Secure Energy Services Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Secure Energy Q3 2023 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, November 1, 2023. I will now turn the conference over to Alison.

Operator

Please go ahead.

Speaker 1

Thank you. Welcome to Secura's conference call for the Q3 of 2023. Joining me on the call today is Rene Amiro, our Chief Executive Officer Alan Ranch, our President and Chad Magus, our Chief Financial Officer. During the call today, we will make forward looking statements related to future performance and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures or ratios disclosed by other companies. The forward looking statements reflect the current views of Secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by Secure.

Speaker 1

Since forward looking information addresses future events and conditions, By their very nature, they involve inherent assumptions, risks and uncertainties, and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR as they identify risk factors applicable to SECURE, factors which May cause actual results to differ materially from any forward looking statements and identify and define our non GAAP measures. Today, we will Our financial and operational results for the Q3 of 2023 and our outlook for the remainder of the year and 2024. I will now turn the call over to Renny for his opening remarks.

Speaker 2

Thank you, Alison, and good morning, everyone. Q3 was another strong quarter for our business, showcasing Secure's ability to generate significant Free cash flow across our infrastructure network. We recorded adjusted EBITDA of 158,000,000 or $0.54 per share, up 8% from the prior year. This robust performance enabled us to convert 66% of that EBITDA into $104,000,000 of discretionary free cash flow, which we use to execute on our capital allocation Priorities. Year to date, we have delivered an annualized 12% return to shareholders achieved through our $0.40 per share annualized dividend payment And the repurchase of 7% of our outstanding shares under the normal course issuer bid.

Speaker 2

These actions underscore our commitment To enhance returns to our shareholders, complemented by our growth capital program this year, we were pleased to bring into service Our Clearwater oil terminal and gathering infrastructure and our Montney water disposal infrastructure expansion at the end of the third quarter, both Of which are backstopped by commercial agreements. These growth projects were completed and safely commissioned on time and on budget And provide critical infrastructure for the handling of production volumes for our customers. Our infrastructure network Maintain significant capacities for customers accommodating increased volumes for processing, disposal, recycling, recovery And terminalling with minimal incremental fixed costs or additional capital, we also continue to see strong opportunities with customers seeking Further expansions based on reducing their costs and environmental footprint. Turning now to an update on the Competition Tribunal Canada's decision earlier this year ordering the divestiture of 29 facilities acquired from Tervita in 2021. The strategic combination of Secure and Trevita enabled the combined company to better serve our customers, provided significant synergies And enhanced value to our shareholders and elevated our position to deliver on environmental and social sustainability initiatives.

Speaker 2

Despite the significant benefits brought to our customers, shareholders and the communities where we operate, we received the decision of the Federal Court of Appeal in August that our appeal Of the competition, tribunal decision has been dismissed. Following the decision, we have proceeded with an appeal to the Supreme Court of Canada And are pleased that we've been granted a stay while the Supreme Court determines whether to appeal to hear the appeal. As a prudent course of action, Secure has also engaged an advisor with respect to a sales process of the 29 facilities in the event a hearing is not granted or the corporation is not successful in its appeal. Due to the uncertainty with respect to the timing of a hearing being granted or resolution of the matter, Our Board of Directors and management continue to consider all options with respect to the tribunal's order to best serve our customers and other stakeholders. I'll now pass it over to Chad to go through financial highlights from the Q3.

Speaker 2

Thanks, Renny, and good morning to everyone

Speaker 3

on the call. We are pleased with the strong performance of the business during the Q3, driving record financial results. Net revenue of $427,000,000 in the quarter, the highest in peers in history increased 2% from the Q3 of 2022 due to continued demand for our critical services and strong utilization across our infrastructure network. Our 8% increase in adjusted EBITDA per share that Rene mentioned was driven by higher revenue and a lower share count. We have repurchased 7% of our outstanding shares this year, maxing out the normal course issuer bid implemented in December 2022.

Speaker 3

Our Board of Directors It has also approved us to move forward with renewing our NCIB in December 2023. We maintained our industry leading Adjusted EBITDA margin of 37% as we continue to diligently manage inflationary costs through price increases and operational efficiencies. Net income for the quarter was $47,000,000 or $0.16 per basic share, down $0.03 per share from the Q3 of 2022, primarily due to a gain on asset sales recorded in the prior year period. We generated $130,000,000 of funds flow from operations or $0.45 a 5% increase from the prior year. This drove our discretionary free cash flow of $104,000,000 or $0.36 per share, An increase of 3% from prior year.

Speaker 3

With respect to returns of capital, during the Q3, we repurchased 4.6 1,000,000 common shares for $33,000,000 and paid our quarterly dividend of $0.10 per common share amounting to 29,000,000 We also incurred $33,000,000 of growth capital, primarily related to Clearwater Oil Terminal and Gathering Infrastructure And our Montney water disposal infrastructure expansion. These assets came into service at the end of the 3rd quarter and will begin Contributing to the Corporation's results in the 4th quarter. Adjusted EBITDA and cash generation supported our capital priorities in the 3rd quarter, While maintaining our total debt to EBITDA covenant ratio of 1.9 times. At September 30, 2023, our debt consists of $153,000,000 of 20.25 senior secured notes, dollars 340,000,000 of 20.26 unsecured notes And a draw on our revolving credit facility, net of cash held of $362,000,000 We maintain a considerable liquidity position of $394,000,000 on our $850,000,000 of facilities maturing in 2025. Overall, Secure maintains a constructive outlook for volumes, activity levels and infrastructure demand throughout the remainder of 2023 2024.

Speaker 3

Looking ahead, we expect to continue to direct our significant discretionary free cash flow to our 4 capital allocation priorities. For 2024, this includes capital structure improvements through the repayment of high interest debt, paying our $0.40 per share dividend, Growing our base infrastructure with customer backed contracts and opportunistically repurchasing shares. I will now pass the call Over to Alan to provide financial and operational highlights by segment.

Speaker 4

Thanks, Chad. Good morning, everyone. Throughout the Q3, Our core business operations continue to demonstrate strength and consistency, underscoring our strong results. The most significant contributor to results in the quarter was our Environmental Waste Management Infrastructure segment, generating adjusted EBITDA of 114,000,000 A 12% increase over Q3 last year. The increase was driven by strong produced water volumes and Higher prices across waste processing facilities and landfills along with higher contributions from metal recycling due to improved efficiency And operating capabilities driving higher volumes and higher ferrous prices compared to the prior period.

Speaker 4

Delving into the key drivers of these segment results, our produced water processing and disposal volumes averaged 156,000 barrels per day, 7% increase over the prior year quarter, driven by solid industry fundamentals with strong commodity pricing and field activity Supporting steady production levels. Meanwhile, oil recovery volumes were down marginally due to lower waste processing volumes, Partially offset by higher produced water processing and disposal. Waste processing volumes remain consistent with the prior year at 65,000 barrels per day. Our industrial landfill saw project delays resulting from weather and the ongoing impact wildfires experienced in the second and third quarter impacting reclamation and remediation volumes. Consequently, Landfill volumes were down by 10% to 1,200,000 tons.

Speaker 4

At our metal recycling facilities, ferrous volumes increased by 14% Due to operating efficiencies and enhanced rail capabilities, improving our recycling operations, ferrous prices were also up by 4%. Our strategic investments included the purchase of new railcars in the 3rd quarter, having increased our handling capacity, Supporting further optimization at these facilities. Throughout our entire infrastructure network, we hold significant capacity to accommodate any increased Volumes resulting in the growing demand for our services. Our utilization rate stood at 62% in Q3, slightly up from Year to date average of 61%. The Energy Infrastructure segment generated adjusted EBITDA of $37,000,000 A decrease of $9,000,000 over the same period in 2022, which saw higher benchmark oil prices and wide differentials, Which created favorable conditions for blending resulted in higher than normal blending profit.

Speaker 4

Pipeline and terminalling volumes Q3 increased by 3% to 105,000 barrels per day compared to 2022 driven by commercial agreements And reoccurring crude oil volumes from our oil gathering pipelines. Overall, the contracted nature of the volumes from these oil gathering pipelines along with the location of Cheers' crude oil terminals close to the customers' production continues to drive strong and consistent volumes for terminalling and optimization. The addition of Clearwater Oil Terminal will further drive volumes in this segment. Finally, our Oilfield Services The segment contributed $20,000,000 of EBITDA, dollars 1,000,000 higher than the Q3 of 2022 as a lower rig count and reduced field activity was more than offset by revenue mix and inflationary price increases over the past year. Turning now to our capital program.

Speaker 4

We are extremely pleased To bring on our 2 major growth projects for the year, both the Clearwater Terminal and Montney Water disposal expansion projects provided reliable volumes And reoccurring cash flows through customer partnerships with long term take or pay contracts. Our planned $100,000,000 in growth capital for 2023 has been committed with the significant growth project now operational. Sustaining capital of $23,000,000 for the quarter related to landfill expansions, well maintenance and asset integrity programs for processing facilities And asset purchases for our metal recycling and waste management operations. We continue to expect to incur approximately $60,000,000 Sustaining capital and $25,000,000 of capital related to landfill expansions in 2023 with similar spending expected for next year as well. The additional landfill expansions are anticipated and in anticipation of increased abandonment, Spending obligations driven from government regulations as the liability management programs in British Columbia, Alberta and Saskatchewan seek to Speed up the rate in which inactive wells and facilities are abandoned and reclaimed.

Speaker 4

For our longer term outlook, the continued need for Energy Security has placed a renewed focus on the enduring role we play in Canadian Oil and Gas and will play responsibly Meeting the growing demand for energy, we are encouraged by the long term investments undertaken by energy producers from exploration and appraisal to production, Development and capacity expansion highlighting the extension and robust nature of the energy industry in Canada. Our organic growth strategy remains focused on increasing volumes across our infrastructure network through long term contracts backed by partnerships. We currently expect to spend $50,000,000 in 2024 that corresponds to equipment purchases and Higher probability opportunities that build upon or leverage our existing infrastructure. We intend to update our growth plans and provide further details upon signing agreements With our customers, Sequra is well positioned for the long term due to the critical services provided to the energy and industrial customers through structure network located in key areas across Western Canada and North Dakota. Diverse waste streams and ongoing demand from our industrial customer base Further enhance the stability and resilience of our operations.

Speaker 4

I will now turn it back to Renny for closing remarks.

Speaker 2

Thanks, Alan. In closing, we remain committed to our vision of being the leader in environmental and energy infrastructure, prioritizing value creation for our customers through reliable, Safe and environmentally responsible infrastructure. This approach allows our customers to allocate their capital, work can yield the highest return while emphasizing operational excellence and leading ESG standards. So far in 2023, We have made significant progress in our ESG initiatives. Some of the highlights include improving our corporate CO2 emission intensity with a decrease of 2.7%, Reflecting our ongoing efforts in energy management, efficient equipment investments and landfill operation improvements, We continue to be on pace to meet our near term target of a 3 year 15% reduction in CO2 emissions by the end of 2024, Establishing an indigenous employee resource network accessible to all employees, providing valuable resources for Our indigenous staff conducting our employee engagement survey, which results in a 75% engagement rate and will guide our action plans for improvement.

Speaker 2

Furthermore, our commitment to workplace safety has resulted in 4 quarters without a lost time injury with improvements in our total recordable Injury frequency in the second half of twenty twenty three to date. The heart of this company lies a collective spirit of responsibility towards our shareholders, customers and our communities. Our ESG initiatives demonstrate our commitments to doing the right thing and making a positive difference. We have made significant progress on this journey And we're committed to continue these efforts. As we move forward, we remain focused on our shared goals embracing the challenges and opportunities that lie ahead.

Speaker 2

That concludes our prepared remarks. We would now be happy to take your questions. Thank

Operator

Question. Your first question comes from John Gibson from BMO. Please go ahead.

Speaker 5

Good morning all. Congrats on the strong quarter here. First for me, I'm just I'm hoping you can answer, although I understand if you don't want to disclose much around the process. But on a recent conference call, a large U. S.

Speaker 5

Waste Blair was asked pretty directly about potential interest in the Terpida assets. I guess what I'm wondering is what types of parties have expressed interest so far? There's obviously a big multiple disconnect with where you are trading at relative to the more traditional waste companies. And do you feel that potential proceeds could Surprisingly upside relative to what the Street is expecting.

Speaker 2

Yes. At this point, John, all we can tell you is that we've had Strong interest from North American parties. And as we go down this dual path, we'll have a little better idea Late Q4, early Q1 as to what path we take and but all we can tell you is that Extremely strong interest right across North America.

Speaker 5

Okay. Fair enough. Second for me, With the addition of the Montney and Clearwater facilities, what percentage of your EWM segment would be backstopped by take or pay contracts heading into Q4 versus prior?

Speaker 3

Yes. Thanks, Sean. The Montney asset, that's all in our EWM segment. So that obviously increases. It's probably the The contract amount there is probably still in the 25% to 30% range.

Speaker 3

The Nipissi terminal right now, that's in our Energy Infrastructure segment. Obviously, that's all contracted.

Speaker 4

I think, John, it's Alan here. Morning. I think, too, over and above the contracts, and this Something that we've been discussing at length over the past few years is that a lot of the revenue That comes into our facilities is production related. Over 80% is production. And when you look at the production profile over the last few years, Very stable and which is why we continue to see stability in our numbers is because a lot of our volume is derived for production.

Speaker 4

Now when we think about Capital investment, we are tying a lot of our capital investment decisions to contracts because when we outlay the capital, We want to make sure there's that guaranteed rate of return for ourselves and our shareholders. And so there is a bit of that different look in terms of the capital All decisions we place, but when you think across the broad business, a lot of it is production related, which is that stability.

Speaker 5

Great. I really appreciate the responses. I'll turn it back here.

Operator

Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Speaker 5

Yes, good

Speaker 6

morning guys. Appreciate the update on your 4 capital allocation priorities for next year. But looks like dividend growth Isn't one of them. Is that just because you see better organic growth opportunities in front of you right now? Or Are you just waiting until you can fully retire the 11% notes before considering a ratable increase in the dividend?

Speaker 2

Yes. I mean, you look at our yield today, it's a pretty healthy 5.2%. The way we're looking forward here is we think our shares are extremely undervalued. So our number one priority really has to obviously be buying back More shares and we put that in the press release that will kick off our NCIB again when we're allowed to December 15. So That's our number one priority.

Speaker 2

You're absolutely right. We've got some inherited high interest U. S. Notes that would want to get retired at some point. They're callable here December 1.

Speaker 2

So those are all priorities before the dividend. It's not saying that we won't increase the dividend down the road, but Really want to take advantage and use our discretionary free cash flow towards those type of priorities right now.

Speaker 6

Got it. And I guess on top of the base case priorities, Rene, just with the balance sheet where it is today, sitting below 2 times, Assuming you are successful in divesting the 29 facilities for, call it, a decent price tag, How should we be thinking about the pecking order for allocating those net proceeds between further debt repayment, Accelerating growth, maybe in SIB, all those options.

Speaker 2

Yes. The tough part of trying to give you even a pecking order, never mind what percentage of that is. What is our share price at the time we want to allocate some of this capital? So think of it this way is there's 4 levers And part of that is we have the lever of debt reduction. We obviously can buy back shares.

Speaker 2

We can obviously grow our organic businesses, as you've seen Alan describing, 2 great projects that we executed on time and on budget. And then you have acquisitions and those 4 levers are going to be pretty fluid going into 2024 and 2025 just based You know where do we get our best bang for a buck as a shareholder. So hard to prioritize, never mind, even give you a percentage allocation because there's so many moving parts.

Speaker 6

Got it. Fair enough. And maybe just last one for me. Just looking at the rig counts Being down relative to last year, but looks like you're still expecting modest production growth around your facilities. Just wondering if you could Help square up some of the key factors supporting your outlook there?

Speaker 4

Yes. No, good question, Patrick. I think when we look at the Environmental Waste Management business, very positive quarter. Our same store sales, up 7% and that's purely based off of the production water that we see and process at our facilities. And so even when you think about production being flat to slightly up and we're still having conversations with our customers as they set Their priorities for 2024, but we believe that, that segment will have growth again in that same store sales in that 6% to 7%.

Speaker 4

When we think about production water, that's been very consistent. The trend on that, if you go back 5 years, remains very, very consistent. I think we're going to get some higher Contribution from our metals recycling. We bought some railcars, which improves our efficiencies on transporting out rail In more cost effective manner and helps us process quicker and get the inventory turns faster. So we're continuing to see improved efficiencies.

Speaker 4

When I look at our waste processing, it remains relatively consistent. And I said that in the opening remarks that kind of flat, I would That is going to be flat. I do think our landfill volumes will continue to pick up here. I think they did have some challenging weather conditions with the wildfires and Some of these delays on some of the reclamation projects where they were maybe focused more on the downhole and not so much on the cleanup of The dirty dirt and some of the facilities that need to be cleaned up. When I think about our energy infrastructure, you're going to see in 2024, obviously, The Nipissi volumes come online and we'll be handling more than 160,000 barrels of oil on a daily basis.

Speaker 4

So We're going to see that throughput increase. And given now we're starting to see some apportionment, that always creates arbitrage opportunities as well and helps The bottom line profit when you can take a look at your infrastructure and take advantage of it. So when I think into 2024 and And the increases we've seen here in Q3 and consistent quarters, I think that trend will continue into 2024.

Speaker 6

Okay. That's great color. I'll leave it there, guys. Thanks.

Speaker 4

Thanks, Patrick. Thanks, Patrick.

Operator

Your next question comes from Keith Mackey from RBC, please go

Speaker 7

ahead. Hey, good morning. Just first wanted to start off on the growth capital expectation For 2024 at that $50,000,000 it sounds like that doesn't include any larger projects similar to

Speaker 2

the ones

Speaker 7

you Brought on stream most recently. Can you just speak to what you're seeing in the market for larger terminal or water handling What's the relative opportunity out there these days? And if you could even potentially put some bookends Around then what 2024 capital on the growth side could ultimately be given what you see in the market and in any projects you're contemplating, Whether they do meet your return profiles as you see them?

Speaker 4

Good morning, Keith. Yes, So when we think about the $50,000,000 that we've allocated for 2024, it's a A bit of a balance between some of the projects that we know are getting closer to having a contract signed and some of these projects actually May start to kick off here late Q4 and start some more capital spend into Q1, which We'll announce these projects once we release our quarters and give you more color around it. But we've got some equipment purchases And we've got some water disposal and kind of pipeline infrastructure that we're going to start working on here through Q4 into Q1. But we've left it at 50, that's our target right now. Obviously, we did 100 in 2023.

Speaker 4

And when you think about the hopper of I would call it greater than $200,000,000 plus in opportunities that we see as Great expansion brownfield opportunities both on the oil energy infrastructure side and on the production water And tying in because obviously the transportation costs and taking it off a truck and putting it on a pipe Have great returns for not only our customers, but ourselves. But as we think about our 2024 spend, These contracts take a long time to negotiate. They can be upwards of a year to get a contract signed. We also need to protect against Rising costs on equipment for these projects and making sure that you're managing the inflation costs and making sure your numbers are tied through. So, we spent a lot of time making sure we have our nails our numbers nailed down such that we can protect our returns as we Thanks for these projects.

Speaker 4

And so, we're more likely to announce these projects once the contract has been signed. And so don't want to speculate what that looks like in 2024. At this point, we're comfortable with the 50, but yes, it could be higher. And When you look at our discretionary free cash flow with our dividend, with our buybacks, we've got flexibility there to Spend on some of these great organic projects, which we feel very, very comfortable with.

Speaker 7

Okay. Thanks for that. And just a follow-up on Q4, it looks like The Street numbers have EBITDA going down maybe $8,000,000 or $9,000,000 sequentially. I know there is some seasonality quarter to quarter, but you have brought on a couple of larger projects that may start to contribute. Can you just talk through how we should be thinking about the sequential EBITDA either growth or decline from Q3 to Q4?

Speaker 3

Good morning, Keith. Typically, when we look back over the years, you see the last several years at least, We have seen that slowdown. Q3 has usually been kind of the high watermark for us in the year and then Q4 is usually slightly lower. And It is usually due to just less activity with Christmas seasonal slowdown. We see rigs starting to fall off before Christmas And some volumes just not move as much as they otherwise would.

Speaker 3

So I think that's the main reason.

Speaker 7

Got it. Appreciate the comments, Chad. Thanks very much. That's it for me.

Speaker 2

Thanks,

Operator

Your next question comes from Cole Pereira from Stifel. Please go ahead.

Speaker 8

Good morning, all. Just a quick point of clarity on the divestitures. Is the plan to wait until you hear back from the Supreme Court about whether you can get a hearing? Or could you theoretically sell the assets prior So that if you got a really attractive bid.

Speaker 2

Yes. The way that the process works is that We have the ability anything that we do is subject to the Competition Bureau approval. So as we go down this dual path, obviously, Whatever path we take, we'll be engaged with the Competition Bureau because obviously they're fulfilling the tribunal order. So Hard to say at this point in time how that all plays out, but do keep in mind that This is not just a secured decision. This is a secured decision along with approvals from the competition bureau.

Speaker 8

Okay, got it. That's all for me. Thanks. I'll turn it back.

Speaker 2

Thanks, Cole.

Operator

And there are no further questions at this time. I will turn the call back over to Rene for closing remarks.

Speaker 2

Thank you. And thank all of you for being on the conference call today. We do have a taped broadcast of the call, Which will be available on Secura's website. So thanks again and look forward to Q4.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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