CA - Total Energy Services Inc. (TOTZF) Q3 2023 Earnings Call Transcript

2023-11-10 17:22:10 ET

Total Energy Services Inc. (TOTZF)

Q3 2023 Earnings Call Transcript

November 10, 2023, 11:00 AM ET

Company Participants

Daniel Halyk - President and CEO

Yuliya Gorbach - VP, Finance & CFO

Conference Call Participants

Cole Pereira - Stifel

Jonathan Orford - ATB Capital Markets

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to Total Energy's Third Quarter 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. Good morning, and welcome to Total Energy Services Third Quarter 2023 Conference Call. Present with me is Yuliya Gorbach, Total's Vice President Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended September 30, 2023. We will then provide an outlook for our business and open up the phone lines for any questions. Yuliya, please proceed.

Yuliya Gorbach

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 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.sedar.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 September 30, 2023, reflect relatively stable industry conditions. Despite lower year-over-year North American industry activity levels, market share gains resulting from equipment upgrades and improved results from our Compression and Process Services segment contributed to modestly higher third quarter results in 2023 as compared to 2022. Third quarter Australian activity levels were lower compared to prior year as one drilling rig and one service rig were out of service during the third quarter of 2023 for recertification and upgrades.

Third quarter consolidated revenue increased 12% on a year-over-year basis, while EBITDA increased by 6%. Our CPS segment was the largest contributor to year-over-year increase in third quarter revenue and EBITDA. Geographically, 48% of third quarter revenue was generated in Canada, 43% in the United States and 9% in Australia as compared to third quarter of 2022 when 47% of consolidated revenue was generated in Canada, 73 -- pardon me, 37% in the United States and 16% in Australia. By business segment, Compression and Process Servicing generated 48% of third quarter consolidated revenue followed by Contract Drilling Services at 33%, Well Servicing at 10% and Rentals and Transportation at 9%. In comparison, for the third quarter 2022, the CPS segment contributed 42% of consolidated revenue, Contract Drilling Services, 36%, Well Servicing, 13%, and the RTS segment contributed 9%.

Third quarter consolidated gross margin was consistent with the prior year 24%. Margin strength in our CPS segment as well as our Canadian drilling, US rentals and US well servicing businesses offset year-over-year margin contraction in other businesses.

Decreased drilling activity in all geographies resulted in a 7% year-over-year decrease in third quarter consolidated operating days in CDS segment, offsetting lower activity with a 10% increase in consolidated segment revenue per operating day. This resulted in a 2% year-over-year increase in the third quarter of CDS segment revenue and flat EBITDA.

In Canada, lower industry activity resulted in a 2% year-over-year decrease in third quarter operating days. Price increases, in part, due to rig upgrade, resulted in an 8% year-over-year increase in third quarter Canadian drilling revenue per day, which in turn gave rise to a 7% year-over-year increase in Canadian drilling revenue.

In the United States, third quarter revenue decreased by 11%, as a 9% year-over-year increase in revenue per operating day was offset by a 17% decrease in operating days due to lower industry activity and the transfer in triple drilling rig to Canada in the second quarter of 2023. Lower revenue and crew retention costs resulted in a 50% decrease in operating income.

In Australia, operating days decreased as 1 drilling rig was taken out of service for recertifications and upgrades. This rig returned to operations in mid-October. Reduced operating days were partially offset by a 29% increase in revenue per day resulted in a 6% increase in revenue, offsetting higher revenue with crew retention and equipment relocation expenses associated with rigorous certifications and upgrade. Also negatively impacting Australian operating income was a weakening of dollar relative to Canadian and US dollars. In RTS segment, a rationalized equipment fleet in Canada and market share gains in the United States contributed to a 12% year-over-year increase in third quarter equipment utilization and a 14% increase in revenue per utilized piece of equipment, which in turn resulted in a 17% increase in third quarter revenue.

Third quarter EBITDA and EBITDA margin were 10% and 24% lower, respectively, as compared to 2022 due primarily to additional costs incurred in Canada to mobilize equipment and personnel for upcoming winter season. Third quarter revenue of Total CPS segment increased by 28% as compared to 2022. This was due to a significant increase in US fabrication sales that more than offset lower sales in Canada.

Also contributing to the year-over-year increase in segment's revenue was increased equipment overhaul activity and a 10% increase in utilization of compression rental fleet. Third quarter EBITDA and EBITDA margin increased 81% and 44%, respectively, for 2023 as compared to 2022. The fabrication sales backlog decreased to $152.9 million compared to the $197.8 million backlog at September 30, 2022.

Sequentially, the quarter-end backlog decreased $32.7 million due to moderation of [quoting] (ph) activity converting to sales during the third quarter of 2023 with no corresponding decrease in production activity as well as the shift in customer demand towards renting compression equipment.

Third quarter Well Servicing segment consolidated service hours decreased 16% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs. And an Australian service rig was taken out of service in the second quarter for recertifications and upgrades. A 1% decrease in revenue per service hour and decreased activity resulted in a 17% decrease in Well Servicing segment revenue. Lower revenues in operating hours in Canada and Australia were partially offset by a 26% increase in service hours and a 30% increase in revenue in the United States as our US service rig business expanded its customer base during 2023.

Third quarter segment EBITDA and EBITDA margin decreased by 27% and 13%, respectively, as compared to 2022 due to lower activity and competitive pricing in Canada and Australia. From a consolidated perspective, Total Energy's financial position remains very strong. At September 30, 2023, Total Energy had $127.6 million of positive working capital, including $29.9 million of cash and zero net debt.

During the third quarter, we repurchased 252,804 common shares under our normal course issuer bid at a cost of $2.3 million. Total currently has $115 million of credit available under $175 million of existing credit facilities. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bankt-defined EBITDA or three times minimum bank-defined EBITDA to interest expense of three times. At September 30, 2023, the company's senior bank debt to bank-defined EBITDA ratio was 0.27 and bank interest coverage ratio was 29.04 times.

Daniel Halyk

Thank you, Yuliya. We are pleased with our third quarter results. Despite lower North American drilling activity, our investment in upgrading our equipment fleet over the past year and improved performance by our CPS segment resulted in modestly improved year-over-year third quarter financial results. Significant share repurchases over the past 12 months amplified our results on a fully diluted per share basis.

During the third quarter, Total continued to fund its capital investments, repay its debt and return capital to shareholders through dividends and share buybacks, entirely from operating cash flow. As Yuliya mentioned, we exited the third quarter with zero net debt, the first time this has occurred since the acquisition of Savanna in 2017. Despite continued lower year-over-year North American industry drilling activity levels, our investment in upgrading our equipment fleet continues to mitigate such as we enter the seasonally active winter drilling season in Canada. Demand for compression and process equipment remains strong with a notable increase in demand for rental equipment.

In response to such demand, our Board of Directors has approved a $20 million increase to Total's 2023 capital expenditure budget, which is earmarked towards continued growth of the compression rental fleet. Our 2023 capital expenditure budget now stands at $92.1 million, of which $59.6 million has been funded to September 30, '23. The remaining $32.5 million will be funded by cash on hand and cash flow. Significantly mitigating the cash required to execute the $20 million compression rental fleet expansion will be the utilization of major components currently sitting in inventory.

Finally, I'm pleased to report that during the third quarter, we experienced a significant improvement in our safety performance across all business segments with a meaningful decline in both the frequency and severity of incidents. A particular note is the fact that we suffered no lost time incidents during the quarter. This outstanding operational execution contributed directly to our improved year-over-year financial results. I would like to take this opportunity to thank all of our employees for their ongoing focus and commitment to conducting our operations in a safe and efficient manner.

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 comes from Cole Pereira of Stifel. Please go ahead.

Cole Pereira

Hi, good morning, all.

Daniel Halyk

Good morning, Cole.

Cole Pereira

Dan, I'm wondering if you can just add some color on what the M&A market looks like in the services space right now. And you previously talked about your cost of capital being a hurdle to M&A. But as you know, is improved balance sheets across the sector, maybe a bit of a hurdle as well?

Daniel Halyk

I would say we're pretty active in the space and stay tuned.

Cole Pereira

Got you. Fair enough. And then some of your larger peers have outlined some pretty attractive day rate upside in Canada, more for the high-spec rigs, high-spec AC triples. Can you kind of talk about what you're seeing for your rig fleet in terms of year-over-year pricing gains?

Daniel Halyk

I would say going into winter, we are completely sold out of our AC heavy doubles or triples and our super singles. And so assuming relatively stable commodity prices, I expect we'll have a decent winter.

Cole Pereira

Got it. And there was some color in the release just on the contracting CPS backlog. I mean it sounds like that's just kind of the normal fluctuations in due to timing and not really a shrinking opportunity set or anything like that?

Daniel Halyk

Yeah, I would say, obviously, it's one point in time, Cole. And so that changes weekly. The other notable difference, I would say, this time versus last quarter or a year ago is significantly -- I'm not sure if it's increased demand for rental or the fact that we're more competitive now that cost of capital, notably that has increased. And that's making our ability to compete in the rental market better. In other words, pricing has gone up, which allows us to entertain new opportunities in that regard. And just a couple of points on that, Cole. First of all, we do not build any compression rental equipment on spec. And so any new additions to the fleet are backed by signed take-or-pay contracts multiyear. And so the other point is fabrication sales backlog does not include horsepower that's being built for rent. And so when you have a shift from a sale to a rental, the rental horsepower or rental dollars are not reflected in our fabrication sales backlog. So it doesn't necessarily mean -- a lower backlog doesn't mean we're still not building things.

Cole Pereira

Okay, got it. Yeah, that makes sense. That’s all from me. Thanks. I’ll turn it back.

Daniel Halyk

Thanks, Cole.

Operator

[Operator Instructions] Our next question comes from Jonathan Orford of ATB Capital Markets. Please go ahead.

Jonathan Orford

Good morning. Thanks for taking my questions. I guess I'll start off with the CPS segment. I'm wondering if you could provide some color on the timing and the expected rental fleet growth associated with the $20 million increase.

Daniel Halyk

As I just mentioned, Jonathan, we don't build any compression rental fleet on spec. And so any new additions to the fleet are backed by take-or-pay multiyear commitments. And I would expect you will see over the next few quarters, our rental fleet utilization go up as well as the size of our rental fleet as those units are constructed, delivered and put out on rent. The other thing regarding utilization, again, it's a point in time, you tend to get a lot of movement below the surface in the rental fleet. You get the aggregate utilization on horsepower. But underneath that is the sale of units, the return of units. There's constant churning there. And so again, it's a little bit like your fabrication sales backlog it's a point in time. And based on our Board's decision to increase the capital for that line of our business, I think it's fair to assume that our rental business will grow over the next few quarters.

Jonathan Orford

And just to follow up on that for the increase. Do you expect to spend that entire amount in 2023? Or there's going to be some carryover, do you think?

Daniel Halyk

It will probably be some carryover. As I mentioned in my remarks, Jon, there's a significant portion of that cost has already been paid for. And it's sitting in inventory, major components. So on a cash basis, it will be less. It will just transfer from inventory to our PP&E.

Jonathan Orford

Okay. That's helpful. And just lastly, I’m wondering if you could provide some color on the outlook heading into Q1. I know you provided some color on pricing earlier, but I was just curious if you provide some color on outlook, especially in Canada.

Daniel Halyk

Yeah. It's a -- I call it a goldilocks environment. It's not too hot, not too cold. I think producers continue to exercise tremendous discipline. There's been a fair amount of M&A, which obviously distracts from drilling and completion. The flip side is the competitive landscape on the service side has tightened up considerably over the past few years. And we're not at new build economics in most areas of our business. And I would say it's a fairly balanced relatively stable business. There's a lot of global macro-economic uncertainty. I think that kind of keeps a lid on things, but we continue to execute. We continue to remain disciplined in where we invest our owners' capital. And we continue to be working hard to try and execute on good opportunities.

Jonathan Orford

Okay. Thanks for that. Thanks.

Daniel Halyk

Thanks, Jon.

Operator

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

Daniel Halyk

Thanks to everyone for participating in our call. I hope you have a good long weekend and look forward to speaking with you after our fourth quarter. Thank you.

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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