Q4 2020 Enerflex Ltd Earnings Call
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Yeah.
Ladies and gentlemen, thank you for standing by and walked through the end of flex fourth quarter and year end 'twenty and 'twenty results webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need of press star one on your telephone if you require any further assistance. Please press star zero I would now like to do.
Most of this conference call Mr. Stefan <unk> you may begin.
Thank you operator, and good morning, everyone here with me are Marc Rossiter and reflects the president and Chief Executive Officer, Sanjay Additionally, and our flex of senior Vice President and Chief Financial Officer and Denmark.
<unk> Vice president of corporate controller.
During this call, we'll be providing our financial results for the three months ended December 31, 2020, a brief commentary on the performance of our three business segments, and a summary of our financial position.
Today's discussion will include forward looking statements regarding <unk> expectations for future performance and business prospects.
Forward looking information involves risks and uncertainties and the stated expectations could differ materially from actual results for performance.
For more information please see the advisory comments within our news release, MD&A and other regulatory filings.
Ultimately one hour following the completion of this call a recording will be available on our website under the investors section.
During this call unless otherwise stated we'll be referring to the three months ended December 31, 2020 compared to the same period of 2019.
We'll proceed on the basis that you've all taken the opportunity to read yesterday's press release.
Now I'll turn the call over to Mark.
Thanks, Stephanie and good morning, everyone.
Despite the unprecedented volatility and energy markets and 2020 and reflects the fourth quarter results benefited from a combination of strong project execution and minimal business disruptions of Testament to the company's employees and their commitment to health safety and doing the right thing.
Although engineered systems bookings were challenged throughout the year more positive signals began to emerge and the fourth quarter, where the combination of improving commodity prices and refresh customer capex budgets led to an increase and bidding activity.
Normalizing for deep bookings of dormant projects from prior year's fourth quarter bookings were $77 million the highest since the first quarter of 2020.
And while positive for recovery and customer spending is and it's early stages and engineered systems bookings will likely remain subdued through the first half of 2021 with expectations for a modest recovery later in the year.
And our aftermarket services business remained resilient compared to prior downturns, despite challenges associated with operational and travel restrictions caused by the pandemic.
While restrained customer spending as expected during a downturn recovery within the services business is usually a gradual process and we expect that dynamic to play out again ultimately a M.
S is most impacted when production volumes decrease, but if wells are flowing equipment must be serviced in order to run reliably.
With a larger service footprint, including broader capabilities and personnel and all operating regions and reflects is better positioned to manage and Ams downturn and any single region.
Our global asset ownership platform demonstrated its resilience and the most challenging of environments fourth quarter results benefited from the contributions of three boom projects that were completed and Argentina, and Brazil, and the third quarter, while the fourth Boone project and the Middle East and Africa region was completed during the quarter and began generating.
Revenue in January of 2021.
In addition, we finalized 210 year renewals for natural gas infrastructure that were previously announced with our second quarter results. These extensions reinforce our strategic goal of generating long term stable cash flows.
In addition, despite the recent energy market volatility, we continue to see demand for our gas and power infrastructure through our asset ownership model and our rest of World segment.
In addition, our U S contract compression fleet of over 350000 horsepower maintain and average utilization of 82% on steady demand driven by strengthening commodity prices during the quarter.
Overall, I am proud of our team's efforts and successes throughout the year to keep our assets performing and our customers happy and.
And our flexible global vision is transforming natural gas to meet the world energy needs.
And we believe that natural gas is an important place and the overall energy landscape.
Natural gas is the cleanest burning fossil fuel that can provide a practical reduction and global carbon emissions, while synergistically supporting the global energy transition.
And our flex is focused on stabilizing cash flows to defend against the naturally get unpredictable cyclicality and commodity markets has been put to the test throughout 2020 the.
The investments, we've made and our asset ownership and Ams businesses have helped and stabilizing the companys cash flow throughout this downturn and will be and important part of our business going forward.
We continue to exercise capital discipline with a focus on value creation via judicious capital allocation.
And our flex believes that maintaining efficiency to optimize operations and preserving the strength of our balance sheet will allow the company to weather. This downturn and will provide a stable foundation to succeed as the industry recovers.
I will now turn things over to Sanjay to review our financial results.
Thanks Mark.
Fourth quarter revenue of $299 million decreased significantly versus the prior year period, due primarily to lower engineered systems revenue on weaker bookings throughout 2020 and reduced contributions from some major projects that were largely completed by the third quarter of 2020.
This was partially offset by higher rentals revenue, primarily due to amounts recognized on the 10 year renewal mentioned by Mark.
As well as contributions from our recently commissioned boom projects in Latin America, and the organic growth of our U S rental fleet.
The accounting treatment of the renewals is a conversion of boom contracts two of 10 year finance lease which results in some onetime revenue recognition as well as recurring revenue that will be recognized over the next 10 years.
Although service revenue continued to see reduced demand versus the prior year activity appears to have stabilized.
Gross margins decreased over the comparative quarter on lower revenue, but gross margin percentage improved due to increased contributions from recurring revenue product lines.
Until there is a meaningful increase in engineered systems bookings the company expects gross margins from engineered systems to decrease and margin contribution from recurring revenue to make up a larger proportion of.
Of total gross margin.
SG&A was lower in the quarter, primarily driven by decreased compensation expense and reduced head count.
Cost recoveries related to government assistance programs and lower travel costs.
Previously announced cost cutting measures remain in place including reductions in travel.
<unk> and non critical it expenditures.
And on Flex continues to manage working capital, including monetizing our receivables and realizing inventory into projects.
Remaining direct material inventories will be realized into engineered systems projects and new contract compression units over time.
These inventory items, our non perishable and can be consumed and various projects across our engineered systems and rental offerings.
From a capital allocation perspective, we saw $10 million of capital deployed towards previously committed projects and USA rental fleet and completion of a boom project and the middle East.
And this project began generating revenue in January 2021.
Our near term focus is on continuing to preserve the strength of our balance sheet. We've identified several opportunities to deploy capital globally, but we will continue to exercise discipline in 2021 and beyond.
Growth Capex will be limited to those opportunities that satisfy stringent investment criteria and enter flex has done a great job of maintaining conservative leverage throughout the cycle, we expect to generate significant free cash flow before growth capital expenditures in 2021.
As a result, we expect to be able to spend $50 million to $100 million and Capex. This year with approximately 20% to $25 million being spent on maintenance capex and the remainder of being spent on value added growth projects.
With significant liquidity on our revolver and the potential for additional harvesting working capital and the possibility that engineered systems activity could pick up and flex is well positioned to consider additional growth projects beyond this level as the year unfolds.
And of Flexes Board will continue to evaluate dividend payments on a quarterly basis based on the availability of cash flow and anticipated market conditions yesterday, declaring a dividend of <unk> <unk> per share to be paid on April one 2021.
With respect to liquidity and reflects as $96 million and cash on hand, and access to $593 million on our bank facility, which gives us the flexibility to manage the business through the current downturn and to consider organic and inorganic growth.
Our net debt decreased by nearly $30 million and the quarter as we continued using cash flow to decrease net leverage and.
And we exited the quarter at a bank adjusted net debt to EBITDA of one three times.
This completes the formal component of the webcast additional details can be found in our February 'twenty for the press release, we will now be happy to take any questions.
Ladies and gentlemen, if you have a question of our comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you were still of yourself from the queue. Please press the balance sheet.
Our first question comes from Aaron Macneil with TD Securities.
Hey, good morning, all net.
Patricia is also on the line and we'd want to speak to this but perhaps you could walk us through how the management teams thinking about your recent announcements.
Announcements and focus around energy transition and when we can expect something a bit more definitive from you in terms of.
And the specific avenues that you'll be pursuing.
Aaron This is mark Patricia is not on the call, but thanks for the question, we're thinking about the energy transition and it really in three ways and we.
And on the press release back in January when we announced Patricia the appointment to Chief Energy transition officer that we are actually currently working on Decarbonizing, the oil and gas industry.
Baidu and carbon capture projects flared of power and also electrifying compression both on our rental fleet and for our customers. So that's one way that we're doing it but really the more strategic work that Patricia is going to be focused on is really looking at new markets and in the press release, we talked about RMG hydrogen and carbon capture.
And biogas processing of some areas that we that appears to be.
Our core competency of of a modular approach to.
Gas processing could really be applied to those industries and create some value for our shareholders. So that's what we're going to be looking at and we're resisting giving of timeline, but I can tell you that it's a priority for us.
And we did.
And sort of a similar vein could you maybe walk us through the ESG scorecard that he published for the quarter and.
How you might stack up against some of your peers and.
If there are any initiatives underway that might positively impact of those metrics. When you reported again next year.
Well, thanks for noticing we put the FASB metrics on the web yesterday for the first time and our company's history. We're proud of getting through that work, we put a lot of energy into it.
It would be difficult for me to try to draw any conclusions and compares against our peers I think thats that.
Something that the market will do.
Happy with our social and governance activities, where we have been very well governed company for a long time, our commitment to safety is one of the primary ways that we engage socially with our employees and our communities.
On the environmental front, and we put a bunch of effort and to understanding our scope, one and scope two greenhouse gas emissions and they are there its not.
It's not surprising but engine driven compression is relatively carbon intense, but that's that's the oil and gas industry and like I said, a few minutes ago electrifying our fleet.
Not not.
Completely but looking for opportunities, where the grid could support and electric and electric fleet is one way that we can lower the carbon intensity and it makes good business sense and some instances. So that's really the biggest thing that we're looking at.
From a sustainability point of view, one of Patricia jobs and one of the reasons. We created the position is that we really wanted to differentiate our revenue streams.
And really start looking at driving revenue from low carbon industries and that doesn't really show up in the SaaS metrics as far as what our personal carbon footprint is but that's something that we're going to be looking at really closely.
Understood and then switching gears event Sanjay spoke to the Capex, obviously, a pretty wide range how much of the board approved at this point and and.
And does that entirely related to awards to date or how are you guys thinking about that.
Well the specifics around what what the board has approved I'm not sure we'll get into that detail but.
And I think we announced the $35 million.
Long term.
Rental project in the in the press release.
Certainly the 20% to 25 of maintenance Capex, you can certainly check.
Check the box on that is virtually assured.
And so I think that gets you to sort of to the lower end of the range.
We've got we've got some contract compression.
Projects that were excited about as well so.
I think that'll get it towards the middle of the range in terms of what's.
What's really committed to at this point and we continue to see some good projects and.
Hopeful that we can convert some of them throughout the year.
Okay, and then finally as it relates to the reclassification of the project.
Are you thinking about replenishing the contract compression and boom assets overtime and some of your customers elect to move assets on their books.
Well I guess first just the point of clarity that that actually is still a 10 year commitment from the customer to pay us for the exact same services that we've been providing.
Historically on those assets so.
There was certainly a component of from an accounting perspective, bringing forward some revenue but.
From a cash perspective.
And we still expect to be.
Enjoying the benefits of working with that customer for for the next 10 years.
It was really I think more of a one off like we're not seeing this as a huge trend.
And as people are are not necessarily kind of migrating things from.
Their balance of our balance sheets of their balance sheet, there continues to be pretty strong interest and.
Using the end of flex capabilities, and the balance sheet to engage with us and boom projects and finance leases.
Okay perfect. That's all from me I'll turn it over.
Our next question comes from Keith Mackey with RBC.
Yeah.
Hi, good morning, Thanks for taking my questions.
First one is just on the new $35 million project. Just curious if you can give any more details of our indication of timing of spend or when you might expect it to come on line.
Yes, we do expect the capex to be spent predominantly in 2021.
And I don't I don't think that this project will materially impact.
Earnings in 2021.
And so it should make a meaningful impact in 'twenty two.
I wouldn't expect to see a big impact in 'twenty one.
Got it okay.
And maybe just on the growth Capex, so given you've got some potential room for more spend and.
Right.
And you might have some larger projects and the hopper or theirs.
Still decent utilization on your U S compression assets, just how are you thinking about allocation for growth capital now in the context of those those opportunities.
Versus even a potential buyback or dividend increase I should add.
Yeah no.
Good question, Keith I think.
We're continuing to.
Be conservative about putting capital out the door.
We want to make sure that we're getting a healthy return on new projects that we and we take on.
Having said that I do think that the market is showing on.
And some good projects.
We're I think we're always balancing the equation of.
Do you buyback makes sense to do dividend increase.
Increases makes sense that really isn't analysis that we keep pretty fresh.
At the company.
What I can say that we still believe that the growth projects are the best way to add value to the company that the share prices recovered quite a bit as youre aware.
Think that makes buybacks less and less attractive and we feel like the best use of our dollars is to continue to grow the business.
We'll continue to be pretty pretty patient and making sure that we're getting the right level of.
Return on the on the Capex that we're putting out the door and the other thing that I'll mention is we're as we're constantly looking at.
And how the market's evolving and.
If we start seeing an uptick in the engineered systems business that that brings a lot more EBITDA and therefore, a lot more financial capacity to the table.
For us to invest and future projects. So.
All of those are variables that we continue to.
Look at their evolving throughout throughout the year.
I think calling of recovery is is we feel really good about natural gas, but the timing of that recovery is really what what is we think of uncertainties. So.
Those are all the variables that go into that thinking hopefully that's helpful.
Yes that is.
That's all I had thanks very much for the color.
Again, ladies and gentlemen, if you have a question of our comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Our next question comes from Josh Gibson with BMO capital.
Good morning, all.
Good morning, Jeff.
First I'm just wondering how the cold weather the last few weeks, specifically in Texas and this impacted your operations both of your fabrication facility as well as on your compression fleet.
John Thanks for the question our shop was shut down for four days last week.
Manufacturing shop and Houston.
Our rental fleet.
Fared very well and we kept a lot of that equipment running so I wouldn't say any material impact on our on our assets and our shop was shut down for four days and of course, what would matter of stuff is a lot of our people.
Suffered last week, a lot more than just and convenience, but there's a lot of the issues. They had on their home life and we thought about them all week, but they're they're back at work and the shop is operating and we are.
And stuff.
Okay, great and glad to hear that switch.
Switching gears, a little bit shell came out with an announcement. This morning that LNG, Canada is an important part of their portfolio. So if we're talking about a 2025 startup wynwood contract discussions are on the facility start for her and her flex.
I don't know what you mean by contract discussions.
Just around the potential facilities for the infrastructure for LNG, Canada.
Well I would like to say that the knock on impact of LNG, Canada has been felt and.
And it's it's a driving force for several projects that are on our pipeline and Canada already.
It's from people that are actually consortium members or people that believe their gas will find a home in the plant. So it's been a positive boost of the sentiment of gas producers and processors and the province and.
And.
And I'd say a lot of projects are and the engineering phase and I think we would hope to start getting orders on equipment.
And the latter half of this year early 2022, and you could trace that equipment either in whole or on part two of the demand created by shell LNG.
Okay, Great. That's all for me I'll turn it back.
Our next question comes from Tim on a child with ATB capital markets.
Hey, everyone.
Couple of questions for me first one just on rental utilization and the first quarter of you're starting to see that move higher and the U S.
Hey, Tim and Steph and speaking so I would say that the stability that we start to see emerge coming out of Q3 or within Q3 and that carried into Q4 is consistent with what youre seeing with the commodity prices and given what we're seeing and Q1 and so far it's been a supportive environment and.
And as that continues and we would expect a gradual recovery and utilization.
Okay. That's helpful and then second one just on <unk>.
Growth capital spending.
<unk> announced.
Boom of award that you guys got three 5 million Bucks is pretty digestible size and I would say.
Smaller and then some of your historical projects and that leaves you about 40 million Bucks for the rest of the year and you mentioned Sanjay that.
If you start to see engineered systems tick back that could grow and I'm. Just curious has there been any larger projects that you've had to pass up just in sort of thinking about it.
And being conservative for the balance sheet, and what's going to give you like what barriers internally or are you looking for or indicators that would give you comfort for larger projects.
Yeah.
So I'll take the turndown question first.
Short answer is no we haven't had to turn anything down I would say.
And in the heart of that.
The heart of the downturn, there was one or two smaller things that we passed on.
In terms of big projects that take a long time to come together.
We've been able to plan around those so far.
Yes, I think look we're sitting with a really conservative balance sheet right now.
One three times Levered.
Relative to our bank covenant.
And so we certainly want to maintain that we certainly are trying to stay within cash flow, but for the right projects.
Think of that we could also consider.
And going a little bit of little bit higher on leverage and debt.
That's certainly a consideration that will take into account and when you. When you look at that we can handle.
Any significant projects.
Relative to the size of that we've seen historically.
Okay, and then I guess the remaining growth capex, how much of that do you think it will be allocated to the U S rental fleet.
We're still that's really on a sort of opportunity by opportunity basis that we assess that so tough for us to nail that down and Tim.
Okay.
Appreciate the details I'll turn it back.
Okay.
Our next question comes from Michael Robertson with National Bank.
Hey, good morning, all thanks for taking my call.
And you guys have done a pretty good job to date, so far and that's sort of pulled back.
In terms of monetizing and working capital.
And just sort of wondering if like this and sort of changed your view on.
And moving forward in terms of like how much.
You know how much inventory and you want to carry on the balance sheet or should we sort of be suspecting.
Of returns of what we saw clean.
Pre pandemic I guess as long as it's gradually recovering here.
And Michael this is mark I'd like to say it will be more disciplined on inventory going forward.
Okay, and do you have like a level and buying sort of like a sweet spot or just.
And we really don't.
And what happened pre pandemic was that we were at the tail end of the.
For a five year.
Tick and engineered systems business, and and we got hit by the pandemic, which was largely unexpected at the same time, we're putting quite a bit of growth capital into our rental fleet. So the working capital debt increased just part of the pandemic was really a combination of.
And really good demand signals for engineered systems that stock and also a pretty aggressive growth Capex program for our asset base, which also was slowed down quite a bit.
Now going forward, we feel that the supply chains globally.
<unk> gotten to the point, where we don't need to build up the same levels of inventory to serve our customers and I'm sorry.
So I just don't I don't have a number or a level of to tell you I just noted minimizing working capital while making sure. We can serve our customers with their products is that balancing act that we always play and we want to be on the conservative side of it as much as we can.
Got it.
Switching gears and just wanted to.
One of your peers noted on our recent call that Youre seeing some e&ps.
Leaning on additional compression.
And as a method of.
Maintaining flat production without.
Necessarily drilling more as a relatively cost effective measure to maintain production and I was just wondering if you guys are seeing any of that as well.
And as well as decline they'll need more compression to keep them flowing and the the number of frac crews and some of the bigger basins is going up kind.
And of completing those those docs that have been out there for a while.
Step and fed support for our compression rental business and the U S has been good and.
And production and the U S has been pretty stable. So I am not about to tell you that the easy thing for an operator to do is add compression to keep production flat. There's a lot of things they have to do but.
To the degree that they are not drilling a bunch of wells and the ones. They have are declining they'll need compression to keep those go and the dynamics are.
They are complex to say the least but we think compression is got a home.
As long as gas demand is robust, which we think it will be for a long time.
Alright, that's great color. Thanks for taking my questions I'll turn it back.
Okay.
And I'm not showing any further questions at this time I'd like to turn the call back over to Mark.
Thank you operator since there's no further questions I would like to once again. Thank you for joining us on the call and we look forward to giving you our first quarter results and me.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Yeah.