Total Energy Services Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to Total Energy's Third Quarter 2024 Results Conference Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After today's presentation, there will be an opportunity to ask questions.

Operator

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

Speaker 1

Thank you. Good morning and welcome to Total's Q3 2024 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 3 months ended September 30, 2024, and then provide an outlook for our business and open up the phone lines for questions. Yuliya, please go ahead.

Speaker 2

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 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.syraplus. Ca.

Speaker 2

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 3 months ended September 30, 2024, represent record quarterly financial results. Relatively stable industry conditions in Canada and Australia, continued strong demand in North America for compression and process equipment and acquisition of Saxon Energy Services in March more than offset a year over year decline in U. S.

Speaker 2

Drilling and completion activity. Consolidated revenue for the Q3 of 2024 was 4% higher compared to Q3 2023. The addition of Sextant in Australia, increased compression and rental revenue and improved fabrication margins in the SPS segment, together with effective cost management in all segments contributed to a 12% increase in 3rd quarter EBITDA as compared to 2023. Geographically, 49% of 3rd quarter revenue was generated in Canada, 34% in the United States and 17% in Australia, as compared to the Q3 of 2023 when 48% of consolidated revenue was generated in Canada, 43% in the United States and 9% in Australia. By business segment, CPS segment contributed 46% of 3rd quarter consolidated revenue followed by the Drilling segment at 36%, well servicing at 10% and RTS segment at 8%.

Speaker 2

In comparison, for the Q3 of 2023, the CPS segment generated 48% of the 3rd quarter consolidated revenue, followed by the contract drilling services at 33%, well servicing at 10% and rental and transportation services contributing 9%. 3rd quarter consolidated gross margin was 26% as compared to 24% for prior year. Margin improvement in CPS and RTS segments more than offset a decrease in CDS segment. As compared to 2023, CDS segment saw 3rd quarter revenue increase by 14%. A 16% increase in revenue per operating day more than offset a 2% decrease in operating days.

Speaker 2

Canadian CDS revenue was 5% lower in Q3 of 2024 as compared to the same quarter of 2023, as 2% increase in revenue per operating day, partially offset a 7% decrease in operating days. Canadian operating days were negatively impacted when an AC double drilling rig was damaged in July during transit. The rig returned to service in mid October following completion of repairs. In the United States, decreased activity and relatively lower pricing as a result of change in the mix of equipment operating during the quarter contributed to lower year over year revenue and the realization of slight operating loss. In Australia, 3rd quarter operating days increased by 93% following the acquisition of Saxon on March 7, 2024.

Speaker 2

Higher day rates on Saxon's deeper drilling rig drilling fleet and the newly constructed drilling rig that was deployed in the 3rd quarter resulted in a 42% year over year increase in Australian Q3 revenue per opening day and was the primary driver of a 16% year over year increase in Q3 consolidated TDS segment revenue per operating day. Revenue in the RTS segment decreased compared to Q3 of 2023 as a result of lower industry activity in the U. S. Consistent pricing, effective cost management and change in the mix of equipment operating contributed to 13% increase in EBITDA and a 24% increase in EBITDA margin during the Q3 of 2024 compared to 2023. 3rd quarter revenue in total CPS segment was consistent with Q3 of 2023.

Speaker 2

The deployment of several newly constructed rental units early in the year resulted in a 19% increase in rental fleet utilization in the United States. This increased rental activity combined with improved fabrication sales margins and increased parts and service activity resulted in a 34% year over year increase in 3rd quarter CPS segment EBITDA and a 31% increase in the EBITDA margin. The quarter end fabrication sales backlog increased to $189,000,000 compared to the $152,900,000 back at September 30, 2023. Sequentially, the quarter end backlog decreased by $15,600,000 during the Q3 of 2024. Revenue in the Well Servicing segment was 5% higher as compared to the Q3 of 2023, an 11% increase in revenue per operating hour offset an 8% decrease in overall segment utilization.

Speaker 2

Increased Canadian and Australian Cerberus rig utilization was not enough to offset the substantial decline in U. S. Activity due in part to significant customer consolidation. Price increases in Canada and Australia following the completion of rig upgrades more than a stack pickup pricing in United States resulted in 11% increase in the segment's revenue per operating hour. Increased utilization and pricing in Canada and Australia also contributed to a 20% increase in operating income during the Q3 of 2024 compared to the same quarter in 2023.

Speaker 2

Lower activity in the United States and reactivation costs in Australia contributed to a 2% decrease in 3rd quarter well servicing EBITDA and 5% decrease in the segment's EBITDA margin. From consolidated perspective, Total Energy's financial position remains very strong. At September 30, 2024, Total Energy had $97,300,000 of positive working capital, including $61,900,000 of cash. Working capital decreased from December 31, 2023 as $42,000,000 of mortgage debt due in April of 2025 became current during the Q2 of 2024. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bank EBITDA of 3 times and then minimum bank defined EBITDA to interest expense of 3 times.

Speaker 2

At September 30, 2024, the company's senior bank debt to bank EBITDA ratio was 0.26 and the bank interest coverage ratio was 10.15 times. Excluding $10,500,000 of non recurring interest expense relating to an income tax reassessment in Q1 of 2024, the interest coverage ratio was 26.65 times.

Speaker 1

Thank you, Yuliya. We are pleased with our Q3 results. The ability to generate record quarterly results despite softer industry conditions in the United States reflects the strength and resiliency of our business model. Key drivers to our business include a strong Asian LNG market, continued investment to increase North American LNG export capacity and the recent completion of the Trans Mountain pipeline expansion in Canada. Total strategy to increase its exposure to the Asian LNG market by growing its Australian business continued

Speaker 3

in

Speaker 1

the Q3 with the deployment of a newly constructed drilling rig, an upgraded Saxon drilling rig and an upgraded service rig under long term contracts. Another service rig is currently being upgraded and is expected to commence operations under a long term contract by the end of this month. Additional opportunities to upgrade and reactivate Australian equipment exist. And in that regard, total has increased its 2024 capital budget by $19,800,000 $13,100,000 of this increase will target growth opportunities, including the upgrade of 2 Saxon drilling rigs and 1 service rig in Australia. All three rigs are scheduled to commence operations in the Q1 of 2025 under long term contracts.

Speaker 1

In addition, dollars 1,000,000 of new rental equipment is being purchased by the RTS segment for deployment by the end of this year. The remaining $6,700,000 of capital is being allocated for the purchase of new drill pipe, Canadian drilling rig recertifications and the purchase of an operating facility currently leased by the RTS segment in the United States. Including the acquisition of Saksin and $14,200,000 of 20.23 capital commitments that carried into 2024. Projected 2024 capital expenditures total $147,700,000 of which $112,400,000 has been funded to September 30. We expect the remaining $35,300,000 of capital commitments will be financed by cash on hand and cash flow from operations, with approximately $10,000,000 of such commitments projected to carry into 2025.

Speaker 1

Our CPS segment continues to see strong demand for compression and process equipment, driven in part by continued investment to increase North American LNG export capacity. Immediate and growing demand for electricity is also driving demand for natural gas as coal power plants are decommissioned and consumers necessarily focus on cost and reliability. In addition, the ability to construct natural gas power generation in relatively short order as compared to other sources such as nuclear is a significant advantage that we believe will provide solid tailwinds for our CPS segment over the coming years. Despite committing significant capital to growing and maintaining our business, we continue to provide stable and sustainable returns to our owners. During the 3rd quarter, $8,700,000 was returned to shareholders by way of dividends and share buybacks.

Speaker 1

This brings to $323,000,000 the amount we have returned to our owners through dividends and share buybacks since inception. I would now like to open up the phone lines for any questions.

Operator

The first question comes from Joseph Schachter with SER. Please go ahead.

Speaker 4

Good morning, Dan and Yolie. I've got a bit of a sore throat, so I hope you can hear me. Dan, can you talk about Australia? What's going on there? Has there been a new field found and they're active going after something like Arbonti?

Speaker 4

Is it oil? What's going on? That's the increased activity and the increased investment on new equipment. Is it a specific play? And maybe you can throw some ideas of just how big this potential is?

Speaker 1

Good morning, Joseph. I think I've got what you've got. So hopefully you can hear me as well. But no, I think what's happened in Australia is some they're short gas. Frankly, there was a fairly hostile federal government that's done a 180 on gas here earlier this year and has come around to promote development.

Speaker 1

You may recall several quarters ago, the Federal Australian government had put a price cap on domestic natural gas, which generally price caps don't encourage additional production and you had a very tight gas market there. And earlier this year, I believe it was in Q2, the government reverse course issued a long term natural gas development policy framework that literally did a 180 on natural gas and was intended to encourage development production and that's exactly what it did. So no really new plays. Obviously, we acquired Saxon, which gives us exposure to new plays with their deeper rig fleet. And so our timing on that acquisition in March was somewhat fortuitous insofar as the federal government changed its policy approach in May.

Speaker 1

And so we're simply responding to customer demand to accelerate production. And it's a very tight market there. They're short gas and it's a good stable environment. The other thing I would say is we've done a little bit of hydrogen drilling there as well, which is somewhat unique. And but the primary driver of our business there is onshore natural gas.

Speaker 1

There's oil drilling as well, but this is really an Asian LNG story.

Speaker 4

What kind of price do they get onshore for their gas, just to put that in context of Canada?

Speaker 1

Well, the cap, I believe was $12 That's been removed. I haven't checked onshore spot lately, but if you look at Asian Japanese LNG prices, they're in that U. S. Kind of $12 to $15 range.

Speaker 4

That's pretty that's very economically incentivizing activity.

Speaker 1

Well, and that's part of the reason why North America is building LNG plants like there's no tomorrow.

Speaker 4

Next one. How do you see M and A opportunities at this point? The Saxon was a fabulous deal. And where do you see opportunities? Given how tough things are in the States, Are prices coming to realistic levels that you might do something in the U.

Speaker 4

S?

Speaker 1

Certainly, we're seeing lots of opportunities. We remain disciplined. They have to fit within our core business focus. But definitely, we see the U. S.

Speaker 1

As an area where there's a lot of opportunity. But we're going to stay disciplined on price and also, obviously, quality of assets matters. But yes, we continue to work hard to identify and if they make sense complete M and A.

Speaker 4

Super. That does it for me. Thanks so much. Thanks, Dan. Thank you.

Speaker 4

Thanks, Joseph.

Operator

The next question comes from Tim Monachello with ATV Capital Markets. Please go

Speaker 3

ahead. Just wanted to follow-up on some of the Australia opportunities that you're seeing. That sounds generally, really positive. Can you say how many rigs you're running in Australia today on drilling and on the well servicing side and where you think you'll be in terms of rig activity by the time you deploy those upgraded rigs in Q1? So I guess by the end of Q1, how many rigs you think could be running?

Speaker 1

So we're currently running 10 drilling rigs, and we expect to, as I mentioned in the notes, add another 2 here by the end of Q1. Service rig side, I believe we're running 5 today, expect to be the 6th will be going here shortly and then a 7th in Q1. Again, there's also spot market opportunities. So you can have some bouncing around. But typically, for us to react well, for us to reactivate and spend capital on significant upgrades, we're not going to do that for a spot market opportunity.

Speaker 1

So the rigs I've mentioned are all rigs that are we're spending significant capital on to upgrade and deploy them under long term contracts.

Speaker 3

Got it. How long are those contracts?

Speaker 1

Not going to comment, but years, not months.

Speaker 3

Okay. And I guess with the rigs that aren't working today, do you think those could go to work without upgrades or do you think those at all require upgrades to work?

Speaker 1

No, some of them can. Australia is a bit of a different market, much less of a spot market situation, largely because it's a very concentrated market from a producer side, but there are spot market opportunities. And so we do have rigs that kind of bounce around. And so rig counts will bounce around a little bit on the margin with spot market work. But yes, it's Canada is much more of a spot market environment than Australia.

Speaker 3

Yes. I imagine Australia is a little bit tougher to get visibility on both given the concentration on the operator and on the contractor side? Well, and

Speaker 1

it's an extremely high cost environment to work in. And so the ability to just go up and down from a staffing perspective, you have labor laws that are fundamentally different. It's just it's not that easy. And so a lot of the drilling programs are fashioned around the labor laws, things like that. And it's a very tough labor market over there and you can't just bounce around.

Speaker 3

Okay. Do you have any other opportunities in Australia that you're tracking for rig upgrades?

Speaker 1

We do, but I'm not going to comment until something gets signed.

Speaker 3

Okay. Can you talk at all about like your expectations for your 2025

Speaker 1

capital program? That will come out in early January. We're going to approach it the same way as we always do, start at 0 and first of all, come up with a maintenance budget that reflects what we think activity is going to look like. And then obviously, any growth opportunities, those we tend to pursue in real time as opposed that we don't dedicate growth capital in the abstract. It's always targeted to opportunities that pass our muster.

Speaker 3

Okay. How are you and Board thinking about the dividend and growing that over the next few quarters?

Speaker 1

So we increased it, I believe, Q1 this year. Our Board reviews it quarterly and we want it to be something that is rock solid, which it is. And we also balance that with share buybacks and our ability to reinvest our owners' capital into investments that make sense. But I would describe our dividend right now is rock solid. We don't worry about it.

Speaker 1

It's not it's sustainable. So I'm not going to usurp the Board's discretion, but it's reviewed quarterly and my wife likes a higher dividend and try and keep everyone happy.

Speaker 3

Yes, absolutely.

Speaker 1

It's part of our balanced approach to shareholder returns.

Speaker 3

Was that Tim? I was just curious if you might be able to comment on the working capital performance in the quarter. Revenue was up pretty significantly quarter over quarter and we had a pretty significant well, working capital harvest, which is kind of counter to the way I thought it was gone. Was there anything unique in that?

Speaker 2

Jim, this is actually interesting you're asking that question. But as you might remember, we have been buying quite a bit of engines and major equipment for Beidel. And Beidel, CPS was performing pretty well and using up that inventory. And that actually you'll harvest off cash right there. So that for us, it's fully expected and it does come and go, but this quarter was quite a bit of that.

Speaker 3

Okay, understood. And then can you speak to, I guess, the U. S. Industry dynamics across your business lines? Have you seen pricing stabilize recently or are you continuing to see a lot of pressure?

Speaker 1

Our drilling is focused in the Permian. We're seeing a pretty competitive pricing, which we tend to want to see that bottom before we start getting into a severe knife fight. I think we're seeing that bottom out. On the well servicing side, we're focused on North Dakota. That's been a very interesting market in the sense there's been very significant customer concentration and consolidation, which when you're running a small fleet that can hit you pretty hard.

Speaker 1

I would describe that market on the service rig side is very competitive. The rental side, I would say the quality of our equipment and the fact that we offer equipment that most competitors don't have combined with we've really seen a lot of competitors exit through bankruptcy or consolidation or just shutting down auction sale, that's held up better. Again, I think I would describe the market as stabilizing and but it is competitive. And but that said, I think our groups have done a pretty good job on cost management and we're not going to dive to the bottom on price just to wear our equipment out.

Speaker 3

Okay. And then Canada, how is pricing dynamics and what's your view on? I think it's good stable. I guess, next year?

Speaker 1

Good stable market here. As Yuliya mentioned, we had one of our high spec AC double rigs get damaged during a rig move. And so that hurt our Q3. It happened in July, so missed almost the entire quarter, which that rigs back. But coincidentally, we also had a AC double in the U.

Speaker 1

S. Here last week get damaged on a rig move. So in both cases, we'll be looking to 3rd party insurance for coverage, but in the short term, it hits your utilization and income statement. But when we recover anything through insurance, that will be reflected when that's recovered.

Speaker 3

That's all for me. I appreciate the details.

Speaker 1

Thanks, Tim.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Mr. Halleck for closing remarks.

Speaker 1

Thank you everyone for joining us this morning and we look forward to speaking with you when we return or when we have our Q4. Have a good rest of your day.

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Earnings Conference Call
Total Energy Services Q3 2024
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