TOTZF - Total Energy Services Inc. (TOTZF) Q2 2023 Earnings Call Transcript

2023-08-11 12:26:02 ET

Total Energy Services Inc. (TOTZF)

Q2 2023 Earnings Conference Call

August 11, 2023 11:00 am ET

Corporate Participants

Daniel Halyk - President and Chief Executive Officer

Yuliya Gorbach - Vice President, Finance and Chief Financial Officer

Conference Call Participants

Tim Monachello - ATB Capital Markets

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to Total Energy’s Second Quarter 2023 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. [Operator Instructions]

I would now like to turn the conference over to Daniel Halyk, President and CEO of Total Energy Services Inc. Please go ahead.

Daniel Halyk

Thank you and good morning and welcome to Total Energy Services second quarter 2023 conference call. Present with me is Yuliya Gorbach, Total’s VP, Finance and CFO. We will review with you Total’s financial and operating highlights for the three months ended June 30, 2023, and then provide an outlook for our business and open up the phone lines for questions.

Yuliya, please go ahead.

Yuliya Gorbach

Thank you, Dan.

During the course of this conference call, information may be provided containing forward-looking information concerning Total's, projected operational 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 business 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.zero.com.

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 June 30, 2023 represent record second quarter financial results. Underpinning these results were relatively stable industry conditions in all jurisdictions, and the deployment or equipment upgraded pursuant to our 2022 Capital Expenditure program.

Second quarter consolidated revenue increased 17% on a year-over-year basis, while EBITDA increased by 5%. Included in Q2 2022 EBITDA was $7.4 million of contract cancellation revenue in our CPS segment, excluding such contract cancellation revenue Q2 EBITDA increased 41% on a year-over-year basis with CPS segment EBITDA adjusted for contract cancellation and revenue accounting for 55% of this increase and the RTS segment 40%.

Geographically 47% of second quarter revenue was generated in the United States, 40% in Canada, and 13% in Australia, is compared to the second quarter of 2022 were 26% of consolidated revenue was generated in the United States, 54% in Canada, and 21% in Australia.

By business segments compression and process servicing generated 54% of second quarter consolidated revenue, followed by contract drilling services at 26%, in each well servicing and rentals and transportation services contributing 10%. In comparison, for the second quarter of 2022, CPS segment contributed 52% of consolidated revenue, contract drilling servicing 28%, well servicing 13%, and the RTS segment contributed 7%.

Consolidated second quarter gross margin of 19% was two percentage points lower than Q2 2022. Excluding the $7.4 million of CPS contract cancellation revenue received in Q2 2022, second quarter gross margin improved by two percentage points compared to 2022. This improvement was driven by improved pricing in all business segments that more than the third quarter inflation and the drag on consolidated gross margin due to the increase year-over-year relative revenue contribution of the lower margin CDS segment.

Increased drilling activity in Canada was offset with lower activity in Australia and the United States, resulting in 6% year-over-year decrease in second quarter consolidated or bringing these in CPS segment. Offsetting lower activity was a 17% increase in consolidated segments revenue per operating day. This resulted in a 10% year-over-year increase in second quarter CDS segment revenue and 12% increase in segment EBITDA.

In Canada, increased activity, and market share gains contributed to an 8% year-over-year increase in second quarter operating days, price increases in part due to rig upgrades resulted in a 19% year-over-year increase in second quarter Canadian drilling revenue per day, which in turn gave rise to a 29% year-over-year increase in Canadian drilling revenue.

In the United States, second quarter revenue decreased by 7% as a 13% year-over-year increase in revenue per operating day was offset by an 18% decrease in operating days arising from modest slowdown in industry activity, and the transfer of one triple drilling rig to Canada.

Despite the revenue decrease, second quarter U.S. CDS operating income increased by 312%, as a result of increased pricing and cost efficiencies. In Australia, operating days decreased, as one drilling rig was taken out of service for recertifications and upgrades. This rig returned to operation in July, reduced operating days were partially offset by a 27% increase in revenue per day, resulting in a 2% decrease in revenue. Lower revenue combined with crew retention and other costs associated with recertification of one drilling rig contributed to 79% decrease in operating income.

In an RTS segment, improved Canadian industry conditions and meaningful market share gains in the United States contributed to a 7% year-over-year increase in utilization and 48% increase in revenue per utilized piece of equipment, which in turn resulted in a 47% increase in revenue. This segments leverage to high activity levels, given its relatively high fixed cost structure was demonstrated by 102% year-over-year increase in segments EBITDA and a 10 percentage point increase in EBITDA margin, despite significant year-over-year cost inflation.

Second quarter revenue in total CPS segment increased by 22% as compared to 2022. This was due to a significant increase in U.S. fabrication sales, that more than offset lower sales in Canada. Also contributing to the year-over-year increase in segments revenue was increased equipment overhaul activity, and a 44% increase in utilization or compression rental fleet. CPS segment EBITDA for the second quarter of 2022 included $7.4 million of contract cancellation revenue, excluding this contract cancellation revenue, second quarter EBITDA and EBITDA margin increased 64% and 22% respectively for 2023 as compared to 2022.

The fabrication sales backlog increased $185.6 million compared to $181.7 million backlog at June 30, 2022. Sequentially, the quarter end backlog decreased by $41.8 million as conversional [coaling] [ph] activity to sales moderated somewhat during the second quarter, with no corresponding decrease in production activity.

Second quarter well servicing segments service hours decreased 13% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs. Partially offsetting reduced activity with a 6% increase in revenue per service hour resulted in an 8% percent decrease in well servicing revenue.

Lower revenue and operating hours in Canada and Australia were partially offset by 27% increase in service hours and a 41% increase in revenue in the United States, and our U.S. service rig business expanded its customer base during the second quarter of 2023, negatively impacting second quarter activity in Australia was the removal of service rig from operations for recertifications in the upgrades.

Lower activity, additional maintenance costs following the busy winter season in Canada, and operating costs inflation that exceeded price increases contributed to a 23% decrease in second quarter segment EBITDA and a 19% decrease in EBITDA margin.

From a consolidated perspective, Total Energy's financial position remains very strong. During the second quarter of 2023, Total reduced its bank debt by $10.5 million or 9%, bringing its net debt position to $2.7 million at June 30, 2023. During the second quarter, we purchased 375,000 common shares under our normal course issuer bid, at a cost of $3.3 million. And we currently have hired $15 million of credit available under $175 million of existing credit facilities.

Total Energy's bank covenants consist of maximum senior debt to trailing 12-month bank defined EBITDA of 3x and a minimum bank defined EBITDA to interest expense of 3x. At June 30, 2023, the company's [indiscernible] bank debt to bank EBITDA ratio was 0.27 and the bank interest coverage ratio was 29.59x.

Daniel Halyk

Thank you, Yuliya.

We are pleased with our record second quarter results. Such results reflect the continued investment in upgrading our equipment fleet, as well as a significant increase in the relative contribution of our RTS segment, following several years of restructuring that segment in response to challenging industry conditions in Canada. Despite a moderation in U.S. and Australian activity, and the normal seasonal slowdown in Canada that was exacerbated by lower well abandonment activity, Total generated $43.9 million of cash flow after changes in noncash working capital items during the second quarter that was used to fund $12.7 million of capital expenditures, repaid $10.5 million of bank debt, reduced the number of outstanding common shares by 1% with $3.3 million of share repurchases and paid $3.2 million of dividends to our owners.

Canadian activity levels gained momentum as we entered the third quarter, and we currently expect continued favorable market conditions in North America and Australia for the remainder of the year provided commodity prices remain relatively stable. Contributing to our constructive outlook for the remainder of 2023 is the reactivation of equipment being upgraded and recertified pursuant to our 2023 capital expenditure budget. Such equipment includes a triple drilling rig relocated to Canada from the U.S. and an Australian drilling rig that both returned to service in July following recertification upgrades completed during the second quarter. That said, an Australian drilling rig that came off contract in July, is currently undergoing routine inspection and maintenance and is expected to return to service in the fourth quarter of 2023.

In direct response to customer demand, we have modestly increased our 2023 capital budget by $6 million to $72.1 million. This increase will be directed towards continued equipment recertification and upgrades, with $42.5 million of our 2023 capital budget funded to June 30, the remaining $29.6 million will be funded with cash on hand and cash flow.

While industry conditions remain stable and positive, global economic uncertainty and commodity price volatility give rise to caution. In such an environment, we will continue to prudently manage our operations and exercise discipline in the deployment of capital. We continue to be presented with numerous growth opportunities but unnecessarily wasted such opportunities against the economics of continuing to pay down debt and repurchasing shares.

I would now like to open up the phone lines for any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Tim Monachello with ATB Capital Markets. Please go ahead.

Tim Monachello

I was just curious. We saw some margin compression, particularly in the CDS segment. And there were some rigs that were sidelined. Obviously, you've got some impacts in Canada just given seasonality. I'm curious how much you think the margin was impacted by rig mobilization and other one-time items that might have hit the cost line.

Daniel Halyk

So certainly relative to the first quarter, you're going to have some contraction in Canada with the absence of boiler revenue. But overall, the margins were fairly stable on a year-over-year basis. Definitely, we had some costs associated with relocating the triple from the U.S. to Canada, and obviously no corresponding revenue of that rig. And then typically spring break up in all divisions tend to have increased maintenance costs, particularly after Q1, which was a fairly busy quarter. So you definitely have some of that seasonal pickup and maintenance expenses. But, year-over-year, margins were relatively stable. And so we didn't see anything unusual there. I don't know Yuliya --

Yuliya Gorbach

Yes. 21% last year, 21% this year, in the second quarter, so, but definitely a little lower than Q1, for sure.

Tim Monachello

Yes. But rates have moved a lot higher over last year.

Daniel Halyk

Yes, rates and costs. Certainly, lower activity in Australia and the U.S. U.S. was more macro. Australia was when you pull one out of five rigs out of service, that hits your activity, reasonably hard. But yes, there wasn't definitely cost inflation, but reasonably stable margins. So rate increases have been offsetting costs but that's a constant battle.

Yuliya Gorbach

And definitely the utilization in Q1 of '23 was higher than Q1 of '22. So that brings a bit relatively more cost for maintenance in breakup season.

Daniel Halyk

So, yes, we don't see anything particularly unusual with the margins in Q2 in CDS.

Tim Monachello

Okay. I guess on the margin, what are you seeing from a pricing perspective in the North American rig markets?

Daniel Halyk

I think pricing has stabilized, there's select areas where you've got some upward bias, but I would say relative to a year ago, you've definitely got the market more stable. And I would say more balanced.

Tim Monachello

Okay. And then, in the CPS segment, is the first quarter a long time that we've seen the backlog come down sequentially? Are you seeing a slowing or tempering of demand from your customers? Or is it more just a higher consumption level in the second quarter and perhaps like an elongation of the period to actually sign-up new orders? I think that was mentioned or alluded to in the MD&A?

Daniel Halyk

Yes. So typically, summertime you tend to get a bit of a breather, just a function of summer holidays, that sort of thing. Again, we had a pretty significant ramp up over the past four, five quarters. You can't go up every quarter. I think part of it was normal seasonality where a year ago, we're coming off such a slow period that it was hard not to increase your backlog. You The other thing as you build up a backlog, your delivery times start going out and you lose some bids on delivery, and you lose some bits on pricing. We certainly, when you've got a have a strong backlog, you're not going to cut your pricing just to get work. Bid activity remains strong. So we see a pretty healthy market there.

Tim Monachello

You haven't noticed any fundamental change in demand?

Daniel Halyk

No.

Tim Monachello

Okay. I think that's all for me. I will turn back. Thanks.

Operator

[Operator Instructions]. This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Halyk for any closing remarks.

Daniel Halyk

Thank you, everyone, for participating in our conference call. I hope you have a great summer and look forward to speaking with you after our third quarter. Have a nice weekend.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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