Total Energy Services Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 8, 2024

There are 6 speakers on the call.

Operator

Welcome to Total Energy's 4th Quarter Results Conference Call and Webcast. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Daniel Hallett, President and CEO of Total Energy Services Inc. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Welcome to Total's Q4 2023 conference call. Present with me is Yuliya Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the 3 months ended December 31, 2023. We will then provide an outlook for our business and open up the phone lines for any questions.

Speaker 1

Yuliya, please proceed.

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 businesses 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 a new information form and other documents filed with Canadian Provincial Securities Authorities that are available to the public at www dotsedarplus. 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 December 31, 2023 reflect continued stable industry conditions. For the year, Total Energy generated record annual EBITDA and cash flow. Adjusting for $26,800,000 of non recurring income tax and related interest and penalties recorded in the Q4 of 2023 following the court's ruling upholding reassessment related to the company's 2,009 income trust conversion, net income for 2023 also represents a record.

Speaker 2

4th quarter consolidated revenue was consistent with Q4 2022, while EBITDA increased by 26% as a result of modestly improved pricing, in part arising from equipment upgrades and the moderation of cost inflation as global supply chain challenges continue to ease. Our CDS segment was the largest contributor to the year over year increase in the 4th quarter revenue and EBITDA. Geographically, 54% of 4th quarter revenue was generated in Canada, 36% in the United States and 10% in Australia as compared to the Q4 of 2022 when 42% of consolidated revenue was generated in Canada, 46% in the United States and 12% in Australia. By business segment, Compression Process Servicing generated 45% of 4th quarter consolidated revenue followed by Contract Drilling Services at 35%, well servicing at 11% and rentals and transportation at 9%. In comparison, for the Q4 of 2022, the CPS segment contributed 44% of consolidated revenue, contract drilling services 33%, well servicing 14% and the RTS segment contributed to 9%.

Speaker 2

4th quarter consolidated gross margin was 27% as compared to the prior year at 23%. Margin improvement in our CDS, RTS and CPS segments offset weakness in the Well Servicing segment. Relatively stable drilling activity in Canada and Australia offset a decline in U. S. Activity and resulted in consistent operating days in the 4th quarter of 2023 compared to Q4 2022.

Speaker 2

Price increases and the mix of equipment operating contributed to an 8% increase in revenue per operating day. This resulted in 8% year over year increase in the 4th quarter CDS segment revenue and a 33% increase in segment EBITDA. In Canada, market gains were primarily primary reasons for 19% year over year increase in the 4th quarter operating days. Price increases in part due to rig upgrades resulted in a 10% year over year increase in the Q4 Canadian drilling revenue per day, which in turn gave rise to a 31% year over year increase in Canadian drilling revenue. In the United States, 4th quarter revenue declined by 44% as lower U.

Speaker 2

S. Drilling activity and the transfer of 1 triple drilling rig to Canada contributed to a 48% decrease in operating days. The decrease in operating days was partially offset by an 8% increase in revenue per operating day. In Australia, operating days increased as 1 drilling rig returned to service in October following its recertification and upgrade. Increased operating days contributed combined with 14% increase in revenue per opening day, arising primarily from rig upgrades resulted in a 20% year over year increase in Q4 Australian Drilling revenue, Partially offsetting the positive impact of higher day rates and operating days was the weakening Australian dollar relative Canadian and U.

Speaker 2

S. Dollars. Moving to our RTS segment, the deferral of several projects in Canada offset market share gains in the United States and resulted in a 2% year over year decrease in 4th quarter segment revenue. Despite lower revenue, 4th quarter EBITDA and EBITDA margin increased 12% 13% respectively as compared to 2022 due primarily to improved pricing and low equipment reactivation costs. 4th quarter revenue in total CPS segment increased by 2% as compared to 2022, driven by continued strength in U.

Speaker 2

S. Fabrication sales, increased parts and service activity and improved utilization of Canadian rental fleet. 4th quarter EBITDA and EBITDA margin increased 31% 36% respectively as compared to 2022 due primarily to improved fabrication sales margins. The year end fabrication sales backlog decreased to $162,800,000 compared to the $219,500,000 backlog at December 31, 2022. Sequentially, the quarter end backlog increased by $9,900,000 during the Q4 of 2023 after declining during the previous two quarters.

Speaker 2

4th quarter well servicing segment consolidated revenue decreased by 16% compared to 2022 as a modest 1% increase in segment revenue per service hour was outweighed by 17% year over year decrease in consolidated service hours. Lower activity in all jurisdictions and slightly lower North American revenue per service hour resulted in the 4th quarter EBITDA and EBITDA margin decreasing by 36% and 23% respectively as compared to 2022. From a consolidated perspective, Total Energy's financial position remains very strong. At December 31, 2023, Total Energy had $123,400,000 of working capital positive working capital, including $47,900,000 of cash and 0 net debt. During the Q4 of 2023, Total reduced its bank debt by $10,500,000 or 10%.

Speaker 2

As mentioned earlier, following a tax court decision issued in February 2024, we fully provided for the certain tax reassessment related to total 2,009 conversion from income trust structure in total 2023 4th quarter results. We also remitted $19,900,000 to pay in full all reassessed income tax and associated interest in penalties. Total has appealed the Tax Court decision and also applied to Canada Revenue Agency for interest abatement due to extensive delay in having the case heard by Tax Court. Total Energy's bank covenants consist of Masoon senior debt to trailing 12 months bank defined EBITDA of 3 times and a minimum bank defined EBITDA to interest expense of 3 times. At December 31, 2023, the company's senior bank debt to bank EBITDA ratio was 0.09 and the bank interest coverage ratio was 10.51 times.

Speaker 2

Excluding $10,500,000 of one time interest expense relating to reassessments of certain of the company's income tax filings related to its conversion from Income Trust to Corporation Design. Interest coverage ratio was 32.27 times.

Speaker 1

Thank you, Yuliya. 2023 was a solid year for total. Continued investment in expanding North American LNG export capacity provided tailwinds during the year, particularly for our CPS segment, which has significant exposure to the global natural gas infrastructure build currently underway. Targeted investments in equipment upgrades over the past 2 years also contributed to our strong financial performance in 2023. Our employees were diligent in conducting operations in a safe and efficient manner over the past year.

Speaker 1

Notably, our Rental and Transportation Services segment recorded a 0 TRIF in Canada for 2023, a significant achievement given the nature of their operations and the harsh environments they often find themselves working in. At a corporate level, Total remained committed to providing our owners with industry leading shareholder returns. During 2023, $52,700,000 of cash flow was directed towards $27,000,000 of debt repayment, $13,600,000 of share repurchases and $12,100,000 of dividends. Total exited 2023 in a very strong financial position with bank debt less cash on hand of only $45,100,000 While oil prices remain relatively stable, North American natural gas prices have weakened considerably over the past few months and certain producers have begun to curtail their natural gas capital budgets. In this environment, total energy remains on operating in a safe and efficient manner and exercising discipline in the investment of our owners' capital.

Speaker 1

Our previously announced 2024 capital expenditure budget of $46,500,000 maintains our current operating levels and provides our business segments with capital to pursue compelling growth opportunities backstopped by long term contracts. As announced yesterday, we are pleased to have completed the acquisition of Saxon Energy Services Australia. This acquisition significantly increases our presence in the Australian land drilling market and is expected to provide a competitive return on invested capital. On behalf of the Board and management, I extend a warm welcome to all Saxon and Schlumberger employees joining our Australian team as well as to Mr. Yasser Naseir, who has joined our corporate executive team.

Speaker 1

We look forward to working with all of you as we continue to grow our global drilling business in a safe and prosperous manner. Finally, we are pleased with our Board's decision to increase Total's dividend. Not only does this decision align with Total's long standing commitment to providing our owners with industry leading shareholder returns, but it also demonstrates our confidence in the future prospects of our company. I would now like to open the phone lines up for any questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Tim O'Challa of ATB Capital Markets. Please go ahead.

Speaker 3

Congrats on getting the Saxon deal closed. I'm just curious, can you give an operations update on how that's going? It's disclosed, I guess, yesterday, but how many rigs are you running in Australia today? And anything else?

Speaker 1

Good morning, Tim. Yesterday was a pretty busy day, particularly given the time zone differences. So I'm still in a bit of a fog.

Speaker 3

Fair enough.

Speaker 1

Yes. In terms of active rigs in Australia today, we would have, I believe, 10. There's a bit of movement. Some rigs are currently in between campaigns, but it effectively doubled our rig count in Australia yesterday. And we're looking forward to continuing to grow our active rig count there.

Speaker 1

So stay tuned.

Speaker 3

Now that the deal is closed, are you able to provide any further details on valuation on the deal?

Speaker 1

No. We're not we've never given forecasts. What I would say is we expect the acquisition to be accretive.

Speaker 3

Okay. Are the 10 or the additional rigs that you're running in Australia, the Saks ones that you acquired, are they running a similar economics to your legacy fleet?

Speaker 1

I would say, we expect the deal to be accretive on a per share basis. So we're pleased with it. Obviously, it competes that acquisition competed for capital with other opportunities and it met our requirements. And I believe it's a win win for both SLB and Total in the sense that it was a business SLB has been looking to exit and it's come into strong hands with a company that wants to grow its global drilling operations. And the Saxon employees were very pleased to have them join our team.

Speaker 1

We're quite pleased to have Mr. Nassar join us at a corporate level. He will bring tremendous technical and global operating experience into our corporate executive ranks. And that will be useful as we continue to try and operate world class drilling business as well as grow that. So again, day 1 of ownership will provide we'll be in a better position to provide an update here with Q1.

Speaker 1

But we're quite happy with the deal and looking forward to expanding our presence in Australia.

Speaker 3

Okay. That's fantastic. Maybe building off that, 2024 has started with a couple of significant capital outlays, one being Saxon, the other being the remnants of that capital to the CRA with Canadian government. Now that you have those under that sort of behind you and you're digesting that, can you just talk about how you're thinking about capital allocation in 2024 specific to return on shareholders, share repurchases? And then also, how you think about M and A on a go forward basis?

Speaker 1

Sure. So our views have not changed in terms of fundamental principles. Extremely compelling opportunity. The reality is we've been prevented from purchasing under normal course since September, a combination of the blackout for the extended blackout relating to Saxon, which by the time that was announced, we were then into our year end restrictions. So we were not able to buy any stock back in the 4th quarter.

Speaker 1

Going forward, that's right at the top of the list of opportunities, particularly given the addition of Saks in here that obviously we haven't issued any shares in respect to that acquisition. Again, we continue to in terms of our current announced capital budget, the growth portion of that are compelling opportunities that are expected to exceed our cost of capital and they're backstopped by long term contracts. And so a bunch of that is earmarked for Australia, including 3 service rigs that the first was deployed here in late February. The remaining 2 will be deployed in Q2 and Q3 respectively. That will rejuvenate our service rig business in Australia significantly.

Speaker 1

We obviously have the 6th Savannah rig. It's parts have landed already in Australia and that's expected to that rig is expected to commence drilling in July under a long term contract. With that addition, we'll be up to 17 rigs in Australia. We're also examining and in the middle of potential reactivation of certain Saxon rigs that if those work out, it will be quite attract of opportunities as well. Domestically, bunch of our carry forward capital relates to compression rentals long term contracts bound for the U.

Speaker 1

S. And our maintenance capital will ensure that we continue to operate at the activity levels we experienced last year. In terms of new capital, we're very nimble. Over the years, we react to opportunities as they're presented. We don't try and force investment.

Speaker 1

We're also quite interested in continued consolidation and we'll look to identify and pursue opportunities that make sense for our current shareholders. So we'll continue to work hard, but stay disciplined on that front.

Speaker 3

Okay, got it. Looking at the CPS segment, I've just noticed that the Canadian horsepower on rent at the end of the period has come down significantly through the year in 2023 in Canada specifically. Your utilization has gone up, so it suggests maybe the fleet size is shrinking. Are you selling equipment out of the Canadian rental fleet or moving into the U. S?

Speaker 3

Or how should we think about that?

Speaker 1

Yes. There's always some movement below the surface. And it's one of the challenges, it's a point in time. I think what we would expect to see over the course of 2024 is continued uptrend in our rental fleet utilization barring some material change. But given some of the investment we've made combined with our NoMad fleet continues to be a very solid piece of our rental business in North America.

Speaker 1

But we also don't build rental equipment on spec. So obviously existing idle equipment is available at all times, but we do not build new units for our rental fleet on spec.

Speaker 3

Got it. And then just last one for me. Just wanted to circle up on your comment on gas prices. Are you seeing any immediate impact to demand specifically for CPS related to lower gas?

Speaker 1

No, I would say we expect to see more of a impact on the front end drilling. And what we're seeing is a rotation from gas to oil. Some of our high spec rigs in Canada transitioning from gas to oil. On the CPS segment, honestly, it's been a solid steady core demand driven by infrastructure that my take just by the nature of the customers is this is all about building infrastructure. It's not about putting on new gas wells.

Speaker 3

Okay. Yes, that's kind of what I would have expected. I appreciate it. I'll turn it back. Thanks, Porter.

Speaker 1

Thanks, Tim.

Operator

The next question comes from Joseph Schachter of Schachter Energy Research. Please go ahead.

Speaker 4

Good morning, Dan. Good morning, Julia. Dan, can you go a little bit more into the dynamics of what's going on in Australia? How many rigs are there? How many are active and working?

Speaker 4

Is it more of an oil or a gas market? And where do you see the growth longer term? Is it going to be from 1 or the other? And have there been any big discoveries like excitement like Armatine or our Clearwater going on in Australia that are increasing the activity there and you're wanting to build the business?

Speaker 1

Yes. So in terms of the overall active rig fleet, Joseph, it's hard to get a super accurate number. They don't have the same reporting processes as we do in Canada, for example, with the CODC fleet disclosures and active reporting count. Our guess is there's probably 25 roughly rigs drilling onshore there, of which we're definitely, if not the biggest certainly, right, post being the biggest now in terms of active rig count. It's a gas driven business or basin, but there's also oil there.

Speaker 1

Pre Saxon, most of our, if not all of our exposure was to coal seam gas, the shallow end. We also though have been involved in hydrogen drilling in Australia recently and that's an interesting opportunity. Again, it's not going to be put 5 rigs to work steady on hydrogen, but it's certainly a niche market that we tend to, I believe, have a front end lead on. What the Saxon acquisition does for us is it increases our exposure to the medium and deeper parts of Australia. That's significant.

Speaker 1

And I think that's the opportunity we see really to grow our businesses pursuing some of the deeper gas and oil basins in Australia. And the gas market over there is quite healthy. It's driven by LNG exports to Asia and that market has been solid and strong. And we continue to expect that market to be relatively stable here over the medium to longer term. And we've the other thing Saxon does for us is further diversify our customer base.

Speaker 1

We are now working for all the major onshore producers pretty much in the country. And like I said, we're excited to bring, I think, a desire to grow that business to the Saxon asset base and there's definitely some opportunities to do some rig upgrades there that will further activate that fleet. So stay tuned on that front.

Speaker 4

Is there any specific play that's really doing anything as I you know Is there something that we to be watching in the news of discoveries of, I. E, as I mentioned earlier, Montney, Clearwater? Is there anything to be specifically keeping an eye on?

Speaker 1

Not particularly. I think, obviously, we're going to be learning a bit about some of the more deeper basins there. So that's new to us. I know there's some excitement up in the Northern Territory. H and P brought in a big triple last year to drill some of that.

Speaker 1

We interestingly were involved with the service rig work on some of those wells, which with our heavier service rigs. I think it's a vast country. It has not my general sense would be there's a lot of drilling opportunities within existing known reservoirs as opposed to say Western Canada where some of our mature basins have been drilled out and kind of looking for new. So I would say generally it's probably a less mature base and again that's just my anecdotal perception. But certainly our focus now is to learn more about opportunities in the deeper part of the market there.

Speaker 4

You mentioned that there could be more consolidation. So are we looking from here not a big deal, but maybe companies with 1 or 2 rigs? So you is that the consolidation potential there?

Speaker 1

In Australia? Yes. No, I would say our focus would be North America and elsewhere. Australia is fairly, I would say, it's we've got a good position there. I think our focus will be on upgrading existing equipment of Saxons as opposed to looking to buy in that market.

Speaker 1

Never say never, but we need to we've only owned it for a day. So I think my impression is there's some good opportunities to take that asset base and enhance the utilization.

Speaker 4

Good. Last one for me. With the consolidation by precision of High Arctic and then CWC, Are you seeing the competitive pressures in well servicing in Canada not as intense? And is pricing power looking like they might be the price leader and then everybody benefits from their consolidation move?

Speaker 1

Yes. Precision certainly has done a good job in bringing some discipline there. It's still a very competitive market. And so relative to the drilling rig market, it's still quite fragmented. But it's definitely going the right decision.

Speaker 1

It comes down, Joseph. Every company got to make their own decisions on balancing utilization with price. And I think generally our approach and there's no absolute right or wrong answer, but our approach has been rather than working too cheap and wearing your equipment out, we'll stand back. I would say we're not in that zone within the well servicing, but in terms of is the market consolidated the point that it's not competitive, absolutely not. It's still a competitive market there.

Speaker 4

Okay. That's it for me. Thanks very much and congratulations on a very nice year.

Speaker 1

Thanks, Joseph.

Speaker 2

Thank

Operator

The next question comes from Cole Pereira of Stifel. Please go ahead.

Speaker 5

Hi, good morning all and congrats on closing the acquisition. Dan, you talked about it a little bit earlier, but can you just talk about how you're thinking about the strategy in that market? It sounds like there's an opportunity to grow utilization. Is that through market share capture or maybe the broader market increasing? And is there also an opportunity to kind of raise prices across the board just given you have a much higher market share now?

Speaker 1

So in response to your first question, I believe it's a combination of gaining market share and an expanding market. Really where we see some opportunity there is with the heavier rigs and some potential upgrade opportunities that exist. And so that will be our focus. Obviously, bringing the 2 companies together, integrating, realizing realistic synergies is a prime focus as well. But I expect we're prepared to invest in good upgrade opportunities.

Speaker 1

That's consistent with our desire to continue to grow the drilling business where obviously Schlumberger is looking to exit. So there's some good opportunities there. I think my sense is the Saxon employee base will thrive under our ownership where we want to get more rigs to work. And it's a base in that I think there's some room for us to capture some market share in as well as expand into the deeper part, which is partly organic just by upgrading rigs. In terms of pricing, it's a competitive market too.

Speaker 1

It's not I would it's kind of similar to Canada in that regard. So I wouldn't see any significant any material pricing gain simply by bringing these 2 companies together. The reality is we really only overlapped with 2 rigs. And so we had no involvement in the deeper end of the base and Saxons for the most part didn't compete with us in the shallow part. So it really doesn't change the market dynamics a whole bunch.

Speaker 5

Got you. That makes sense. And then thinking about the Canadian side of the business on drilling and well servicing, commodity prices have been a bit volatile. We've seen some modest CapEx cuts from a few gas focused producers. How are you thinking about the activity outlook for those businesses compared to 2023?

Speaker 1

Again, we're not going to give specific forecasts. What I would say is when you watch our rig count here over the next while, you can expect to see some migration of our bigger rigs from gas to oil, not a huge thing, but I think you're going to see a bit of that migration of some of our high spec deeper rigs. Most of our pretty much all of our super singles are oil focused already. So there's not a lot of change there, but I think on the deeper end you'll see some migration.

Speaker 5

Got you. That's all for me. Thanks. I'll turn it back.

Speaker 1

Thanks, Cole.

Operator

As there are no more questions on the phones, this concludes the question and answer session. I would like to turn the conference back over to Mr. Halleck for any closing remarks.

Speaker 1

Thanks everyone for participating and we look forward to speaking with you after our Q1. Have a great weekend.

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Earnings Conference Call
Total Energy Services Q4 2023
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