PrimeEnergy Resources Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the EXPRO Q4 2023 Earnings Presentation. My name is Emily, and I'll be coordinating your call today. I'll now turn the call over to our host, Quinn Fanning, Chief Financial Officer. Please go ahead.

Speaker 1

Welcome to Xpro's Q4 2023 conference call. I am joined today by Xpro's CEO, Mike Jarden. First, Mike and I have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on our 4th quarter results just posted on the EXPAREL website, expro.com, under the Investors section. In addition, supplemental financial information for the Q4 and full year results is downloadable on the EXPAREL website, likewise under the Investors section.

Speaker 1

I'd like to remind everyone that some of today's comments may refer to or contain forward looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update forward looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward looking statements. More complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC's website, sec.gov, or on our website, again, atexpro.com.

Speaker 1

Please note that any non GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our Q4 2023 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike.

Speaker 2

Thank you, Quinn. Good afternoon, everyone. I'd like to start off by reviewing the Q4 financial results presented in today's earnings press release. I will then discuss the macro environment, which we believe supports a favorable multiyear outlook for energy services companies, lever to international and offshore markets and presents a compelling growth opportunity for EXPAREL. Finally, Quinn will share our outlook for 2024.

Speaker 2

For a recap of consolidated results and quarterly results by region, I'll direct you to Slides 3 through 7 of the presentation that we posted to expro.com. As you can see on Slide 3, EXPARO brings 2024 in a strong position for growth having delivered a solid 4th quarter with actual results at or above the high end of the revenue and adjusted EBITDA guidance ranges that we provided on our Q3 earnings call. 4th quarter revenue was $407,000,000 and adjusted EBITDA was $85,000,000 or 21 percent of revenue. Adjusted EBITDA for the 3 months ending December 31 includes $4,000,000 of unrecoverable LWI related costs. Excluding such costs, adjusted EBITDA would have been $89,000,000 or 22 percent of revenue.

Speaker 2

Revenue for the 12 months ended December 31, 2023 was $1,500,000,000 up 18% year over year. Adjusted EBITDA for 2023 was $249,000,000 or 16 percent of revenue. Excluding unrecoverable LWI related costs of $36,000,000 adjusted EBITDA for 2023 would have been $285,000,000 or 19 percent of revenue. Most significantly, 4th quarter results reflect the expected rebound in North and Latin America activity. The notable step up in revenue and profitability in the 4th quarter followed a relatively weak Q3.

Speaker 2

NLA revenue at $145,000,000 was up sequentially by $40,000,000 primarily reflecting increased well construction activity in the U. S. Gulf of Mexico and Guyana and a rebound in well testing activity in Mexico. In addition, Q4 results include results of recently acquired PRT Offshore, which generated approximately $15,000,000 of revenue in the December quarter. NLA segment EBITDA at 30% reflects a significant step up in revenue and a good mix of higher margin activity.

Speaker 2

While the Q3 results reflected a confluence of factors, the NLA team has delivered very solid results since we completed the merger back in October of 2021, with approximately $1,100,000,000 of aggregate revenue over the last 9 quarters. NLA segment EBITDA margin has averaged 27% since mid-twenty 22. Operationally, noteworthy in NLA, our Tubular Running Services or TRS business achieved an industry first in the Gulf of Mexico by successfully completing an operator's well using a fully non marking completion running package. This running package provides the industry's only truly non marking chilled air running solution, which helps preserve well integrity and extends the lifecycle of the well. This was also the first deployment of the collar load support system in the region.

Speaker 2

The success of this completion run was a culmination of extensive planning and testing with a super major customer. This was a great example of our ability to provide solutions and positive results for the industry's most complex wells. For Europe and Sub Saharan Africa, revenue at $134,000,000 was generally flat quarter over quarter with lower revenue recognized on our ongoing E and I project in Congo. Visa segment EBITDA margin at 31% has been strong over the last several quarters. Notable in the ESA region, we were awarded a corporate frame agreement to deliver well testing services for Equinor in the Norwegian continental shelf.

Speaker 2

The 4 year contract with the potential of 3 2 year options build on EXPAROS previous 7 year agreement. The scope of work includes well flow management and production optimization services to enhance Equinor's assets across completion, intervention, production as well as abandonment operations. Building on the corporate frame agreement, the WorkScope will see delivery of hydraulic intervention well services using our innovative coil hose light well circulation system that is designed to provide a more efficient and lower carbon footprint approach to operations versus traditional coiled tubing. A significant portion of the contract is directly linked to the demonstrable commitment to a low carbon plan, allowing Expro to implement its environmental capabilities with Equinor and further enhance the strength and depth of this partnership. The Middle East and North Africa team also delivered an excellent quarter with revenue up 13% sequentially to $65,000,000 and good fall through on incremental revenue.

Speaker 2

MENA segment EBITDA margin at 33% was up about 3.5 percentage points quarter over quarter. Noteworthy in MENA, XPRO's automated bucking and catwalk system delivered improved safety at record efficiency on one of our clients' challenging wells. We were contracted to provide a high quality, low risk tubular running service to our clients onshore fleet of drilling rigs, making an operational first for the triple catwalk in the Emirates on the initial deployment of our TRS system, we set a record for instantaneous tripping speed and the 2nd best performance overall tripping speed while running ATN 5H tubulars. The overall rate was more than twice that of the average run-in the same field previously. Finally, in Asia Pacific, 4th quarter revenue was $62,000,000 down 13% relative to the September quarter, primarily reflecting lower subsea well access revenue following our suspension of vessel deployed light well intervention operations in September.

Speaker 2

At 9%, Asia Pacific segment EBITDA margin reflects demobilization and other unrecoverable LWI related costs. Excluding unrecoverable LWI related costs, Asia Pacific segment EBITDA margin would have been 16%. Quinn will provide an update on our Lightwell Intervention business in his prepared remarks. During the Q4, EXPAREL completed in Asia Pacific region the deepest deployment of our Mark VI coil hose coupled with a successful nitrogen lifting application in a remote location offshore New Zealand. This marked the first ever Mark VI coil hose deployment in Asia Pacific reaching an impressive depth of 8,650 feet, surpassing depths achieved globally by approximately 25%.

Speaker 2

The coil host solution provide a swift break up time compared to traditional coiled tubing, minimize planning and operational duration. This streamlined approach not only reduces safety risks, but also lessens the environmental impact during well intervention operations. In terms of commercial activity, we built a healthy order book through the 1st 3 quarters of 2023 and I'm pleased that we have continued to build on this momentum. During the Q4, we captured roughly $186,000,000 of new contract awards, including a production manpower contract worth roughly $50,000,000 in Thailand. Other notable contract awards during the quarter included several subsea contracts across both West Africa where we were awarded a contract to provide subsea services for a multiyear plug in abandonment campaign and also in Australia.

Speaker 2

The NLA team was also awarded a multi year well test contract in Latin America, which highlighted the importance of service quality in a very competitive market. At quarter end, our backlog was approximately $2,300,000,000 which is down modestly from September 30 and is generally consistent with historical seasonal patterns of contracts awards in the year end period. I will also note that EXPAREL is increasingly working with larger energy services providers where we have complementary capabilities and operating footprints to deliver integrated services and solutions for our common customers. Our reputation for safety, service delivery and cost effective innovative solutions enables us to collaborate effectively with other service partners. In addition to a number of technology awards that are highlighted in our press release, we had several operational and commercial successes during the Q4, which are summarized on Slide 8 of our earnings presentation.

Speaker 2

The Q4 of 2023 marked 40 years since the launch of our first subsea test tree system. Since then, EXPARO has remained at the forefront of subsea landing string technology. We have undertaken more than 3,000 subsea deployments and exploration and appraisal, completion and intervention applications and remain a global leader in large bore subsea tester assembly solutions. The evolution of this market and these assemblies has allowed us to expand into the open water well intervention business through the introduction of both riser based and riser less well intervention solutions. I'm also pleased to share that the that EXPARO was named Energy Transition Pioneer of the Year at the 2023 Global OWI Awards and recognition to our commitment of sustainable energy solutions.

Speaker 2

This recognition reflects EXPAROS critical role in creating a cleaner and more sustainable future. We have a number of initiatives underway across our business to build on our work to both reduce our own emissions as well as to support our clients in achieving their sustainability targets. We're innovating with a purpose by adapting and investing in technologies that are focused on carbon capture, use and storage, the geothermal sector and emissions monitoring management and mitigation solutions. Just a few days ago, we announced that Expro had entered into a definitive agreement to acquire a leading oil and gas well integrity and production optimization company, CoreTrax. Total consideration is roughly $210,000,000 and we expect to close this transaction sometime in the second quarter.

Speaker 2

The acquisition is expected to be accretive to adjusted EBITDA margin and free cash flow. With an enterprise value of less than 5 times our estimate for standalone 2024 EBITDA, the Cortrax transaction should also be immediately accretive to shareholder value with cost and revenue synergies providing incremental upside. Headquartered in Aberdeen, Cortrax has operations globally with over 50 technologies and impressive intellectual property portfolio of more than 250 patents. We're excited to welcome John Fraser and his teammates to EXPARO and to incorporate the CoreTrak suite of technology enabled solutions into our well construction and well intervention and integrity businesses. As many of you may know, EXPARO is a market leader in deepwater tubular running services with a range of technology differentiated solutions.

Speaker 2

TRS and tubular products represents about 80% of our 2023 revenue of $534,000,000 Our overall strategy is to develop in house as well as acquire complementary services and solutions that allow us to leverage our global operating footprint, become more relevant to our customers around the world, expand margins and improve free cash flow performance. Consistent with the strategy within well construction, we are focused on growing our cementing technologies and performance drilling tools business. In addition to adding breadth to businesses in which EXPAREL has expertise and experience, the cementing technologies and performance drilling solutions that we are focused on tend to complement rather than compete with the downhole drilling, surveying and logging offerings of larger service companies. While our preference in most cases is to contract directly with operators, our market leading deepwater TRS business and a suite of innovative cementing technologies and performance drilling solutions allows us to be a preferred services partner with both the larger service companies as well as the drilling contractors. Xpro's Cementing Technology business was bolstered with a small technology acquisition, Delta Tech, that was completed in early 2023.

Speaker 2

Cementing Technologies is approaching $100,000,000 of revenue annually. With good margins and low capital intensity, we see the potential to grow that business to $200,000,000 to $250,000,000 of annual revenue within the next couple of years. Similarly, combining CoreTrax's field proven technologies and performance drilling and wellbore cleanup with Xpro's existing drilling optimization portfolio provides a comprehensive solutions toolbox. CoreTrax adds meaningful scale to an attractive business at what we believe to be a compelling valuation. With combined revenue of more than $100,000,000 the combined EXPARO and COR Trax Drilling Technologies business will have critical mass and scope for good growth and high incremental margins.

Speaker 2

In addition to performance drilling tools and wellbore cleanup solutions, CoreTrak's best in class expandables business provides us with additional capabilities within our well invention and integrity product line. Expandables are used in both drilling applications and to extend the life of existing well stock either as a permanent solution to a repair zone of damage or to isolate existing perforations prior to refracing. Coartrax's expandable business is more levered to production optimization and drilling activity providing EXPAREL with additional breadth to our well intervention and integrity offering and to expand our OpEx levered revenue. From a regional perspective, CoreTrak strengthens our presence in the EISA and MENA regions where both companies have strong established relationships and adds new revenue opportunities and areas for growth in North and Latin America, Asia Pacific. About half of the CoreTrax's 2023 revenue originated in MENA and additional breadth that CoreTrax adds to our portfolio of services and solutions will allow us to more fully participate in MENA projects, which are expected to substantially increase over the coming decade.

Speaker 2

The business of Expro and Cortrax in Saudi is less levered to new offshore oil developments than it is to gas and unconventionals, so we continue to expect good growth in the kingdom. Based on recent comments from a Saudi Aramco official that they expect to be very, very busy rather than very, very, very busy over the next several years, we also agree with several of the sell side market analysts' comments that the market reaction to Aramco's capacity growth curtailment announcement was a little bit overblown. More broadly regarding M and A, our team looks at a lot of acquisition opportunities. We analyze many of these in detail and for a variety of reasons take a pass on most of them. We do believe however that additional consolidation is good for the long term health of the energy services sector and that we can utilize smart synergy focused M and A to accelerate growth and create shareholder value for EXPARO.

Speaker 2

The proposed Cortrax acquisition like the PRT Offshore acquisition that we completed in the Q4 of 2023 will provide breadth to an existing product line, increase differentiated technology and add incremental scale in select geo markets. For both CorTrax and PRT Offshore, we think the valuation was attractive with potential cost and revenue synergies providing additional upside. In both cases, the consideration mix reflects our intent to maintain a low leverage capital structure. Turning to our market outlook, we expect current growth trends to continue in 2024 and beyond, with the best available information indicating that oil demand will surpass 2023 in pre pandemic levels at approximately 103,000,000 barrels per day. This momentum will be driven by continued recovery in Asia, improving macroeconomic data for the U.

Speaker 2

S. And Europe and an increase in global travel with subsequent increase in jet fuel demand. We believe the pace of growth is stabilizing, which along with production restraint by OPEC provides market tailwinds supporting sustained investment and activity growth in the high single to low double digits. The EEI forecast average Brent prices were being flat overall year on year with average 20 24 prices of about $82 per barrel. I will caution that geopolitical turmoil including ongoing conflicts in the Middle East could result in upward pricing pressure as we progress throughout the year.

Speaker 2

Constructive pricing levels should allow our oil company customers to make final investment decisions on new projects, including FIDs on the long cycle development projects that characterize the international and offshore markets and to which EXPARO is most levered. In the gas markets, we observe high inventories in storage due to a warmer than normal winter in the Northern Hemisphere and a persistent lack of sustained cold weather in the 1st part of the U. S. Winter. These trends have loosened market conditions resulting in slightly lower forward gas price forecasts.

Speaker 2

In our view, gas will remain a structural source of lower carbon electricity generation and a critical transition fuel on the path towards global net zero. As a result, the case for continued investment in LNG to meet the ongoing requirements of Europe and Asia remains very strong. Operators continue to focus on shareholder returns and maintaining fiscal discipline. Upstream investments are expected to continue to grow following the positive post pandemic trends in spending that we observed through 2023. Development activities provide relatively good visibility for strong and sustained offshore spending over the medium term with global offshore FIDs in each of 2024 2025 likely to be in the $100,000,000,000 area.

Speaker 2

And projects in Norway, Brazil, Guyana and Angola collectively will attract the largest share of offshore development budgets. Additionally, strong activity growth in international land is forecasted in the Middle East in countries such as Saudi, the Emirates and Qatar in support of the ongoing large gas and LNG developments. The industry experienced a record level of project FIDs in 2023. This growth in capital commitments and the multi year sanctioned projects pipeline through 2,030 is driving demand for our services and solutions. Specifically, we're experiencing increased activity in our well construction and subsea well access businesses as well as elements of our well flow management business, which apart from moving into an operations and maintenance phase on our Congo project, we envision will grow further through 2024.

Speaker 2

Similarly, energy security, diversification of supply, operators desire to maximize investments from existing assets and a drive for cost efficient lower carbon production continues to drive further demand for our production optimization related activities within well flow management and well intervention integrity product lines, especially across the Asia Pacific and Latin America regions. Despite robust commodity pricing and production optimization efforts, the number of mature assets reaching the end of their economic and environmentally sustainable life continues to increase, particularly in Europe and in the U. S. This underpins the increased activity in the decommissioning market and a growing requirement for cost effective plug and abandonment solutions, which will also be bolstered by the proposed CoreTrax acquisition. Finally, investment in lower carbon energy alternatives is also increasing with growing activity in the geothermal sector, especially within Europe and Asia Pacific and the carbon capture and storage space as governments, operators and even financial institutions look to be catalyst for reduced emissions.

Speaker 2

As we've discussed in the past, the current energy services cycle is more about margin expansion than it is about capacity additions. We have ongoing efforts to optimize equipment utilization and increase operational efficiency, both of which will have positive impacts on overall profitability. We also continue to have generally constructive conversations with customers about capturing more of the value we create through technology, process efficiency, safe well access and enhanced production. As noted in the slide we prepared for today's call, net pricing did not have a material positive impact on margin in 2023. However, market conditions in our backlog seem to support a 1% to 2% positive impact on adjusted EBITDA margins in 2024 with capacity constrained asset classes such as Deepwater TRS, Subsea Test Trees and elements of the well test business having the greatest pricing momentum within EXPAREL's product lines.

Speaker 2

All combined, the outlook for EXPAREL in the broader energy services sector remains positive. With that, I'll hand the call over to Quinn to further discuss our financial results.

Speaker 1

Thank you, Mike. Good morning, good afternoon to everyone on the call. I'll again remind you that our press release and the accompanying slides are available in the Investors section of our website, expro.com. We plan to file our 10 ks after the market closes today and we will also make available downloadable financials covering Q4 and full year 2023. As Mike noted, we reported revenue of $407,000,000 for the December quarter as compared to the guidance of $375,000,000 to $385,000,000 that was provided on our Q3 earnings conference call.

Speaker 1

Revenue was up sequentially $37,000,000 or approximately 10% relative to the Q3 of 2023. Year over year, revenue was up by $56,000,000 or approximately 16% relative to the Q4 of 2022. Looking at the full year, revenue was up by $234,000,000 or approximately 18% year over year. Adjusted EBITDA for the Q4 of 2023 was a bit over $85,000,000 as compared to Q4 guidance of $75,000,000 to $85,000,000 representing a sequential increase of approximately $35,000,000 or 70% relative to the Q3 of 2023. Adjusted EBITDA margin for the Q4 was 21% and was up approximately 7 percentage points quarter over quarter.

Speaker 1

Excluding the $4,000,000 impact of LWI related unrecoverable costs, adjusted EBITDA would have been $89,000,000 and adjusted EBITDA margin would have been approximately 22% compared to $65,000,000 18% for Q3 on a comparable basis. On a full year 2023 basis, adjusted EBITDA was $249,000,000 which represents an increase of $43,000,000 or approximately 21% relative to 2022. Adjusted EBITDA margin for the full year was approximately 16%. For full year 2023, excluding unrecoverable LWI related costs of approximately $36,000,000 adjusted EBITDA would have been $285,000,000 and adjusted EBITDA margin would have been 19% compared to $234,000,000 18% for 2022 on a comparable basis. Regarding our LWI business, as previously disclosed, the well control package and lubricator components of our vessel deployed LWI system recovered in November, but we have determined not to participate in the recovery of the subsea module for the seabed, where it has remained since September of last year when the vessel provider's crane wire failed during operations offshore Australia.

Speaker 1

EXPRO reached this decision after considering a range of factors, including the expected cost of recovery and repair, which also includes the necessary recertification of the system. To the extent possible, we are trying to put excess LWI related costs behind us. In this context, note that Q4 results include a non cash charge for accelerated depreciation for the subsea module and related equipment of $19,000,000 At this time, we're not able to assess the timing and potential costs of completing customer work scopes for which the vessel deployed LWI system was integral, but do not expect such cost to be material to EXPRO's financial results. We remain active in the rig deployed light well intervention space. We are continuing to determine a path forward for our vessel deployed LWI business and what alternative service delivery and service partner options are available to the company.

Speaker 1

In the near term, however, our focus will be on cost avoidance and loss mitigation. Separately, we are also pursuing an insurance claim related to the Subsea module with any insurance recovery available to offset any additional out of pocket costs. Support costs for 2023 at $294,000,000 totaled 19% of revenue, which was up about 6% year over year and down as a percentage of revenue by 2 30 basis points year over year and down by 6 50 basis points from 2021. Improved operating leverage reflects merger related synergies from the Expro Frank's transaction and good cost discipline alongside strong revenue growth. Turning to liquidity, full year adjusted cash flow from operations, which excludes cash paid for interest net, cash paid for severance and other expense and cash paid for merger and integration expense was $170,000,000 inclusive of a $25,000,000 increase in net working capital.

Speaker 1

Cash conversion or adjusted cash flow from operations as a percentage of adjusted EBITDA for 2023 was 68%. Full year adjusted EBITDA less capital expenditures and free cash flow or adjusted cash flow from operations less CapEx was $130,000,000 $55,000,000 respectively. In addition to $122,000,000 of total CapEx in 2023, uses of cash included the acquisition of Deltatek in Q1, the acquisition of PRT Offshore in Q4 and the repurchase of 1,200,000 EXPAREL common shares at an average price per share of $16.70 Xpro has total available liquidity at year end of approximately $300,000,000 with cash and cash equivalents including restricted cash of approximately $152,000,000 and availability under revolving credit facility of $147,000,000 Interest bearing debt at year end was $20,000,000 In connection with the proposed acquisition of Cortrax, which contemplates paying at least $75,000,000 of cash at closing, we intend to exercise the accordion feature on our revolving credit facility to maintain our currently strong liquidity position. A lender in the existing credit facility has agreed to provide a backstop for the exercise of the accordion for up to $75,000,000 Moving to our outlook for 2024 and beyond, Page 11 of our accompanying slides summarizes our current guidance for Q1 and full year 2024.

Speaker 1

Based on our strong performance in Q4 2023 and a positive activity outlook, we currently anticipate generating revenues of between $1,600,000,000 $1,700,000,000 in 2024. Adjusted EBITDA is expected to be between $325,000,000 $375,000,000 Adjusted EBITDA margin is expected to be in a range of 20% 22%. Free cash flow margin or free cash flow as a percentage of revenue is expected to be within a range of 8% 9%. Our 2024 guidance assumes that we will close the Coartrax transaction around mid year. Net CorTrax will contribute $70,000,000 to $80,000,000 of revenue and an adjusted EBITDA margin that is accretive to standalone EXPAR results.

Speaker 1

Furthermore, guidance assumes no revenue and no additional unrecoverable LWI related costs in 2024 and a step down in revenue that we recognize on our LNG capacity expansion project in Congo beginning in Q2. Finally, full year guidance for 2024 is based on aggregate support costs and cash taxes of between 19% 20% of revenue and 3% 4% of revenue respectively. As is typical, Q1 is expected to reflect seasonal impacts of the winter season in the Northern Hemisphere and the budget cycles of our National Oil Company customers, with revenue expected to be in a range of 365 $1,000,000 to $375,000,000 or down about 10% sequentially from a very strong Q4 and up about 9% year over year in both cases based on midpoint of guidance. Adjusted EBITDA margin is expected to be in the range of $63,000,000 to $73,000,000 or approximately 18 percent of revenue. Beyond 2024, with a constructive fundamental backdrop and good business momentum, we see a clear path to $2,000,000,000 of revenue, mid-20s adjusted EBITDA margin and a free cash flow margin of 10%.

Speaker 1

The business drivers that we believe are critical to meeting these medium term targets are summarized on Page 11 of our slides, but I will highlight plus 10% organic revenue growth and modest net pricing gains as 2 of the most important assumptions. Through this growth cycle, our intention is to remain disciplined with cost and CapEx. Operating leverage is key to margin expansion and is more in management's control than is pricing. Our capital allocation strategy focuses on maximizing utilization of existing assets and growing higher margin, lower capital intensity services and solutions. For 2024, absent large new production solutions projects, which typically include milestone payments, capital expenditures should remain within the range of 7% to 8% of revenues or approximately $120,000,000 to $135,000,000 With growth in less capital intensive elements of our business and better pricing, CapEx as a percentage of revenue should moderate over time.

Speaker 1

With that, I will turn the call back over to Mike for a few closing comments.

Speaker 2

Thanks, Quinn. The Q4 of 2023, we captured strategically important contract wins, closed on a meaningful acquisition and continued to build on strong business momentum. Our performance reflects a culture of excellence and execution and our focus on providing cost effective technology enabled services and solutions to our customers. I am proud of what we've accomplished since the merger of the EXPARO and Frank's businesses 2 years ago, and I'm excited to lead this team as we grow into the future. As you heard from Quinn, our initial guidance for 2024 reflects a positive outlook for the year ahead with a midpoint expectation for about 9% revenue growth and adjusted EBITDA margin of 21%, likewise at the midpoint of guidance.

Speaker 2

When we announced the EXPARO FRANKS merger, I indicated that we believe the company had a clear path to $1,500,000,000 revenue and adjusted EBITDA margin of +20 percent. Today, we believe the international and offshore recovery is still in the early innings of a multiyear growth phase that will favor long cycle development, in general, and the cost and carbon advantaged barrels at deepwaterdevelopment, in particular. Xpro was built to ride the industry tailwinds that we expect to persist for the next several years with good leverage to the international offshore Middle East North Africa capacity expansion and global gas themes that we believe will characterize energy markets for the balance of the decade. Our core competencies align well with operators that are motivated to maximize production and minimize emissions from existing well stock. At EXPARO, we are starting to see better financial results across our businesses and over the medium term, the company should be able to deliver on our medium term targets, which include annual revenue of $2,000,000,000 and adjusted EBITDA margins of +25%.

Speaker 2

As activity continues to ramp up, we are well positioned to support our customers across the well lifecycle and to deliver on the financial and other objectives that we have outlined. We appreciate the investment community's interest in EXPARO and your continued support of our ambitious business plan. With that, we'll be more than happy to open up the call for questions.

Operator

Thank Our first question today comes from the line of Luc Lamoine with Piper Sandler. Luc, please go ahead.

Speaker 3

Hey, good afternoon, Mike, Quinn. Mike, you gave us the overall revenue and EBITDA guide for this year and talked about some of the global themes along with where you're seeing pricing this year. But just seeing if you could kind of maybe help us understand or build up kind of where your growth is coming from in 24% either by geo market or kind of major product lines?

Speaker 2

So, great question. Thanks for participating. Really the 2 major areas for us are really going to be subsea. We're going to see a step up in the traditional subsea landing string business. We're also going to see a step up in well construction and in particular very strong growth in West Africa.

Speaker 2

And I think as you've heard me comment before, I still believe when you go back and you look at the either the number of FIDs or the dollars of FIDs that are being sanctioned in West Africa in particular, we're still behind where the curve was back in 2013, 2014. And I think we're going to continue to see those FIDs approved here in 2024, which tells me we're going to continue to have a really strong backlog of subsea projects and well construction projects. Those are really tied to drilling of wells and completing of wells. I think we're really going to set up well for strong growth in 2024 and then even into 2025 as well.

Speaker 3

Okay, perfect. Thanks so much.

Speaker 2

Thanks, Luke. Appreciate

Operator

it. The next question comes from Ati Modak with Goldman Sachs. Please go ahead.

Speaker 4

Hi, good morning team. Hi, Ati. On core tracks, it looks like it's a little bit more manufacturing focused or manufacturing of equipment versus services. Obviously, the margins look pretty good, but curious if you think about how you think about the relative revenue mix a target for the company between services and manufacturing? And what's the thought process around margins as you think about acquisitions going forward with that in mind?

Speaker 2

Sure. No, it's a great question. So it's CorTrax is not so much of a manufacturing. It's more of a rental business. So it's more rental of tools and probably less service intensity.

Speaker 2

One of the benefits for us quite frankly is it's a lower personnel requirement for operational things. It's oftentimes they'll either be rented to the operator or rented to the rig to be run and installed. But it very much fits in, in particular with well construction and of course within our well intervention integrity. So we see really good alignment with that. But still around that, very similar to the nature of EXPAREL overall with we rent our equipment, we provide services with our people.

Speaker 2

So it's very similar in that sense.

Speaker 4

Got it. That's very helpful. And then you mentioned market conditions and backlog for the 1% to 2% margin expansion, but maybe something similar on the long term target of 25%, if you can help us understand what the components and drivers there are?

Speaker 2

Yes. I think it's I think part of it will be pricing traction. I also think it's going to be mix. As we continue to, if you go back to the question Luke just asked, having increased service intensity with our well construction, our subsea businesses, those are typically higher margin because they're drilling related, completions related type activity. So as we start to convert more into that type of mix in 'twenty four going to 'twenty five, that's why we'll continue to see some margin expansion.

Speaker 2

And I think we'll also be able to really start to see the impact of some net pricing improvements here in 2024.

Speaker 1

And obviously operating leverage is a significant part of the story as well. So I would say at least in the medium term, probably half of the margin expansion is coming from activity mix and pricing as Mike indicated and then probably other half is the fact that support costs are growing at an inflationary factor and we expect top line to be at least 10% organically.

Speaker 4

Makes sense. Thank you for taking the questions.

Speaker 2

Great. Thanks, Adi. Thanks, Adi. Appreciate it.

Operator

The next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Speaker 5

Yes. Mike, I want to get your perspective on what EXPAROS plans are to pursue the LWI kind of service line. Obviously, you mentioned that you weren't able to recover the sub C module. How does that factor in your thinking and your future thinking? And just trying to maybe help investors understand what kind of invested capital did you have in the Subsea module?

Speaker 2

Sure. No. And thanks for asking the question. It's we will continue to participate in the Lightwell Intervention business. We have what we call our in riser systems, which are more rig deployed.

Speaker 2

We continue to be active in that. We'll continue to expand our footprint in that and our commitment to it. And a lot of that has to do with our history and our knowledge with subsea landing strings and valve technology and those kind of things as a direct application for intervention type systems. And we continue frankly, we continue to look at alternatives for a vessel deployed type system. We're looking at partners.

Speaker 2

We're looking at potential joint ventures or partnerships and those type of things because ultimately there is a massive need in the marketplace and in the industry for this type of technology to have efficient intervention capabilities. So few wells are intervened on, so few subsea wells are intervened on today globally, there's just a market need there. So by no means are we abandoning the light wall intervention concept because there's very much a market need. We're just rethinking how we're going to approach that and who we're going to partner with really to have a more balanced risk profile for that.

Speaker 1

If I could just complement that, Ramon?

Speaker 5

Yes, go ahead.

Speaker 1

I think one thing I think is important to note is that the decision to not participate in the recovery of the subsea module and I think that's important to it's not that we couldn't recover the subsea module is that we chose not to participate in the recovery operations. But that is a separate decision process from whether or not we participate in the vessel deployed light well intervention business. We evaluated the costs of recovery, repair and recertification of the system and ultimately came to a conclusion that those costs could potentially exceed the value of the asset. We're basically put in a position of having to make a decision before the recovery operations commenced. And ultimately, our weighting of the balance of risks and our desire to limit incremental out of pocket expenses brought us to a conclusion not to participate in the recovery.

Speaker 1

But the subsea module will be recovered, But once we've decided not to participate in it, that is the responsibility of the vessel provider, the Hoos Crane Wire failed, which is why the subsea modules on the seabed in the 1st place. So it's not that we couldn't recover it. We chose not to and the subsea module will be recovered, but it would be characterized as a wreck from EXPRO's perspective and we'll pursue a separate insurance claim.

Speaker 5

Understood. And any sense of the invested capital?

Speaker 1

I mean, you'd have to disaggregate it. Obviously, we recovered the well control package and the lubricator. I mean, all in the system, we've invested circa $40,000,000 We recognized accelerated depreciation in the just completed 4th quarter for about half of that. So obviously we've got elements of the system that we can use to either build out something similar or packages as part of the joint venture partnership as Mike indicated.

Speaker 5

That's helpful. And just my follow-up, Quinn, you mentioned that the Congo project as previously stated would be shifting call from the construction phase to more of the services phase of that contract. Can you just help us about what will happen sequentially in 2Q as you transition?

Speaker 2

Yes. So

Speaker 1

a little bit of it is ultimately the timing of completion of effectively the plant sale portion of the contract. So if you remember, this was a $300,000,000 contract directionally overall. About half of that represented the completion and delivery of the plant to the customer. And that's what will be completed, we believe, sometime in the second quarter. So that's about $150,000,000 of revenue.

Speaker 1

The remaining balance will be spread over 8 plus years in an O and M contract. So really since the second quarter excuse me, Q4 of 2022, we have been recognizing $25,000,000 to $30,000,000 of revenue on a percentage completion basis. And sometime in the Q2 that will probably step down into the mid single digits of revenue, so called $5,000,000 $6,000,000 of revenue, but at a substantially higher contribution margin generally consistent with the rest of our services. So I think when you think about year over year top line growth, really we're starting effectively $100,000,000 in the hole between our suspension of vessel deployed light wall intervention operations and the E and I Congo project. So the guidance that we provided, yes, includes some contribution core tracks in the back half of the year, but we're essentially making up $100,000,000 of revenue that won't be repeated before kind of $1 in terms of growth.

Speaker 1

So if you think about same store sales, the actual underlying growth of the business is substantially better than the implied top line in our guidance, albeit with a little bit of help from Cortrax. Thanks a ton. Appreciate it.

Speaker 2

Thanks for the questions. Appreciate it.

Operator

Our next question comes from the line of Eddie Kim with Barclays. Eddie, please go ahead.

Speaker 6

Hi, good morning. My first question is just on the Saudi exposure in your business in light of their news of the capacity expansion curtailment. Could you just remind us roughly how much of your overall revenue is generated in Saudi? And if the primary exposure there is in the wealth management business, which I believe it is? And separately, you mentioned CoreTrax also has a strong position in the Middle East and I assume Saudi as well.

Speaker 6

So just any way you could help us understand the exposure to Saudi in your business would be great.

Speaker 2

Sure. No, Eddie, thanks for the question. So yes, most of our revenue in Saudi is driven by Wealth Management. A strong proportion of our activity is actually tied more to gas and unconventionals and that's not going to that will not be very affected with the activity we have in Saudi. And I think whatever everybody needs to keep in mind is, there's still going to be significant growth in Saudi overall.

Speaker 2

It's just not going to be to the same level that I think everybody previously thought. But we still anticipate a very strong which when you have differentiated services and you bring technology, that's what Aramco is really looking for. And so that fits in well, whether it's some of our traditional well flow management services or the CoreTrax services. They're very much differentiated technologies. So we continue see a very strong level of activity in Saudi in particular.

Speaker 6

Okay. Okay, got it. Thank you. And just my follow-up is on net pricing. Mike, around the middle of last year, you said you expect the net pricing gains to kind of really start gaining traction and hitting the P and L toward the end of the year.

Speaker 6

But if I heard you correctly, it sounds like that might not have come through as you'd expected. Did I get that right? And if so, could you talk about which product lines or segments maybe underperformed your expectations on the pricing front last year?

Speaker 2

Sure. No. And Eddie, you didn't get it wrong. What we said last year was we felt like we would start seeing the impact of net pricing at the back end of 2023. And that's really what's kind of set this up for that kind of 1% to 2% expansion in margins we're going to see here in 2024.

Speaker 2

And it's very much going to be the tighter asset classes, things like in well construction, TRS, deepwater activity, subsea landing strings deepwater activity. That's where we're seeing more pricing traction. Some of the other business, keep in mind, we still have about 30 percent of our business is going to be more production related, production optimization related and generally tied more to customer OpEx spend. Those we don't we didn't anticipate and I don't anticipate we're going to see much net pricing traction there, because it's more of a that's activity you're going to see and you're going to have day in, day out, whether irregardless of the number of FIDs or the CapEx dollars are being spent. So it's not so much that that segment underperformed.

Speaker 2

It kind of performed as was anticipated. We don't think we'll see much pricing in that. But that's the kind of work and activity you really want to have, when you have softness in the market or you have a cycle. That's why we stay focused on having a balance between CapEx and OpEx. And I think the industry overall, if you kind of think back to last September, there was lots of discussion from the rig guys on rig rates and they felt like there was continue to see some strengthening.

Speaker 2

I think everybody reality is pricing traction, those kind of things are still going to happen. But I think the slope of the curve isn't quite as great as maybe folks thought when we were back together in September last

Speaker 1

year.

Speaker 6

Right. Understood. Thank you for all that color. I'll turn it back.

Speaker 2

Great. Thanks. Appreciate the question.

Operator

Our next question comes from Steve Farazani with Sidoti and Company. Steve, please go ahead.

Speaker 7

Good afternoon, Quinn, Mike. I wanted to ask a little bit about the M and A pipeline. Used a couple of nice acquisitions announced over the last couple of quarters. These are higher margin. These aren't commodity based products, clearly accretive and you're not the multiples have been very reasonable.

Speaker 7

Is there a lot and even going back to Delta Tech, is there a lot out there given your balance sheet you clearly could do this all day long? What how are you looking at it, parameters you're considering and what the pipeline might look like?

Speaker 2

No, it's a great question. I'll tell you it's something Steve, we spend a lot of time discussing and analyzing internally. And there's 3 first criteria that have to be met. The industrial logic, the industrial logic and the industrial logic. And we start with that on all those.

Speaker 2

And when it fits in, when it's so obvious, from an industrial logic standpoint to our customers and to the market and those kind of things, those are the kind of ones we move forward. And then yes, there are other deals we could look to go out and do, but we're going to maintain we need to make sure that we achieve deals that and transactions that the industrial logic fits, but also the financial logic fits, which means from a value standpoint, it has to be there. The other element is, I don't want to become and we're not going to become a roll up story. We're not going to go out and try to do 279 acquisitions. The difference when we do acquisitions is we're going to actually integrate them.

Speaker 2

We're going to bring them in. We're going to drive synergies. We're going to bring the entities together. But that's why we're thoughtful on these. We'll continue to do them.

Speaker 2

And I appreciate your analysis, your quick analysis on core tracks because you hit you clearly have understood what we're trying to do there. It obviously makes sense for us to do. And we like those obvious ones that we can go out and get across the line. So we continue to be active in that space.

Speaker 7

Great. That's helpful. On pricing, an area where it's not developing as a market where you were talking about moving assets out U. S. Land, I know last quarter you were talking after the disappointment in NLA, you talked about maybe getting some of those assets into international markets.

Speaker 7

I think you specifically noted TRS and U. S. Land. Given that 2024 is probably not going to be much better U. S.

Speaker 7

Land, can you talk a little bit about progress there?

Speaker 2

Yes. I mean, we're continuing. So we talked about it in Q3, just because we want to give a complete picture of kind of how things happen in NLA. And I think as you can as you guys get a chance to look at the numbers, you'll see that the kind of how the stars misaligned in Q3 in NLA, we don't see that same issue here now. The level of activity in the Gulf of Mexico, the level of activity in well construction in Guyana, well flow management in Mexico, those are all kind of went back to a normal fact pattern, a normal behavior pattern.

Speaker 2

But we've been looking at U. S. Land over the course of the last 18 months. We continue to we're not going to exit the U. S.

Speaker 2

Land business full scale, but we are going to focus on the right basins and in the right locations in the U. S. And if we end up having excess assets, and we have had some excess assets, we'll take advantage of being able to redeploy those assets to markets that are going to be stronger, more robust going forward. So we'll continue to size that business as appropriate, but that's been an ongoing process for U. S.

Speaker 2

Land for us for really the last 6 quarters.

Speaker 7

Great. Thanks, Mike.

Speaker 2

Perfect. Good to talk to you. Thank you.

Operator

We have no further questions. So I'll turn the call back to the management team for any closing remarks.

Speaker 2

Great. Thank you, everybody. We really appreciate the time and look forward to catching up with all of you in some one to ones and those types of things. Have a good afternoon. Thank you.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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Earnings Conference Call
HP Q4 2023
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