hesitant to break those out. What I would say is you'll begin to see Australia normalize in Q1. I think partly we're having a pretty close look at how we're managing labor costs. during these situations. Q4 was a bit unique in the sense that in Australia you have a fairly prescribed rig acceptance process where up until the rig is accepted, you don't have any cost recovery. We had some delays in getting rigs out in part because of wet weather conditions and so we were eating a lot of costs leading up to that and we're having a pretty good look at how to better manage that process and so for that reason I don't want to suggest that what happened in Q4 is a normal situation. Quite frankly we were disappointed with what happened there.

Do you think that I guess those one-time-ish costs in Q4 were fully, you know, the factors that drove the margin degradation from where we saw it in Q3.

What I expect is you're going to see much better margins coming out of Australia, in part due to better management of rig startups. And so, like I said, I don't want to start quantifying largely because I don't like making excuses. And I expect that going forward, we'll be better managing the cost during these rig commissionings and startups. So what I would say is I would expect that Q4 is an aberration. And, you know, we've got further rig startups in Q1. We're also seeing a lot of opportunity for additional rig reactivations, but we're not going to start adding more until we know what we're doing is being well managed.

Okay, so you've got two drilling rigs in Australia being reactivated in the first half, one in Q1, one in Q2. and another service rig in Q1. Correct?

Correct. And we have some other opportunities that we haven't pulled the trigger on yet, but part of that is just to make sure that how we're managing these reactivations is efficient. And in fairness, it's been extremely busy over there. We've reacted a lot of iron in the last couple quarters.

Got it. Can you remind me just how many rigs were upgraded in Australia in 24 for both the service and well servicing, please?

Three service rigs. Three service rigs and five drilling rigs, I believe. I'd have to go back and check. Plus, we had some minor reserve, like, not major upgrades, but recertifications. It's been a busy, busy year there.

Okay. And how's weather in Australia playing out in Q1? Have you seen that?

So now it's the, you know, Q1 is kind of their breakup quarter. It's been up and down a bit. Currently we have a few rigs shut down due to there's a typhoon or a cyclone or something, uh, off, uh, the West coast. So, uh, that's kind of par for the course in Q1. Um, definitely, uh, Q4 was wetter than kind of normal. And, uh, you know, hence that through a bit of a wrench into our, uh, rig reactivations in, in particularly in December, but to slow things down a bit, but Q1 is kind of their breakup quarter. But again, um, You know, we're having a hard look at how we're managing these reactivations and helping spread the risk out on costs.

Most of those deployments didn't happen in Q4, and it's just kind of concentrated there. By no means are you saying it's an excuse, but it's definitely going to be managed quite quickly.

Okay, that's helpful. So how many, do you expect activity in Australia generally to be higher or lower in Q1 versus Q4, just given typhoon and other weather impacts?

We're into March. Generally, with the rigs that are being reactivated, barring weather shutdowns, it's going to be higher. Again, check the forecast out. Like I said, we've got, I believe, two drilling rigs right now shut down because of weather.

They have no travel restrictions. I guess in a more normalized scenario, once we get into Q2 and weather is better and you've got all the rigs that you're planning to reactivate in the field, how many drilling and service rigs do you think you'll have running?

We will have, well, we've got the two drilling rigs coming on, so that would take us to 12, and another service rig, which would take us to eight. So, pretty significant increase year over year. Like I said, we need to do a better job with these startups, and we need to do a better job working with our customers to... how would you say, bear the costs of labor. And again, part of this is, you know, the labor laws in Australia are not the same as North America. And so it's much more of a fixed cost. And so, like I said, we're digging into this pretty deep to make sure that going forward, we have a more efficient startups on some of these rigs.

Got it. I've got some more questions, but maybe I should get back in the queue unless there's other people waiting.

I would suggest you go ahead.

Okay. The capital program in Canada, a lot of capital allocated to upgrading rigs. How should we think about that from a market share or activity perspective? Can you talk a little bit about that? your expectations there and what those upgrades might look like.

So we're doing some work in our service rig division. We've had a very good experience upgrading service rigs to really expand their capability both for thermal operations and I would call it deep basin operations. And so we've taken a pretty steady approach to continuing to expand our fleet there. So that's part of it. On the drilling rig side, the primary project this year, and we're somewhat tight hole on it, but we're doing a pretty significant upgrade to a existing mechanical double that it'll come out as a AC triple, and there's some intellectual property involved with that. And so I think our sales groups will begin marketing. Normally I wouldn't say much, but we've given them the go-ahead to start marketing that rig, which it won't be done until Q4, but it's going to be a pretty special rig. And like I said, we've got some property protection in place for the design.

That's interesting. So that's, I guess, on spec at this point?

It is, but I expect I'd probably unleash the hounds right now. There's a lot of demand for this style of rig, and in particular, we believe this rig will be very sought after. So I'm not too worried about that. But yeah, we did it on spec.

Interesting. And the economics in the market are high enough to do a mechanical double to AC triple conversion. That would be one of the most expensive conversions, I think, in the market.

It's not cheap, but I can tell you the cost relative to new build is substantially lower. You can't justify new build right now, but again, part of the beauty of this is the patented design that we've got and the Like I said, it allows us to undertake this conversion at a substantial discount to new build price.

And I would imagine you have other rigs that could follow suit if this one is picked up?

Correct. Correct.

How long does a conversion like that take?

Those are all idle mechanical doubles, too. And we also, like I said, got patent protection on this, so we'll be watching closely to ensure no one tries to copy our concept.

Sorry, and how long do you think the conversion takes?

Like I said, we expect the rig to be completed by Q4.

Okay, interesting. Can you talk a little bit about CPS activity and your outlook there for the year?

They're doing very well. You know, this tariff, I'm certain he's definitely, you know, thankfully I have no hair left to lose. But what we've seen is very strong bid activity and, you know, Like I said, we'll give an update after Q1 in terms of backlog, but there's very strong demand for compression process equipment, and it's part of this infrastructure build. And so the reality of the supply chains in that business is there's so much cross-border activity that it's just – you know, I think the temporary relief here announced yesterday – makes a lot of sense. You know, we've got somewhat of a natural hedge insofar as we've got manufacturing capability on both sides of the border. But the reality, a lot of the choice of where you fabricate is based on where the end use is and also, you know, shop utilization and windows and that sort of thing. But what I can say is that business is performing well and we expect that to continue.

Okay, great. And you mentioned tariffs. Can you talk a little bit about your exposure, what you might be seeing from customers, if there's any hesitancy in your customer base for capital allocation, or if you see people perhaps front-loading at a tariffs?

What I would say is our order experience suggests not. But again, I think there's a lot of uncertainty that probably has slowed order commitments down, but certainly, um, they remain very strong. Um, you know, our, uh, from our perspective, um, you know, orders are X works the factory in which they're built. Um, you know, as well, um, you know, tariffs, whether U S or Canadian that drive up input costs are going to apply to everyone. So, um, Again, I would hope that we can get this sorted out. All it's going to do is drive up costs, but I would say our experience thus far, it certainly hasn't caused us to be concerned about shaw uploading over the next several months. I'll put it that way.

I got it.

So who knows, Tim? Your answer, I'd ask you... if you know what's gonna happen there, but it's certainly the uncertainty is not helpful for anyone. But like I said, I think the industry as a whole is in the same boat and one benefit we have is having production on both sides of the border. But again, the supply chains are so integrated. It's a North American market. It makes it just, it adds complexity and confusion if tariffs are put in place.

Yeah, understood. It's a very dynamic situation. Nobody really seems to know where that's going. In terms of capital allocation given to the dividend bump, can you talk a little bit about your expectations for NTID activity? The stocks, you know, like most stocks in the service space are down. and then also, you know, how does M&A fit into your strategy for 2025?

You know, our views haven't changed. We look at share buybacks the same as we would any capital investment, including M&A, and right now our cost of equity is extremely high, and share buybacks are right at the top of the list for capital allocation, and, you know, M&A has to compete with that.

All right. That's all for me. Thanks so much for taking my laundry list of questions, and I'll turn it back.

Thanks, Tim.

Thanks, Tim.

Thank you. Our next question comes from Akshay, a retail investor. Please go ahead.

Hi, Dan. Thanks for taking my question. Good morning. I have two questions, and I apologize. I joined the We're meeting a little late, so if you've already answered this. First question is on capital allocation, just like the gentleman who asked me before, on the buybacks. I understand what you mentioned, but can we expect the cadence to be similar to, let's say, last year, knowing that the cost of equity is high, the buybacks to be kind of similar to what it was last year?

You know, I'm not one to try and predict the future, nor do we give forecasts, but, you know, current market conditions make our buybacks extremely compelling. And so, you know, what that looks like in three, six months, time will tell. And the other thing is relative to other opportunities. But right now, you know, we've been in blackout for a bit. Obviously, we don't buy during blackout, but... NCIB share buybacks right now would be at the top of the list.

All right, thank you. And then my other question is, you know, just to share the . Somewhere between two and three. Sorry, you broke up there. Oh, sorry. Could you start over? You broke up there. Give me a second, I'm taking apologies. Is it better now?

Yeah, that seems better.

Okay, thank you. I was just mentioning, in terms of where the shares trade now on an EBITDA basis, you know, EBITDA last year was about 4.3. You know, we're trading somewhere around two to three times. Can you please comment on the long-term, long-term of the business, viability of the business and how we look at it, you know, like three, five to 10 years. Um, and what, you know, what opportunities may be, um, to look at in the future.

You know, I'm again, I'm not, um, one to kind of get into five-year plans or that seems quite Soviet to me. I think what we do is we have core principles, um, We're also flexible, dynamic. And obviously, you know, when we make investments, you know, we're doing that in the context of a macro view. And I would say our macro view of our industry is, first of all, demand for oil and natural gas will continue to go up. And I think you're seeing the pendulum swing back in terms of energy security and energy reality. and affordable energy. So the macro background, I think, has and will continue to improve relative to the previous five years. Now, again, you're going to have cycles. It's a commodity business. But from a demand perspective and a public policy perspective, I think the next five years will be better than the previous five. As well, the underinvestment within not just the producer side but the service side has been massive. You know the flip side is there's definitely been technological improvements that allow us to do more with less but all in all you know you see various numbers that we're replacing a fraction of the reserves that we produce each year and fundamentally that catches up with you at some point. You know probably more relevant to total is a significant consolidation and contraction in energy service capacity. And again, you know, comments earlier, you know, there's no new build economics for drilling rigs today. You know, so we're being creative and looking at opportunities to take existing assets which we put as, you know, There are sunk costs, so we look at the incremental capital to put those assets back to work. In certain cases, we believe that provides reasonable and required returns. We're going to continue to be nimble. We'll continue to be opportunistic. What I would say five years from now will be larger and more international. would be my guess. And do I think we're going to run out of opportunities to achieve that? No. What those opportunities will be, time will tell.

Got it. Thank you. Appreciate taking the time. Does that help? Thank you. Yeah, it does. Thank you so much. Thank you.

Thank you. And this concludes the question and answer session. I'd like to turn the conference back over to Mr. Halleck for closing remarks.

Thank you, everyone, for joining us, and I look forward to speaking with you after we release our Q1 results. Have a pleasant weekend.

Thank you. This brings us to the close of today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.