Total Energy Services Inc.

Hello, and thank you so much for standing by. My name is AP, and I will be your conference operator today. At this time, I would like to welcome everyone to the Total Energy Services, Inc. First Quarter 2026 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star. followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. There is no restriction on the Q&A. Thank you. And I would now like to turn the call over to Mr. Daniel Halleck, the President and CEO of Total Energy Services Inc. Please go ahead.

Thank you and good morning. 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, 2026. We will then provide an outlook for our business and open up the phone lines for any questions. Yuliya, 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 business and the oil and gas 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 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 results for the three months ended March 31, 2026 reflect continued strong North American demand for natural gas compression and process equipment and the deployment of upgraded equipment in Australia and Canada that more than offset lower North American drilling and completion activity. On a year-over-year basis, consolidated first quarter revenue increased by 25%. Contributing to this increase was $58.4 million of increased CPS segment revenue, $6.1 million from CDS segments and $2 million from well servicing. First quarter EBITDA increased $4.7 million compared to 2025, driven by the increased activity and improved fabrication margins in the CPS segment and the deployment of upgraded rigs and higher day rates in Australia and Canada. negatively impacting first quarter financial results was a $6.5 million year-over-year increase in share-based compensation expense due to a 52% increase in the company's share price during the first quarter of 2026. That was partially offset by a $2.9 million year-over-year increase in the gain on sale of property planning equipment following the sale of well-servicing equipment in the United States in February of 2026. $6.3 million of the $6.6 million of share-based compensation expense recorded in Q1 2026 was unknown cash in nature. Geographically, 46% of first quarter revenue was generated in Canada, 32% in the United States, and 22% in Australia, as compared to the first quarter of 2025, when 47% of consolidated revenue was generated in Canada, 31% in the United States, and 20% in Australia. By business segment, the compression and process services segment contributed 52% of first quarter consolidated revenue, followed by the CDS segment at 31%, wealth servicing at 11%, and the RTS segment at 6%. In comparison, For the first quarter of 2025, the compression and process services segment generated 42% of the first quarter consolidated revenue, followed by CDS at 36%, world servicing at 13%, and RTF segment at 9%. First quarter consolidated gross margin was 22% in 2026, which was 268 basis points lower than 2025. Contributing to this decline was a 10% point increase in the first quarter revenue contribution from the CPS segment, as this business segment historically generates lower margins than the other segments. A year-over-year increase in CPS segment and Australian margins partially upset a decline in RTS and North American CDS and well-servicing segment margins. First quarter CDS segment revenue increased 7% compared to 2025. An 18% year-over-year decline in first quarter North American operating drilling days was partially offset by a 38% increase in Australian operating days. Segment revenue per operating day increased by 11% during the first quarter of 2026 due primarily to increased pricing on upgraded rigs in Australia and Canada. that was partially offset by a change in the mix of equipment operating and competitive pricing in the United States. First quarter CDS segment EBITDA decreased by 5%, a segment EBITDA margin decreased by 3 percentage points compared to 2025. Due to competitive pricing, costs incurred to reactivate equipment in the United States and low utilization in Canada that was partially offset by improved Australian results. RGS segment revenue for the first quarter decreased 15% compared to 2025. This was a result of lower industry activity exacerbated by lower revenue for utilized fees resulting from the change in the mix of equipment operating. Higher costs associated with the change in the mix of equipment operating, competitive market conditions, and this segment's relatively high fixed cost structure resulted in a 23% year-over-year decrease in the first quarter segment EBITDA. and a 4 percentage point decrease in the segment EBITDA margin. First quarter CPF segment revenue increased 55% compared to 2025, driven by increased fabrication sales and higher parts and service activity. Year-over-year first quarter CPF segment EBITDA increased by $6.1 million, or 39%. EBITDA margin during the first quarter of 2026 was two percentage points lower compared to 2025, primarily due to the year-over-year increase in relative contribution of lower margin fabrication sales to segment revenue. The fabrication sales backlog at March 31, 2026 was $446.9 million, which is $181.5 million, or 68% higher compared to $265.4 million backlog at March 31, 2025, and $0.2 million higher compared to $446.7 million backlog at December 31, 2025. In well servicing, a 2% increase in revenue per service hour combined with a 4% increase in operating hours resulted in a 6% year-over-year increase in first quarter segment revenue. Increased Australian and Canadian activity was partially offset by substantial decline in U.S. activity following the discontinuance of U.S. well-servicing operations in January of 2026. Higher pricing and increased fleet utilization following the upgrade of several rigs over the past year contributed to 126% and 10% increases respectively in the first quarter of Australian and Canadian operating income. Segment EBITDA for the first quarter of 2026 was 110% higher compared to 2025, due to improved Australian and Canadian results, as well as the cessation of operating losses in the United States. Total Energy's consolidated financial position remains very strong. At March 31, 2026, Total Energy had $113.4 million of further working capital, including $91.4 million of cash. Cash on hand exceeded bank debt by $46.4 million at March 31, 2026. Total Energy's bank governance consists of maximum senior debt to trillion 12 months, bank-defined EBITDA of three times, and a minimum bank-defined EBITDA to interest expense was three times. At March 31, 2026, the company's senior bank debt-to-bank defined EBITDA ratio was a negative 0.19 times the total was in that cash position, and the bank interest coverage ratio was 51.1 times.

Thank you, Yuliya. We are pleased with our first quarter results. But for the substantial non-cash share-based compensation expense recorded due to the significant increase in total share price during the quarter, these results would have constituted record quarterly financial results. The substantial investment we have made over the past two years reactivating Australian and Canadian equipment and supporting the inventory needs of our CPS segment continued to bear fruit and position us well for the future. Our strong balance sheet ensures we are able to continue to fund such investments while at the same time providing our owners with industry-leading shareholder returns through dividends and share buybacks. In Australia, an upgraded service rig commenced operations in early May, bringing our current Australian active rig count to 13 drilling rigs and 8 service rigs. The currently active drilling rig will be taken out of service during the third quarter for approximately two months to complete certain upgrades, following which it will commence operations under a new long-term contract. A new Australian service rig is currently under construction and is scheduled to commence operations in the first quarter of 2027. In Canada, the upgrade of a second idle mechanical double drilling rig into a state-of-the-art AC electric triple pad rig is underway with completion expected by the first quarter of 2027. Demand for this style of rig is strong and we will look to contract the rig closer to completion. Our current expectation is that post-breakup, Total's active Canadian drilling rig count will exceed last year. In the United States, we are beginning to see signs of improvement with our current active U.S. drilling rig count at four. Inquiries to put additional rigs back to work have increased significantly over the past few weeks. Recent oil price strength is also contributing to increased demand for our high spec service rigs in Canada. Any pickup in Canadian and US drilling and completion activity will also provide tailwinds for our RTS segment. Our compression and process services segment continues to see strong demand for its products and services driven by North American LNG infrastructure and natural gas fired electricity generation projects. The record fabrication sales log of $446.9 million at March 31st provides visibility well into 2027 and current coding activity remains vibrant. While increasing lead times for major components such as engines makes managing this business more challenging, Total's balance sheet strength provides the capital required to support the significant inventory investment required to ensure we can continue to satisfy our customers' demands well into the future. Expansion of our U.S. fabrication capacity in Weirton, West Virginia is underway with completion expected by the first quarter of 2027. Once completed and fully staffed, this expansion is expected to almost double our U.S. compression fabrication capacity. Our first quarter results clearly demonstrate the capacity of our business to generate free cash flow. After funding working capital needs and lease payments, as well as $20.7 million of capital expenditures and $6.5 million of dividends and share buybacks, we repaid another $10 million of bank debt during the quarter and grew our quarter end cash balance to $91.3 million, or $2.49 per outstanding share. In closing, I would encourage shareholders to join us at our 30th Annual Meeting of Shareholders, which will be held at 10 a.m. on Tuesday, May 19th at the Calgary Petroleum Club. I would now like to open up the phone lines for any questions.

Thank you, Mr. Daniel. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Again, please press star then the number one on your telephone keypad. We will pause for just a moment to compare the Q&A roster. Your first question comes from the line of Tim Monacallo with ATB Carmark Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Tim.

Good morning. Australian activity levels are really strong in the quarter. I'm curious about weather impacts in the quarter. It typically would be a slower quarter. seasonal activity quarter and what activity levels would have been if it hadn't been for the weather impacts that you may have seen?

So first quarter is typical, was pretty wet, particularly we saw in the Cooper Basin where a lot of our heavier rigs were shut down, put on standby for pretty extended periods of time. So definitely that had an impact on the financial performance of Q1, but that's pretty typical, Tim. So as we come out of the wet season, everything else being equal, you should see better performance as we go back to full operating rate and normal operations.

Did that have an impact on the Australian day rate in the quarter as well, which was down a little bit quarter over quarter?

Yes, you get a reduced rate either standby with crew or standby without crew or zero.

Got it. And then were there any reactivation costs or one-time costs in the drilling segment in Q1?

Yes, in the U.S., We went from very low utilization, came into Q2 with four rigs utilized, so we spent some money, expended, not capitalized money, to reactivate rigs there. So that hit our U.S. In Canada, nothing out of the ordinary or normal kind of ramp up into Q1, but I would say it was a bit more pronounced in the U.S.,

Do you expect those reactivation costs to continue in the next couple of quarters? Sounds like you're expecting some stronger activity levels in the U.S. in particular.

Well, hopefully, you know, as we put more rigs to work and we expense all that, unless it's obviously a major upgrade or research, but yeah. Yeah, the difference is you're going to be spreading those costs over more operating days, which obviously helps. But, you know, to the extent we continue to ramp up in the U.S., we'll have additional reactivation costs. But we have traditionally not broken that out. That's just part of running a business.

Can you speak a little bit about the pricing environment in Canada and U.S. for drilling?

Really depends on the class of rigs. I would say high spec rigs in Canada, notably AC triples, doubles, AC doubles, and super singles. It's a tight market, so pricing tends to be pretty stable and positive there. The mechanical double, lower spec market tends to be very competitive still. You know, the U.S. were not big enough, I think, to give any meaningful insight. You know, we certainly saw some pretty competitive pricing last year, which caused us to give up some market share. But obviously, that's changing where, you know, we're comfortable putting rigs back to work here. So, but we're not big enough player in the U.S. to give any market insight.

Got it. In the compression process business, the financial performance, the revenue is up a lot, maintain the backlog at record levels. So that would suggest that your throughput of backlog and bookings were relatively strong in the quarter. Have you changed anything in terms of the amount of shifts you're running in your manufacturing facilities to increase throughput or how should we think about throughput through the year relative to the Q1 level?

No, we're running a pretty steady state there. I think, you know, the big difference will be next year as we look to ramp up our U.S. operations. You know, completion of the facility for Q1 is the target. We're on track. And obviously your staff, you know, taking your head count up will take some time. But, you know, we're already, you know, working on that. I would say good, steady operations. That'll help us improve margins over time. Trying to add a whole bunch of overtime in that, easier said than done. Again, if someone's willing to pay a premium, we'll get things done, but we're really trying to load level. and run a steady operation. You know, one of the big challenges in that regard is just the engine deliveries and working around that. But so far, you know, our group has done a pretty good job on that front.

Got it. And with that capacity addition in the U.S., you mentioned 50% addition to your U.S. manufacturing capacity. What would that addition be in terms of your total CPS manufacturing capacity?

It would almost double our U.S. fabrication capacity, not 50%. So our initial projection was at least 75%. You know, as we work through some things here, we're seeing a near double. You can look at U.S. You know, there's, again, for various reasons, competitive and otherwise, we don't break out rental. revenues but you can see the US rental fleet has shrunk considerably over the past several quarters as we sell units you know so increasingly the revenue is primarily fabrication and you can sort of extrapolate assuming we can you know ramp it up to you know almost a hundred percent what that means from a revenue point of view Obviously, if you're doubling production, you're going to get some costs, energy, so everything else being equal, I'd expect a significant ramp up in activity in the U.S. Once we've got crews properly orientated and all that, because there's going to be some startup expenses and headaches and efficiency challenges, but once we get that ramped up, Again, you're spreading your overhead over a larger number of hours, which should benefit margins.

Got it. And then just given the lead times for large engines being over two years here and the increased capacity you have, I would imagine that you have some lead orders in place that would help you fill that capacity.

Is that the right way to think about it? Yeah. Lead times on certain engines are now well north of three years, so we're looking into, it's actually kind of ridiculous where it's at right now, but what we're doing is certainly trying to load level as much as we can and manage our inventory purchasing decisions around load leveling of shops.

Okay. And then getting pretty long in the tooth here, but just one more, can you talk a little bit about how you're thinking about M&A and the current market? And I mean, obviously your balance sheet is in a very good position and you've got lots of capacity, but just curious if you're tracking anything or how do you think about it?

Yeah, no, I think we're thinking about it the same way we always do, which is can we get a return on the investment that reflects our cost of capital and how is it compared to organic opportunities which include share buybacks. We're very active in evaluating opportunities, both internal, external. We continue to see good opportunities to upgrade equipment, but we can also walk and chew gum at the same time. We're going to stay disciplined, but our bias is to grow if it makes sense, but it's got to make sense financially as well. But we are active evaluating many different opportunities, so we'll update as appropriate.

Okay, I appreciate it, and a nice quarter. Thank you.

Thank you. Again, if you would like to ask a question, press star 1 on your telephone keypad. All right. That will conclude our question and answer session, and I will now turn the call back over to Mr. Daniel Halleck for closing remarks. Please go ahead.

Thank you. Well, thank you, everyone, for joining us this morning, and hope to see some of you at our AGM next Tuesday. Have a great weekend. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you so much all for joining. You may now disconnect.