Q3 2019 Earnings Call
Thank you ever standing by.
The conference operator, welcome to the T.S. Energy solutions third quarter, 20, and I didn't results conference call and webcast. As a reminder, all participants in listen only mode and the conference is being recorded.
After the presentation.
I'd to ask questions to join the question Q You May Press Star then one at a telephone keypad should you need assistance during the conference call you might say one operated by pressing star zero.
I'd now like to turn the call <unk>, Tony Latino Chief Financial Officer. Please go ahead Sir.
Thank you operator, good morning, everyone and thanks for attending today's call I'd like to note that in our commentary today, there will be forward looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions.
These risk factors and assumptions are summarized in our third quarter Mdna and press release dated November 14, 2019, and in our annual information form dated March 12, 2019. In addition, certain financial measures that we all referred to today are not recognized.
Under current generally accepted accounting policies and for a description in definition of these please see our third quarter Mdna at this time I'd like to turn the call over to Tom Simons, Our president and CEO well. Good morning. Thank you for joining todays shoot Street conference call for see yes once.
Today's call will talk about Q3 results.
Well sure progress on or 80, 2016 capital allocation strategy.
It will provide our customary detailed operations update and outlook for each of the business slots.
Further shirt or outlook for industry.
Our company and our thinking around capital allocation.
Capex and girls prospects for the business.
Tony will give a detailed financial update.
Questions, then, we'll make closing remarks and principles to golf.
In the quarter, we generated 315 million Canadian net revenue and 42.2 million EBITDAX for the strong free cash flow that generator allowed us to further reduce our credit white.
From 95 million Canadian to 75 million Canadian.
We easily funded our modest dividend and spent approximately 10 million cash capex.
We further bought shares in town south them. So the modest tune up three quarter up 1 million shares we sensed picked up the pace on share by.
And a further bought almost about her mouth, just since the quarter close.
We plan to take advantage of potential tax loss selling up the stock.
We increased working capital a little through the quarter because the port at Corpus Christi will close for five months. This winter so we need to build bear right or inventory in advance of that.
The company remains committed.
To 80 2016 for the balance of the year, so 80% of free cash flow will be used to reduce the bank line, we want to further de risk the company.
20%, a free cash flow will be allocated to buying back shares.
16 million Dollarss funds the dividend.
16 burned millet million remains at very low percentage of EBITDAX and free cash flow.
We'll review the 80 2016 allocation or free cash flow strategy in the new year.
Our priorities for me de risking the business.
Creating value for equity holders and preserving value for our bond holders.
Our free cash flow capabilities make share repurchase a compelling offset the share price levels.
In our 13 year history as a public company, we've returned to shareholders approximately $325 million through dividends and distributions.
Our business model supports returning capital to our shareholders, while being able to sustain and grow the business.
However.
Pardon me our business model supports that however, well consider all options in the new here in light of the share price.
Capex remains around 10 million cash capex per quarter, and two to 5 million up lease capex per quarter.
Because their manufacturing and logistics infrastructure are far below full capacity capex is mostly rolling stock or trucks.
We have added led didn't Midland.
To allow continued growth of catalyst, our Permian production chemical business.
Context catalyst operated on seven acre spring and a half years ago. When we purchased the company now we operate on 30 acres.
I'll move on to operations.
And I'll also provide an outlook for each business line as we go through the update.
You are less drilling fluids made a great financial contribution in the quarter, we averaged 117 drilling fluid jobs through the quarter today, we're operating 102 jobs a day yes.
We see that as a likely activity level through Q4 and potentially rights through 2020.
We have capacity with or infrastructure and possible new customer wins that could create upside to that number, but we wouldn't need to take market share to expand that dropped out.
We see drilling activity in the U.S. for industry around 800 breaks without sort of approximately 100.
We continue to target results based customers, hoping to win new business by providing better technology and execution, leading to lower all drove lower overall drilling costs for our customers.
The biggest drop in activity for a yes as occurred in Oklahoma, that's always been a very competitive market. So lower margins now it's also very slow free industry.
The northeast is also off a couple jobs for us.
Texas, New Mexico continue to drive results spray, yes at 100 jobs, a asks can meet its targeted 15% EBITDA and generate nice amounts are free cash flow.
Expansion on that job child would be very fine actually freed up just a shrinkage would reduce the EBITDA percentage and free cash flow.
Business relies on operating leverage.
I see our competitive advantage a asset to lights.
For our customers, we lower drilling days saving them money.
For investors, our previous investments in product manufacturing infrastructure and building the best team in the U.S. My business.
All adds up to an upstream service line that generate substantial free cash flow.
This businesslike pays its way within our portfolio of companies.
It's not a loss leader for bundled offerings to big oil and gas companies the North American operators don't want to buy any place.
Baxter and his team continue to lead you the U.S. dropping slow it industry in terms of innovation and being a solid business.
You asked production chemicals Jae Kim catalyst sauce saw steady performance through the quarter, we'll continue to slowly expand withdrawals Tommy in the Permian and Rockies.
Yeah.
We continue to see higher water cuts in the Rockies, which drives more chemical treatments.
The Permian continues to expand for our customers and we're growing in that growing market.
As the Permian Horizontals age, we expect water cuts to rice driving increased trading.
We also expect the overall production in the Permian to slow the rice.
I will propel growth for us burn and his team are working hard to increase our profile within the market.
Firmly establish us as a tier one capital supplier.
We need that to expand our business what the majors.
Our plan for us production chemicals remains.
Service the customer.
With a sense of urgency of a small company, what the science capabilities a big company.
That's really the magic formula for the entire company.
We continue in the U.S. pushed forward will stem works our provider of novel stimulation chemistry. This is a very low capital nice business line that complements our operations.
And financial model and goals.
Well move on to Canada now.
I'll start by expressing our dismay with what we see is terrible public policy in Canada towards oil and gas.
We applaud the Alberta, Saskatchewan governments for their leadership on this critical matter.
We remain committed to Canada with our business.
We'll be advocate advocating as such.
I thought a white house Hassan is wrong.
With our customers our employees and our shareholders and taking the fight to our opponents auto walk transaction, Victoria are not putting Canadian oil and gas on blowdown mode.
Canadian drilling fluids managed to average 53 jobs for Q3.
They were 58.
At this level, we dipped below our targeted 15% EBITDA level spot because our infrastructure built we can still generate free cash flow at these levels. This is a low capex business.
We see Q4 looking like Q3 with reduced activity over Christmas as is traditional in Canada.
Q1 looks to be busier, but overall industry likely only runs 125 to 140 drilling rigs on average in 2020.
We need pipelines, so our customers can get real pricing for their production.
LNG and oil pipelines will be powerful catalyst for Canadian drilling fluids like Ats Canadian drilling fluids relies on operating leverage.
I'll move on to pure count our Canadian production chemicals business under New leadership, we continue to see solid topline results, but more importantly, better EBITDA margins and free cash flow generation.
Morale is up.
The pipeline to win new business is strong.
Much improved processes around purchasing manufacturing and pricing are all yielding solid results.
Thank you to Kennen day Burleson, the entire pure 10 team.
The great work and dedication to meeting customers needs, while also generating acceptable financial results in a tough market.
We see substantial upside for pure chemists pipelines and LNG happens, we grow as wells age and just production expense.
[noise] stem works in Canada continues to help customers turn underperforming wells in cat into cash flowing assets.
As production is allowed to grow in Alberta stem works will benefit.
So I also continues to perform very well.
It's our reaction chemistry business based in Vancouver in source self supply complex products through sale go into all of our operating lines and also continue to expand the non energy sales say Alco generates.
Clearly focused on new technologies to cleaned and recycle water, it's keeping its nose above water in a very tough Canadian market. We remain committed with clear that mean increased activity or technology breakthrough for clear to be able to meetings meaningfully fund actually contribute.
In a position to play the long game with clear, we're convinced that money can be or made around water as environmental matters.
Our overall outlook remains positive.
Because at current activity levels for industry CES generate substantial free cash flow.
Thanks.
We see.
We see modest production growth likely in the Permian for industry, which we can benefit from.
We see drilling and.
Drilling fluid competition meeting to knock off bad business practice, and actually generate cash flow for themselves.
We see that as a positive for CES, we see our biggest competition in production chemicals looking to spin out of its parent company next year, that's possibly a Pos a positive for us.
They won't be looking for either a low share multiple or declining financial results.
Our other major production chemical competition is twice saw a price increase in the last 15 months. That's also a pause there for see us.
Most importantly, our customers now spend their own money on drilling and completions and maintaining their production. We believe this will mean that only best in class suppliers will survive and thrive and the long term.
I'll now turn it over to Tom Thanks, Tom.
As Tom mentioned Q3 represented another consecutive quarter of strong alignment with our financial areas of focus including free cash flow generation prudent capex margin improvement debt reduction working capital optimization and improving returns the company generated $316 million forever.
During the quarter and 42.2 million in adjusted EBITDAC, representing 13.4% of revenue and a third consecutive quarterly improvement in adjusted EBITDAC margin.
US revenue increased slightly in comparison to Q3, 2018, generating 227 million or 72% of total revenue us results were underpinned by improving market share in our drilling fluids business, despite falling industry rig counts in the quarter and also benefited from increased.
Just activity levels across our production chemicals business as the company was able to capitalize on its strategic investments completed in 2018 in key infrastructure and operations in attractive markets, including the Permian and the Rockies.
Canadian revenue of 88 million or 28% of total revenue for the quarter represented a decrease of 21% year over year. This decrease is primarily attributable to the persistent industry challenges, which resulted in a decline in drilling activity as industry rig count decreased.
31% NCS is operating days decreased 36%, however year to date, the Canadian drilling fluids business has succeeded in maintaining very strong market share at 36%.
Sure Kevin production chemical business model proved very resilient. Despite government mandated production curtailments as Canadian treatment points decreased by only 1% year over year and perhaps more importantly.
Operational efficiencies in that division, which commenced in Q1 continued to be realized throughout the year into Q3.
During Q3, Capex spend was 9.5 million.
Which represents a 64% reduction from the investments made in Q3 2018 primary expenditures in the quarter related to supporting increasing production chemicals activity levels and associated head count in the U.S. we.
We continue to expect Capex in 2019 to be at or below 50 million and include remaining key strategic investments primarily in the Permian basin.
In the quarter. We also successfully completed an amendment in two year extension sure a senior credit facility, providing us with additional availability on our U.S. facility, along with improved pricing on amounts drawn.
As at September Thirtyth, we had a net draw of 75.3 million honor senior facility compared to 161.5 million on December 31st 2018, and 94.8 million on June Thirtyth 2019.
This continued decrease was driven primarily by strong operational free cash flow generation in 2019, partially offset by opportunistic share repurchases sure NCB program.
In Q3, we repurchased 764000 shares at a weighted average price of $2.03 per share for a total amount for the quarter of $1.6 million. The company renewed its NC IB program effective July 17th 2019.
Since inception of our NCS be programs. The company has repurchased a total of 9.4 million common shares at an average price of $3.21 per share for a total amount of $30.2 million representing approximately 3.5% about.
Standing common shares as at the initial July 17th 2018 inception date.
Having completed significant capex programs in 2018, we continue to focus on increasing free cash flow generation and improving return metrics through execution in key markets prudent capex improved working capital efficiencies and opportunistic margin expansion.
Throughout 2019, we continue to expect that EBITDAC will materially exceed the sum of cash expenditures on interest taxes, and capex, allowing for a seat surplus free cash flow that may be allocated to reduce debt pay our dividend and continue our share buyback program.
Operator at this point I'd like to turn it over to you to open up the line to potential questions.
We will now begin the question answer session. The joined the question Q You May Press Star then one on your telephone keypad.
You will hear donut lodging request for using a speakerphone. Please pick up your handset pricing any keys to address your question. Please press Star then too.
We'll pause for a moment as part of trying to Q.
The first question comes from Aaron must deal with TD Securities. Please go ahead.
Hey, Marty.
Turning air.
Tom in your prepared remark you mentioned your expectation for Permian water production volumes to show some growth in 2020.
As water cuts increase overtime and even if it's just anecdotally how are you thinking about the change in contributions from Jay can catalyst.
2020 versus 2019, and just to order to understand the order of magnitude do you think that this growth can offset your expectations for a decline in a.
We're locked in there and to to put to heart of a stake in the ground, but if I was a bedding man I'd say that.
2020.
Probably is down five or 10% bottom line results for us over 19.
Jay can catalyst is growing pure cam is starting to make appropriate returns against their revenue.
But we probably need the rig count to be over 800.
Where we need some nice wins at some of the big customers. We don't have rigs with today. So I think it's down a little just because industries a little less active.
And any picked up.
You know closes that five or 10% Delta pretty quick.
Okay, and then I guess, just moving over to U.S. drilling you gave some guidance on expectations for the 800.
Average rig count, but in the context of your customer base today.
Winning any additional customers do you think that A.S. will outperform the broader markets perform in line or underperform based on the conversations you're having with customers today.
I think we'll outperform we're making more money than our other might customers because we've got a better cost to goods, we got more efficient infrastructure, where size right for people and we've got innovation or technology. They don't have to offer that works.
Are we going to go up 5% in market share I don't think somewhere and we need to lead with price.
But we're still hanging in there are high seventys in the Permian and our new wins are happening in the Delaware as people look to push push that north.
Those wells potentially get harder to drill.
And thats good for the month company and we've got infrastructure that could easily support 20 or 30 more jobs in that market and remain very efficient for the customer.
Yes.
About what we expect for for Jay Kevin catalyst.
We bought more land in Midland because we expect to park more trucks, we're not in need of more analytical equipment, but we're going to build a 10000 square foot lap building basically in front of our office and lot complex in Midland.
As part of our effort to showcase our capabilities to the majors because we do some work for them.
We need to do a lot for them and they're coming in late compared to the independents, obviously on ramping up production and we want to be in on that so we need to project that we are tier one.
And then we just need to use the body of work, we have as evidenced that were better than the competitor.
Okay, and you had mentioned parking similar tracks given your expectations for some growth.
In Jae Kim catalyst do you expect to maintain.
2019 spending levels or.
Do you think it'll be higher lower like any.
Early glimpses of what 2020 Capex could look like.
So so Aaron we continue to believe that we're going to track at or below the 50 million cash capex that we talked about this year and we provided that in Q4 2018, and we'll do the same thing for next year.
During our Q4 Mdna in call I think at this point, it's safe to say that that 50 million is probably the higher end of what we think we're going to spend but as Tom said.
We need to continue to monitor the end markets in Q4 in early Q1 and at that point give you a more reasonable estimate, but I think at this point 50 million is the number to think about and don't be surprised if we end up with a number that's that's below that for our expectation next year, when we come up with that estimate.
Q4.
Okay, and then even with that.
5% to 10% decrease in the bottom line performance.
Good chance that you have paid off all or a whole bunch of the line by this time next year and I know you hinted at reevaluating that 82016 plant in the new year, but can you share any updated views on what you might look to prioritize even just conceptually and isn't as simple as the shifting to reduce.
During the balance the 2024 notes or to get something else in mind.
It's to de risk the business against a commodity shock it's to de risk the business against losing a big customer we only have one over 10% but.
We look to the business to do that.
We've made a huge step that way we've dropped the line by over half.
I think the next easiest way to create value for equity holders and security for bondholders.
Is to buy shares so we're going to look hard at that air.
And following up on some of the other elements Aaron we have a gift we have a very strong free cash flow generating business.
And we've continued to show that Q1, Q2 Q3, we're going to continue to focus on that and that gives us the flexibility and.
With regards to paying down debt and yes, we do talk about the bank line, but absolutely. If we had the opportunity to buy back some bonds that that is obviously higher cost debt.
Thats the way, we look at at de leveraging as part of the as one of the options that Tom referred to and we would absolutely look at that option, if it made sense to us as well.
Okay, great. Thanks for taking my questions I'll turn it over.
The next question comes from Greg Coleman with National Bank Financial. Please go ahead.
Morning, Greg.
Greg Your line is live.
Hey, Mark Abbey.
Hello, Yes go ahead.
Sorry, I'm still figuring out how phones work.
Thanks for taking the questions I wanted to start by poking around our margins, it's great to see them tick up in the quarter I was little bit, but they did pick up and I think we're back to close to two year highs now into year end, we anticipate a normal seasonal roll off or you're going to margins. Given you know your Thanksgiving Christmas budget exhaustion is that consistent with what you're thinking or.
Could we see either something outside of that either then pulled in which I think it's unlikely or the more role sort of more than we've seen historically, just given what's going on with U.S.
I'd say I'm reluctant to spend outside of operating cash flow from a producer standpoint.
Yes, let me start off from a from a financials perspective.
Gary.
Greg So obviously with the rig count down to where it is we're currently on the 102 rigs in the U.S. with the us versus the 117 rig average in Q3 in 128 rig average in Q2. So obviously you should expect a lower contribution in that business, which.
As a big part of our business.
But however, it is a very strong business and as I said and alluded to in terms of capital allocation considerations were going to do the same thing for the business in EPS in particular is a great business great people that run it and then have always punched above its weight, we are not going to be looking at reducing.
Cost that don't make sense in the mid to long term. So if we do have to realize a bit of margin erosion in the quarter as the company and Ats figures out what the new environment looks like we're going to keep those high quality people and if it if it requires us to take.
On the chain a little bit in margin in Q4, and even Q1 I will do that but I think your your initial comment was bang on.
Quarter over quarter, absolutely, we should see a reduction in frankly, that's already we're starting to see that they came out in initial reports from the research community Yeah, Greg I'll build on that the reason to say carry 20 people.
Yes through the winter.
Is the success, we're having with this new mud system in the Delaware.
We're dropping costs and dropping days.
And then the words of RVP BD in the Permian and he said in 40 years. It's the first thing he scene that somebody can copy and that it's real and measurable so we're reducing incidences of lost circulation.
Drilling in the Delaware and intermediate section, we're reducing the need for diesel dilutions to keep the weight down to avoid the losses.
And most importantly, we're able to break that system at the end and recycle the brining in the diesel so we're going to keep people because we think thats a proposition that some of the big operators that were on were knocked on location with.
They are going to give us a shot with that.
So we think we can put those people back to work.
Got it all that makes sense.
Sticking with margin commentary looking out a little bit longer term in the past, we've got some healthy discussions and debates about sort of critical EBITDA margin levels 15 kind of being a bit of magic number I don't think anybody's and sustaining that level in the short term given the challenging macro environment, but Tom do you have an idea challenging macro defining it as 800 rigs in the U.S.
Hundred 25 to 140 of Canada, Sean do you have an idea as to what we would need the macro to look like or sort of that 15% to be an achievable. All your average EBITDA what kind of operating environment. If you need to accuracy has to get to get to those levels.
Thousand rigs in the U.S. and 200 in Canada and.
May be less if we continue to have success with this mud system in the Delaware and if you have to pick up in Canada. This to support LNG.
We're killing it on these deep place, Greg as you well no.
So we don't even maybe need that much of a pickup in Canada. So much operating leverage in those businesses that an extra 20 jobs for both business units can really power charts that results and then we're going to go back to that location afterwards, fracked and treated so.
So.
Production growth in the Permian and LNG in Canada.
I don't think it takes a lot, but it does take a little or take some big market share gains for us.
No I appreciate the frankness on those macro levels, we'll keep an eye out.
Moving over a little bit to the balance sheet on working capital.
I think in prior quarters, you talk to net neutral working capital in the back out between 19, Keytruda is pretty close to zero.
But the new factor you threw in there that I guess is new to me was the Corpus Christi Port shutdowns, we want to stop Paulson barite should we be looking for new or working capital to be around Q3 E call. It not really plus minus anything or or should we look for big Harvester drop.
Speaker 1: So we typically see an increase from Q3 to Q4.
For couple of reasons number one we're what we're expecting in terms of the trend and quarter over quarter activity.
Speaker 1: And perhaps more importantly, our focus on working capital optimization I think this year versus others, you should expect flat quarter over quarter and if we continue to do what we've been able to do over the last few quarters, you could see flat to potentially down.
Quarter over quarter.
Speaker 1: That's great to hear Okay, and then lastly from me just on the Capex side not to beat a dead horse here and around touched on a lot of it but just some clarity you got that $50 million.
Our ads.
2090, $6 million spend or less I think based on year to date. Your 34 million Ed I think we're all kind of looking for less than that but if we look at your capex net of dispositions you started the net capital is only more like 20 million. So I just wanted to clear. The we're all talking about same numbers here when you talk about 50 million.
That would be relative to 34 million year to date eat up to a maximum of 15 in Q4 not up to a maximum of something like 30 million in Q4, because your net numbers more like 20.
That's that's correct.
Okay, Great and then just on that if we're looking out to next year and thinking of up to 50 million or less you have divested of about $50 million of assets a year to date.
Is there much left there to go are there are there noncore asset sales that that could take your net number to materially below that or should we be tied out that if you're a bit less.
So you should be still thinking a 50 or a bit less until we give you the update and again as I told there and don't be surprised if it is a bit less in terms of an estimate we regularly so dispose of assets and that's typically.
US putting some of the rolling stock set that we used to support our business I vehicles out.
For for disposition, our disposal and it's a regular cadence and that's actually part of our maintenance Capex that we use to keep those vehicles on the road and when they're getting close to being.
Hi, mild out we'll bring them in and we'll sell them and that's where the majority comes from in terms of.
Proceeds from disposal of assets that number that you quoted for this year is a little bit higher than we typically see so I wouldn't expect it to be that same size, but when you think about the amount of cash that we spend on capex that number will be in that 40 to 50 range and we're thinking about where it's going to be for 2020 and will.
Update you in Q4, but for now use that number in that number does not include those disposals that you saw this year and I would argue that that numbers a little bit higher this year than it will be next year, yeah, we could be running a truck option over here, Greg if they were all in one place.
You drive them you depreciate them you replaced them and you sell.
Simple as that alright, guys. That's it for me thanks again.
Thanks, a lot Greg.
Once again, if you have a question. Please press Star then one.
The next question is from Keith Mackay with RBC. Please go ahead.
Hi, good morning oriented.
Good morning, Jeff.
Just one one question for me Tom in your prepared remarks, you mentioned the competitive behavior of some of the larger mud companies.
This is something that we think it's been happening for for quite some time, but have you noticed change or intensification of that have that competitive behavior over the last quarter as the U.S. rig count has slid.
Well, we're watching the commentaries of the big integrated service companies to see how they talk about their business offerings and then we compete with them every day on the street, what we're seeing is that.
There are new bids that they're putting in their raising their prices and what we're hearing them say on their calls is they're not going to have loss leader business lines. They can afford to subsidize the customer and how they got into that position in the first place is they took a sales.
His approach where the bundled everything for the big operator, and before it became a technical service they allow drilling fluids to become a loss leader to help them get pumping equipment out or expensive downhole tools.
And I think that they're getting the same pressure, we're getting make money or don't be in the business. So I don't think it's changing overnight, but we see the results of the guys that segment or how big businesses and those businesses are not making any cash flow. So.
So we we think we understand why they're behaving differently.
And for the customers that.
I think we do a better job, but the.
Premium for the value adds to high I think we can pick some of that work up when we cost the same as the other guys.
We don't need to raise our prices to generate cash flow in these businesses, we just need enough volume.
Gotcha. Okay. So just just to be clear then in what you're seeing in the competitive space competitors have being actually raising prices and not not slashing prices and say coming after some of your semi or key client.
We see mom and Pops working for results that if they brought their accountant other office once in a while they quit doing we don't think we can prevent that ever from changing.
But the bigger corporate competitors need to do what we need to do and that is turned some cash. So we're seeing the bigger competitors raise prices or even look at divestiture of the business because they allow the people that it may be turned around to leave.
Or they push them out.
Got it and just on the divestiture side, then would it potentially make sense or be viable too.
By a competitor business as a as opposed to having to organically when when competitors or how are you thinking about that currently.
I'm thinking that if they're selling it.
It's because it's not paying its way and we're not issuing one share for anything that doesn't pay its way.
And they're not selling it if it's higher margin business.
So.
I don't think we're interested in maybe there's the odd asset that could drive cost of goods down or give us some infrastructure and a good place.
But we're pretty built out everywhere and we don't need to add low margin sales.
Got it and understood. Thank you very much.
The next question is from inquiries with JMP. Please go ahead.
Morning, everyone.
Morning.
With respect to some of the strategic initiatives in non oil and gas I guess areas of focus are able to providing goalpost maybe come even 2021, what percentage of your business you would like that to represent or I mean, where you'd like to be there.
Off we could ever get to 5% it becomes interesting maybe you look at ways to expand that.
Through M&A.
We're not at that point DN, it's a low volume high margin space, whether its cosmetics.
Or industrial or household goods, the probably the big volume areas would be agriculture municipal water treating.
And we continue to poke around those markets. If we get a hit on a technology, we can make big volumes in Kansas, and we can make smaller volumes in Vancouver, where much of that stuffer originates.
And.
You've kind of hit or on the last set of questions and with mine, but I mean, historically, you've been pretty active in quite successful in the M&A market are you able maybe able to qualify what that market looks like right now relative to when you've been active previously and.
Acknowledging that you have something to grow at your Kansas facility and.
Some of the prior comments you made.
Its a.
I mean, it's never say never but it's not an area of focus we think we can organically grow the business.
We can organically shrink the share count and further de risk the business and those are our priorities.
Okay.
We don't need infrastructure in anywhere.
That we need to be and we need to work on adding relationships of trust and filling these plants because there is more margin in the second half obviously of the volume than the first half.
And with respect to adding customers in West, Texas, I mean, what are some of the gating factors you've realized is trying to get on with these guys and where you I guess, you think you need to improve to start winning some of these larger super major customers.
We need to work for their competitors.
Have better drilling.
Or completion metrics than they do.
And play a hand in that which we are and then we need to advocate for that so we got into a couple of the very big independence in the last six months.
In the Permian, specifically in the Delaware and we're working hard on the Super majors that look to be ramping up as the independence get a little slower.
So we're going to get the work with technology in execution.
And what they're looking for.
Is to be as good as the best operators with their capital and have certainty of supply of high quality products. Our mill in corpus our reaction plants in Kansas and Vancouver, our distribution in Midland our Mega mud plant in the Delaware.
All of those things are the things that the Super majors are evaluating when they consider you were ISO certified and manufacturing working to have all of the labs to be that way.
We think we check the boxes for them.
We get them want to what an independent gives them in service.
And sense of urgency, but the problem solving capabilities of a big company.
Got it.
Last one from me Tony I, just want to reconfirm, but that $39 million of Gionee and Q3, that's a reasonably good run rate moving forward.
Correct.
Okay perfect. Thanks, very much guys, though I'd turn it back over here.
Thanks.
The next question comes from analyze Mattel is with industrial once please go ahead.
Good morning.
Morning.
Just want to focus a bit on some of the things I've heard from some other service companies that Theyre thing potentially a relatively hard stop in some sort of activity.
In the second half of Q4, you know there's a number of factors at play in here versus whether they're doing work for independence versus majors, and whether theyre drilling related or come Gleason related I know, it's a myopic question because its short term versus I would agree your 800 rigs kind of long term next year, but just to not.
Be surprised are you seeing anything along that line or not.
Traditionally and Thats not uncommon event, where people have exhaustion in their budgets.
Traditionally the hard stop is on completions.
Want to drill the whole land you want to drilled a hole the high spec rig and you're not going to sharp production in at the end of the year to save the treating costs. So if you're hearing that my guess is it's probably completions.
Type work, which is a very small percentage of our business, we're kind of half upstream half production and the vast majority of the upstream drilling so.
We think there will be.
Sort of a break in Canada Christmas because we've always observe it the us doesn't seem to shut the rates down at Christmas.
Thank the hundred stays for the quarter.
In the U.S., plus or minus and I think 50 to 60, and Canada and a little less for 10 days in December and I think production takes a long I think the hard stops or that people can leave a wells will be completed after the new year.
Great. That's what I was looking for and thanks very much for that color.
The next question comes from Josef Schachter was shut the energy research Servicers. Please go ahead Sir.
Thanks, very much and.
On a decent quarter pretty tough business.
Which also I'm, sorry, I'm, sorry, I missed your conference a month ago I was stuck in the Toronto Airport for intake.
No, but your partner does a great job and.
We appreciate.
Being there and.
Moving the flag and letting the started them through to the client base.
The first question I've got is on the debt.
You pay down 19 million in the quarter 85 billion year the debt today, a run rate on cash flows 131 40.
The target.
During 2021, you want to give you got below two to one what's your comfort zone, where you get off that 80 20 approach that you have right now.
So thats the IB dividends on the 80% down what is your target to get to 250 million. If there is there a number or is there a percentage.
Looking at.
And said, it's a good question and there as you can appreciate a whole bunch of moving pieces.
The biggest moving piece was the one that we sort of showed over the last three quarters, which is what level of free cash flow can this enterprise generate so we haven't really good feel for the and obviously soda you could you just rattled off some pretty good estimates and then the next pieces at what point do we get comfortable making a decision.
And if at all to very away from 80 2016 on the one and we can wait until we get to a certain point in time, but.
Much more realistically, we're now we're going to regroup and take a look at what the free cash flow capability continues to be for the business.
What we believe that will lead us to and in terms of a metric its not really the debt amount. It's really the leverage level that we look at that we feel gives us a point between those two guardrails that we feel comfortable making or tweaking. The 82016, if we choose.
Used to and very specifically, if I had to be put on the spot for a number it would probably be around two times level that I think we'll get to over the next year or so and and on that's the thing that makes a tricky in a good way.
On the on the low extreme of the Guardrails is the fact that as you know.
By the very nature of our business model when things are flat year over year or more importantly, when the soften year over year, we're actually harvest a whole bunch of cash from working capital so that gets us very comfortable.
Allowing us to flexibility to tweak that ratio that Tom talked about that will always be revisiting, but in terms of leverage level. It's probably around two times that we can see in in the mid term that we're comfortable with and then like I said given the nature of our business we have that additional.
Bush and because if things are flat or down.
We actually see an improvement on the debt site Joseph I'll jump in here and say, we're going to meet as management and board in January once we see what our customers are going to do next year, what aramco does with their IPO and OPEC does with supply.
What happens with Pmax in LNG, Canada.
The variable for the change that could lead us to be a little more debt averse is that our customers have gone from spending 130% of cash flow for 20 years to spending about 80%.
So we have a duty to make sure that the balance sheet for our business reflects that shift I don't think week over LIBOR the business in the first place in the context of customers outspending cash flow, but.
It seems like that change to cash flow driven businesses that we work for.
As permanent or semi permanent and if that's the case.
Then we continue to pay down some debt.
And feel our way through our customers' expectations to spend money, we know that theres a lot of money to be made for long term equity holders by buying and canceling stock and we're keeping our eye on that.
No I agree with you and then it also you know if there is more caution in 2020, it just put more powerful applied.
Once people see the deliverability issues.
From the U.S. sales is not as high.
As expected.
My questions for me a one on one side.
This new mud system, you've got for the Permian, Delaware is is giving you marketshare and and.
Your competitors don't really have a product or is this something that you can change to the.
To the Eagle heard or.
Other basins the Montney here in Canada, the DNA in Canada, and create a higher margin products for yourself.
No the great thing about the business as much as the industry says drilling as manufacturing.
It's knock your strong a hole in the ground and all you have to do is drive around North America to see the geography changes and so that system. Joseph is slumber, Jay would call. It basin specific it works into certain type of geology and it's not.
Required and other areas.
Okay.
Hi, good it's not if there was one size fits all eventually everyone would cost yet and the customer would bid at down yeah. Yeah. I was just wondering if it's something that you were doing new here that you could use for a period of time until your competitors do create something got especially for the tougher based on those but.
I pick up or just saying there lastly, a with the announcement by a minister Savage of opening up conventional drilling do you see that as a potential bounce to your Q1 revenue forecasts are here. This is forecast for 2020 120 Claudia.
Yeah, we do we've already seen products come in we're seeing some well capitalized operators.
Looking like they're going to put some money to work so that move by the government looks to be helping services a bit in the near term.
Okay.
So for me.
Just popped in my head with the TC decision that the interruptible, where hopefully prices are from or in the summer.
Are you seeing anybody on the business I talked about more activity given their hope that we're not looking at 27, guys look more like $1.50 gas in the summer and and trying to.
Put together a plant business plan for activity in the summer.
Too early to say.
Our Canadian customers are getting very financially strong by being hamstrung on growing production. So I think the arb is growing we just don't know when it opens up.
Okay. Thank you so much for around lately me on this stuff and and congratulations again for the quarter topic business.
Thank you thanks to assess.
This concludes the question and onto the session I would like to turn the conference back over to Tom Simons, President and CEO for any closing remarks.
Well in conclusion, the quarter allowed CES to further de risk by reducing the bank line by another $20 million Canadian.
It allowed us to buy three quarters of 1 million shares and it comforter it allowed us to comfortably fund or dividend cash flow.
So we're not using debt or equity issuances.
As our industry has long been known for to fund dividends or fund Capex.
We funded the 10 million cash capex on cash flow as well.
Going forward, we're going to remain conservative around our balance sheet.
Well buying castle shares and will fund our modest dividend out of cash flow.
All of that is only possible because of our people running great business lines. We thank our customers for the business and look forward to creating value for equity holders, while preserving value and the bought thank you.
Thank you. This concludes todays conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.