Q4 2020 CES Energy Solutions Corp Earnings Call
[music].
Great.
[music].
Thank you for standing by this is the conference operator welcome to this day E. S Energy Solutions Corp, fourth quarter and year end conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to.
To join the question queue you May Press Star then one on your telephone keypad.
Should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Anthony I'll, Let Gino Chief Financial Officer. Please go ahead.
Thank you Sherry and good morning, everyone and thank you 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 results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our fourth quarter MD&A and press release and annual information form all dated March 11th.
2021 and in addition, certain financial measures that we will refer to today are not recognized under general accepted accounting policies and for a description and definition of these please see our fourth quarter MD&A and.
This time I would like to turn the call over to Tom Simons, our president and CEO.
Well good morning, everyone. Thank you Tony.
The purpose of today's call.
And just to show how battle tested the nature of our Great company, Yes.
We've experienced two oil crashes just since 2015.
Yeah and here, we stand again.
Today, we're undrawn on our bank line and in fact, we exited 2020 with $18 million cash and the bank.
Today.
See us through its two mud companies Canadian energy services in Canada and <unk>.
Yes, and the U S.
Number one day.
Drilling fluid provider on land and North America.
In terms of market share.
And for non for performance based on management's estimations of the market.
For the number three production chemical provider on land and North America and.
And climbing the ranks.
We're on the comm and pipelines and stimulation.
And finally and Frac.
And drilling out Frac plugs.
And when you blend that all together.
Off a common manufacturing platform common distribution platform backend plot for them and are committed and harmonious culture.
It creates operating leverage which is code for margin which creates profit.
And an industry that typically consumes capital and never creates cash flow.
So while the year has been a test for everyone on this call and everyone on our payroll and the poor folks that didn't get to stay on payroll here, we stand to gain battle tested and actually better than ever.
I'll move on to the next point.
We have massive underutilized throughput in our infrastructure and our manufacturing plant.
And we've even been able to reduce capex on rolling stock because of parking trucks as we downsized head count for reduced operations. So the business is poised as their customers cash flow growth as commodity prices for oil and natural gas.
Gas is growing and where its economic again I've been told anecdotally by plenty of find customers that their natural gas philosophy, and they want to do us flared and the Permian because they can now sell it and make money. So we're poised to grow as our customers have a commercial reason too.
Produce more oil and gas and not need to spend money to match that growth. We can just make more chemicals seldom and then sell them more later.
We have a motivated capable for.
And hungry work force, which.
Which we kept in place through these two crashes and the last five years.
We have infrastructure in the correct places.
The Permian.
Western Canadian sedimentary basin, the northeast U S Gulf Coast, we manufacture and Kansas not and the Gulf Coast.
People may have noticed that things keep happening and the Gulf coast.
And we've got a client and Vancouver, So we look at supply chain of commodities coming off the water not just out of the Gulf Coast.
Two times now and five years, we can get supply of commodities when you can't get them elsewhere, it's pretty handy.
As Covid eventually lifts and we feel very hopeful.
And encouraged about the future of our great company.
Okay.
And as we're running a larger market share company with less working capital [laughter], if people could meet together and the business I would say, we'd have accountants and warehouse managers and company officers high Fiving each other Christmas parties.
We have learned.
Somewhat with the help of change of management, but really by embracing the idea the week and create permanent value for the listeners on this call.
By running this business with less inventory without running out.
Taken the use of AI.
<unk> taken a change of culture and warehouses, it's taking faster invoicing, it's taken a massive FERC.
It's taken process change, but we're running this company with low to mid thirties working capital. So we've been able to grow market share.
Without needing to use the bank's money.
And that's obviously very powerful and we're committed to having that be a permanent change and we think we can.
I want to say to all of our employees listening are the ones that call and later and listen to this we couldn't have done this without you and <unk>.
Deserves some of the benefit.
And we're grateful.
I'll now go into the operations report.
I'm going to continue with a bit of a more muted tone and like last quarter and all.
I'll just be Plainspoken and say why.
Our historical updates I want to I'm, an ex drilling guy and I like to brag about the breakthroughs, we have solving our customers' problems because everyone wants to know why do they hire us instead of somewhat bigger.
Because that must be better or someone really small because they entertain them.
And we've got competitors that are either on the cusp of going broke and they need to steal ideas or we got an ethical competitors that just steal ideas because that's cheaper than hiring great people to think of great ideas. So we're gonna start being a little more guarded and per.
Testing what everyone on this call benefits from us and doing better than our competitors.
But I will specifically talk about where we'd go on and why and hopefully give people confidence that is lasting.
So I hope to share enough for listeners to feel confident.
That said, we have a diverse customer base across more than one segment.
Segment and.
And that the tricks of the trade can't be divulge.
But there's too many and that's because there's too many weak competitors do we need to let fail and we can't let the unethical one steel all right yes.
Equity and bondholders that want more color from us.
See us and Midland Calgary, Houston, and Grand Prairie It doesn't have to just be Tony right.
Vern and Gary can take people around and Midland Richard control people and Houston.
People always ask us what's the trick there isn't one trick it's the chemistry, it's the application and it's the people. It's the culture, it's the location of the infrastructure.
And almost bring a little gin pad and come up with a calculation about 100, how would you rate who you would pick your supplier and it's a recipe and and a picture tells a lot of words. So for people that are very curious as we use these updates.
We are available for you.
If you're an investor and the business I'm going to start with Canada.
For Q4, and Canada, our Canadian drilling fluids continued and it still continues to dominate the drilling.
Sag D heavy oil with cold recovery southeast, Saskatchewan, and all the markets, where drilling fluid technology lowers drilling and you get fees and if done properly.
And can lead to superior completion and outcomes on the well as well.
During October we averaged 31.9 jobs.
And November 37, and.
December down to 31 and.
And for Americans and familiar with why Us Canadians observe Christmas so basically half the month gets losses, maybe 10 days.
So both are way down from 2019.
In 2019, we averaged.
55.79.
But we made money off that lower number.
It was hard on us and it was really hard and our poor employees.
And I.
I just got to stay as a Canadian.
God help the people and this industry that continue to get screwed by Ottawa.
And the indifference of people and central Canada that are on the verge of not having energy of line five gets shut down.
And the people and Vancouver, it seemed to one energy for themself, but they don't want the places that produce it to produce it and we need a break from you guys. It can't be both ways and these people that earn these living and working for us and companies like us.
And the devastating their lives and we need to come together as Canadians.
Most businesses.
With that volatility that I mentioned going from 56 jobs to 31, 33 jobs and the year.
They wouldn't be able to make money because their assets and their cost base are fixed.
Our assets for our inventory.
And our costs are our people.
And if we're careful and.
Attempt to be sensitive with both we can take them up and down and stay out of the glue and we were able to do that.
Before analysts get too crazy.
Say that were up.
It is very competitive out there SCS continues to work way below market trying to sell that business.
In January we average $65 seven and five jobs.
And February sixty-three 0.7 and five.
Mark 47.7 and five.
We do feel confident we'll hold our position and the deep markets.
Everybody's asking about the Clearwater.
Working on a system that we've done a lot of regained perm work around that we think could be less damaging.
And what people do now which is just drill out with T. C. L water to prevent the hole from falling and they don't track those wells. So we need someone to run the trial on that system.
And see if it improves productivity and.
And reduces drilling fluid cost a little bit there's no money and buying kcl for $15 and selling it for 16, and that's not our business and that's currently how those wells are drilled.
And that play the economics are spectacular for the producer.
Know that we're focused on it with a science angle and trying to get into it H D. D continues to be a nice niche business for us and Canada with the odd wind in the us as well.
And I'll move on to peer Kim.
This has got to be the best turnaround and history, it'll be the best turnaround and that I've had the fortunate and that being around and microwave.
Dave Burroughs came to us gosh, probably seven eight years ago from Weatherford a day.
Dave and Ken Zinger had become and often team.
Many of you don't know Ken and a few of you will on our lighter had Ken and I started this company 20 years ago September 5th Global one.
I wish more people knew Canada newest contribution to the business.
And we each had newborns 20 years ago. My parents thought I was out of my mind.
Quit as a sales manager of and New York Stock Exchange listed company that you know thought I was the fair haired boy and was going to be their guy and Canada.
I, just always want it to work for myself.
And was the best much salesman and I've never seen in my life and I didn't want to compete with them.
And so we did it together and for some of you that no. Other story, we took it public to get the third guy and monetize and keep our company and.
And 20 years later, we're bigger than that and U S listed company.
What those guys have done the pure Canada is nothing short of incredible.
They have got supply chain dialed in.
And they have got sales methods and pricing dialed in and they've got culture working as one day.
They have lab support dialed in.
They have customer experiences and problem solving at Sky high levels, they've got us and new plays and they're helping us get and the oil sands, where the spend is mind boggling, it's a factor higher than our sales today.
And we're looking at new problems in new markets because of the credibility that those guys are creating for pure Kim.
So the debt the shoutout is justified pure Kim has become and accretive contribution to our company after having been a financial drag on it for a long time, we always expected it to be for a long time, but the turnaround has been fantastic and benefits everyone.
On this call I'd like to thank the people in pure Cam.
For their patience for the last few years.
And we know that.
Change is tough for people and this change has been worth it Guy as you guys know work and the best Chemical company in Canada.
And to continue to invest and you guys invest and analytical capabilities.
We're gonna take over the Canadian market and become the number one up here.
Whoever you want a pure Kim again, thanks for your patience, we fixed it.
And then it kicks and mass and now we're going to have some fun and be do something we're really proud of.
And I will say that.
And I've lost my place for a bit.
I'll now move onto pure Kim for I mean to us to clear.
Oh pardon me I do wanted to go back to this.
Sorry, so customers are showing trust and pure camera and our brand.
And without getting ahead of our skis, we see a lot of service companies coming out with things about ESG.
We want to never be disingenuous, and we don't want to say moving carbon neutral 2050, I don't know that I'll be alive and 2050.
I want to promise things to people on this call debt.
Later I can look for high and have made good on so we are certainly working on.
Ways to demonstrate how this company.
Yes.
Following its weight in that fashion and finding ways for our customers.
To get out of under the block cloud the politics is put oil and gas under service companies need to make their customers better and then the customer hires the service company and that's how this works. So we're doing things like that and then as those solutions take.
He will tell you about them.
The other then.
Come up with some way that we won't release submissions and think that somehow satisfying shareholders is more important and satisfying customers. Our good standing at pure camera is allowing us to look at opportunities to possibly tie up carbon.
And it's letting us look at opportunities that progressive customers are considering in the energy transition. So I think there's a reasonable chance over the next five years that this company could make some money through this transition, but it won't be with window dressing press releases.
Yes.
It will be doing things that relate to using natural gas as feedstock to become hydrogen and it will be doing things that relate to carbon sequestering.
It will be doing things that allow fracs to be done faster.
So that you're using less water less fuel less product less trucks on the road.
Those are the things we've been talking about for five years already and we're already working on initiatives like that it will be doing things like reducing waste stream off things that are already happening by using science and finding out a way to get paid for that so that everyone on this call and see earned.
<unk> per share go up a little.
I'll move on to stem works now and works is performing well its financial contribution remains accretive really proud of the guys and the states transcend the young fellow down there about a year ago is so busy we're now hiring him company and.
And I think we're gonna have success, pushing stem works, and Oklahoma, where theres lots tired old wells.
And if there's ever been a perfect storm to go find young technical Petroleum engineers, and the United States to build out and new business line. It's right now because all the oil companies have laid off hungry young petroleum engineers that know can't have it be two.
Too good for them to work for a service company.
We can find a couple of young kickass people that are willing to live and a truck and go live on location and let us brainwash them into our culture and teach them how to build the unique treatments to bring back old wells and turn a liability and do a producing asset stemware.
And it can be a big business for us and the U S. It's basically small volume treatments and specialized asset including nano particles.
But they are not the entire solution.
Unlike what other companies claim and it's not one product for every rock that makes no sense at all.
But we're having great success with stem, where some both sides of that of the country and want to tell people that.
And that's a alco and Mike and his group continue to have great success supporting our energy businesses.
Selling into cosmetics and industrial as well a lot of there we always have.
We're not gonna segment those results, they're not material, but we're also not naive diversification for this business would be great.
But you know having a billion dollar platform.
It takes a lot of sales to say your diversified but we are working on it and appreciate mikes contribution there.
And clear market conditions are finally, starting to pick up where they're able to get enough business to make a financial contribution. So thank you Gavin. Thank you for you know staying in the fight Waller was so tough.
Outside for clear is the oil sands and it's water management.
And it's the energy transition Gavin and Ken Zinger, and I go back 30 years, So Gavin and his 30 years of wisdom to look at what has been already tried and why it didn't work and help us avoid mistakes.
Look at different ways to do things, we need to do things with your money as investors that can be commercial.
And then the oilfield everything that was old becomes new again, so it helps having management that's been around the block and Grimsson and Canada had been around the block together a lot.
As this energy transition happens all the old ideas could it be presented as the newest greatest idea we're already seeing it.
I think crimson and idle probably after resumed drinking more wine together, because we're going to look at ways to clean up waste.
Will help the industry improve its ESG rating and become more investable I don't think industry will get funded with outside capital.
But if companies can get a decent multiple maybe we don't end up with 10, E&ps and owning all of North America, we still have a couple of hundred.
Which would be better for everyone involved.
I'll now move on to us.
A little bit of and update on our corporate strategy session that we helped us.
And say that.
Just touch a little bit on culture, and say that we presented to our before I moved to the US that we presented to our board a case study of 12, what I would call failed competitor attempts to consolidate businesses that do versions of what we've done over and.
The last 20 years and.
The common thread of Y and my view. These businesses failed was culture. So as I've talked about culture and talked about the names of the people leading these businesses.
We are decentralized on purpose folks these businesses need to rerun with local brands with local nuances and cultures to match the people that buy their services have strong financial and quality controls and the back and but don't get too heavy and it.
About what the customer experience is and then they can thrive.
That's how we got to 20% and the U S.
Started at six now we're at 20.
We took the share count from what it was when we IPO, the three and a half and and Goodyear's, We do 17 times that of EBITDA.
It wasn't by being centralized that fails in the oilfield every single time, so I wanted to share that on today's call, but we continue to have our eye on what is a difficult cultured and manage for the.
And the officers, but it is the only way that the culture and worked in our opinion and this kind of a business.
And move into the U S. A S.
Yeah, We know it's Wow way to go be I used to get asked for and the first one into the U S could the U S ever get to 20% you have 30, 35, and Canada. All the time 20 would be a home run and the states and.
And you never tell people, no, but that seem pretty high.
We have it.
And we've been asked how we're going to keep it.
I would ask why would we lose it we didn't get it by giving away product and we didn't get it by using our balance sheet. If we did that we'd have had 30% we got it by focusing on the customers that we got work from during Covid, three or four years ago.
These sales cycles are enormous and we went after strategic accounts, specifically the super majors with unique strategies to each account identified what their problems were and what.
What was causing them to take twice as long to drill as the independents and small guys and how could you take us solution to them that they would feel they came up with because if you give them. The solution. Then you think you're smarter than them and I'll throw you out.
And it took a long time to have that come around but we've had breakthroughs across the industry.
Success.
It comes success and today, we have 20 per cent of the U S drilling fluid market and very importantly, it's concentrated in areas. So you have enough operating leverage to make money, having 20%, but scattered everywhere wouldn't be as powerful and you wouldn't make money.
I would attribute it to the culture Richard's built a culture of teamwork humility and gratitude.
It's really incredible they get results by having a culture, that's different and Jacob catalyst and.
And a different culture and in Canada.
And that's gonna be how we're going to continue to run the business, we're working for the Super majors, the large independents the privates.
And we treat all of them as our most special and how do you do that.
But having a culture that rewards for our employees for results not for tenure and.
And that'll be as detailed as I'll tell them you want on how we run the business.
And October <unk>.
Friends and 47 jobs.
In November around a 56.
In December we got up to 69.
And January <unk> 75.
Yeah.
In February we hit 80.
Today, we're at 88.
I think theres upside with the Supermajors.
Everyone on this call follows them as closely as we do that'll come in fits and starts.
I would predict that we'll just have a slow creep up it won't be huge.
But at 88, the company's doing real well.
J Cam catalyst.
Vern and his team have done an incredible job there were formally calling and jae Kim catalysts now leave.
And we've formally merged the two businesses internally and the customers that's been almost five years. Thanks, so much to Vern and his group.
Vern Disney brought us private company catalyst into us five years ago. This summer.
And the Vern and Trey and Lisa had the largest private company or one of the leading private chemical companies and the Permian and.
And he basically merged himself into us which is not a small feat.
And today Vern is leading and 80 acre reaction chemical plant and Kansas, So we make molecules there.
He blends them down and Midland.
Or and Kansas.
And then we stage them across all the appropriate basins and the U S.
I said at the beginning of the call we are a strong number three.
Crossland and North America.
Jae Kim catalyst and pure can work together.
To solve problems and all the way up to the oil Sands, we've got good old Curtis that works for both groups and if we got a heavy oil problem and Canada.
He's the one man on the world the consult that problem if no one else can.
And Curtis and Canada are probably the two leading guys and the world and problem solving there and.
And of course, we're doing better and the oil sense because of that.
So the business is focused it's adding new customers.
Being opportunistic where it can.
And it's well on its way to expanding its reach and the Mighty Permian.
And with upside and unique and niche opportunities.
It's it's financially.
And it's.
Pardon me for losing my way here and.
And basically for Jay Kent catalyst that takeaway is maybe slightly reducing capex to revenue ratios.
Because a little less treater truck requirement as new production comes back and the lower 48.
Not through vertical wells, but through new horizontal wells and so watch for us to give soft guidance to that as time goes along but as it's very simple big horizontal wells and continuous injection not a treat or truck type of treatment.
We don't like trader trucks, but we must have treater trucks, there for vertical wells generally the horizontal wells take a lot of product they go into the well for ever and high volume clearly better for all chemical companies as the percentage of U S production is more and more.
For us that it is better for us and champion X and Baker and by the way we're rooting for champion X's price increase that they sent out by a letter this week.
I'll go on to superior waiting.
Tom and the crew running that place great. We've taken advantage of some buying opportunities to pick up or a good price, but we are running below optimum capacity. There. So that does affect cogs negatively a little bit there's just not enough takeaway out of the facility because drilling volumes are down.
And so we have been grinding some other products and there we wanted to do that for years and sometimes out of crisis comes good things. So if this forces their hand to diversify that mill and the other grinding things in two or three years. This might have actually been a blessing in disguise.
Without them and to turn it over to you Tony and then I'll close it up at the end.
Okay.
Thanks, a lot Tom.
Although our Q4 exceeded expectations, we are even more proud of the fact that we continue to demonstrate our financial resiliency and the merits of our unique business model to withstand industry shocks and positions. He has to capitalize from improving industry conditions, we entered the downturn from a position of <unk>.
Actual strength and proactively implemented measures during Q2 to provide additional protection during the downturn and ultimately support growth as industry conditions began to stabilize and improve our fourth quarter continued to benefit from those cash preservation and cost reduction measures and as a result.
Our overall liquidity position and balance sheet strength also continued to improve as we once again displayed our counter cyclical balance sheets at low points of the cycle.
Well overall oil and gas industry conditions continued to be significantly impacted by a reduction and global demand during the year the fourth quarter of 2020 saw some of those headwinds continue to subside as Tom alluded to as a result through the fourth quarter and to date and see US has benefited from the general reversal.
And production shut ins across major basins, and and improvement in drilling and completion activity, our established infrastructure cost rationalizations and initiatives and committed high quality employee presence in key basins have allowed us to realize market share gains and sequential.
<unk> mentioned revenue and adjusted EBITDAX.
She has exited the quarter with a net cash balance of $18 million compared to $93 million drawn at the end of Q1 before the downturn began our strong cash position was driven by a combination of increased activity levels and increased market share effective inventory management and cost contained.
And the measures we ended Q4 with $300 million and total debt net of cash comprised primarily of $289 million of the company's senior notes, which don't mature until October 2024, and representing $127 million reduction from $427 million at the end.
Q1.
Our focus on company wide working capital optimization, and 2019, and 2020 position the company extremely well to maximize working capital cash inflows through the second and third quarters as activity levels declined as industry activity continued to improve and the.
First quarter sales.
<unk> began to make modest investments and working capital and exited the year with a working capital surplus of 273 million, representing a $144 million.
Reduction from $417 million at the end of Q1.
We experienced a similar working capital harvest during the 2015, and 16 downturn, where we harvested $153 million and came out of the downturn with an undrawn.
Credit facility net cash position and ample liquidity to support improving activity levels and market share growth and as Tom said, we did that again.
Through the pandemic, we have benefited greatly from the high quality of our customers and diligent internal credit monitoring processes. As a result, we managed to maintain a strong collection record and minimize the accounts receivable losses recording only $3 $8 million and credit loss provisions in 2000 and.
And 'twenty that represents less than 5% of revenue for the year. We continue to remain diligent and focused on strong AR collections minimal bad debt expense and inventory management.
Subsequent to December 31st see us activity levels continue to improve and both production chemicals and drilling fluids and markets requiring the company to make modest investments and working capital and as of today, we have and net cash balance of $8 million and and continue to have a fully accessible.
Senior credit facility.
The quarter see us generate it.
Revenue of $213 million compared to 166 million and Q3 and down from 316 and the fourth quarter 2019.
Revenue generated in the US was $137 million, representing 64 per cent of total revenue for the company, while Canadian revenue was $76 million and the quarter for.
For the year see us generated revenue of $888 million compared to $1 3 billion for 2019 revenue generated in the us for the year comprised 68% of total revenue well Canadian revenue represented 32% for both periods revenue results represent.
The decrease over prior year comparative period, driven primarily by the reduced activity levels across all business lines and as the low commodity price environment and reduced demand resulted in temporary production shut ins deferred completions and significant declines and drilling activity in North America.
Sequentially. The company has benefited and the fourth quarter from continued strength in all divisions, notably U S drilling fluids market share as Tom mentioned increased to 20% and Q4 and for context that represents a record for the company and us up from 13% in.
Q4, 2019 and up from the previous record of 17% and Q3, 2020 six.
She us achieved adjusted EBITDA of $24 $7 million, and Q4 compared to $18 2 million and Q3 and $39 7 million and Q4 2019 included and these results is a $2 $9 million benefit.
And nice I see us from the federal government's Canada emergency wage wage subsidy program, which has been instrumental in allowing us to mitigate further Canadian personnel reductions through the downturn adjusted EBITDA margin and the quarter was 11, 6% representing.
And increased from 11% and Q3 and as the company benefited from improved competitive positioning the reversal of those production shut ins and both the us and Canada improved.
Improving activity overall and increased market share for the year, adjusted EBITDA was $102 million compared to $167 million and 2019.
In may of 'twenty, and 'twenty, and we announced it in light of deteriorating industry conditions, we were eliminating all nonessential capex spend and reduced projected 2020 spend by 40% from $50 million to $30 million and the fourth quarter of 2020 Capex spend was too.
4 million, bringing the total for 2020 to $22 $9 million well below that $30 million guidance.
Our balance sheet continues to benefit from prudent structuring and maturity schedules for our credit facility and senior notes.
Total debt at the end of Q4 was primarily comprised of those.
Senior notes in.
Amounting to $288 million.
On our six and three eights with a six and three eights coupon and again as mentioned those don't mature until 2020 for December 31st with.
With that cash balance of $18 3 million and fully accessible senior credit facility and that gives us ample liquidity and access to that 235 million dollar CAD equivalent and a security.
<unk> provides us with significant availability going forward.
In summary, we feel very comfortable with our strong financial position ample liquidity and a conservative maturity schedule.
We continue to monitor our capital allocation options and the context of market conditions.
Look and the levels of our surplus free cash flow generation and <unk>.
<unk> to 2020, we made a difficult yet calculated decision to suspend our dividend.
This decision allowed us to conserve approximately $16 million and cash on an annualized basis, given the heightened uncertainty at the time, we temporarily suspended activity under our <unk> and CIB program and the second quarter of 2020 after using for $8 million to repurchase two point.
3 million shares in Q1.
On July 16, 2020, we announced the renewal of for NCI B program and during Q4, we opportunistically repurchased for 5 million common shares and an average price of 91 cents per share.
And resulting and the repurchase of nine 4 million shares at an average price of $1 19 per share for all of 2020.
Subsequent to year, and we've repurchased an additional five point for a million shares at an average price of $1 46 per share and repurchased and canceled a million dollars worth of senior notes and 988.
We continue to assess share buybacks and bond repurchases and the context of our assessment of market conditions market prices and certainty around our surplus free cash flow levels. We.
We remain cautiously optimistic on our outlook for 2020, one and beyond we came into this downturn from a position of strength with a strong balance sheet and with a proven counter cyclical leverage model as demonstrated in 2020 again.
Our goal for this downturn has been the safety of our employees the preservation of our strong balance sheet and the optimization of our industry, leading position and critical employee base to withstand the downturn and maximize our potential and as conditions and begun to improve and we remain committed to those financial goals.
And believe we are well positioned to continue to capitalize on stabilizing and improving market conditions at.
At this time I'd like to turn the call back over to us to.
For the operator for Q&A.
Thank you.
Now begin the question and answer session.
To join the question queue. You May Press Star then one on your telephone keypad and you'll hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any key.
To withdraw your question. Please press Star then two.
We will pause for a moment as callers join the queue.
And the first question comes from Keith Mackey with RBC. Please go ahead.
Hi, good morning, and thanks for taking my questions here.
Maybe just if we can start.
And I know you've had previous conversations about any kind of end market diversification and Tom I think you mentioned it a little bit and you're in your prepared remarks, but maybe if you can just discuss where this stands within your current set of priorities and any progress you may have had on on that front.
It's a it's a high priority key because.
It can be low volume high margin business and we've got.
50, chemical reactors that can make products for that Claire.
Clariant.
And is doing the reverse and they sell into those markets and see energy us aside market because of the reverse is true their reactors can supply energy.
So we're just copying bigger smarter people the opposite say uncle.
You know does as much out of energy as it does in energy. So we have a placeholder the plant is certified.
It's terrible I don't remember the acronym, but where I. So 14 I think go one Keith for oilfield. The so called plant has whatever that cosmetic designation is.
If you go into your medicine cabinet, where and it with molecules and Chanel number five or chopstick, there and medicated gold bond.
I use London drug hand soap or I mean dish. So just because our stops and that we give a gifts gift basket out of Christmas and Theres 50 household goods and it.
We just need bigger distribution it it could be meaningful we.
But we don't want it.
And we don't want to mislead people that it can move the needle.
So.
It's important but we have a billion dollar enterprise, we need to sell 10 or $20 million not a couple of million dollars for it to be meaningful, but it's a real business on paper, we have every opportunity and the world.
And Mike and his team are focused on it and were you know kind of enhancing the team is what I would say without losing focus what we need to do.
Just have a team that that's their job it is and energy people as a side job and so far it's been.
Some of us doing it as a side job and funny enough that having a side hustle when you have a full time job it doesn't work out all that great. So.
We're getting more focused on it we already make money and it but it isn't material.
Got it okay, and maybe just a quick follow up on that so to get to that 10 to 20 million dollar <unk>.
Number and that's more of a focus and potentially G&A cost intensive Ah.
Initiative versus having to spend more capital.
It's not capital at all it's getting sales.
We've got the reactor capacity, we've got the science capacity when we even have the sales channel capacity.
We just need to convince somebody to buy it.
Got it.
Got it okay. Thanks for that and and one more question, maybe just turning back to the oil and gas market.
And on on the consolidation of customers I know you mentioned, it's better for the industry to have more customers than 10 fewer so what is your view on and your experience with the consolidation that's happened both in Canada and the us to date and what is your your outlook on.
On where the industry is going and how that might impact your business.
And can break both ways every time, there's one of these and we sit down and go is it you know.
Look at our different business lines, who knows who's going to get the job.
That's gonna have the power whether its drilling completion.
Stem production pipeline maintenance and.
And who do they like to.
And the supply chain decide does engineering decide and us at a positive or neutral or negative and so.
And on it.
I'm glad we got ISO certified and 15. It was the way we started getting into the big guys or at least could bid them and.
And then we started getting work and then getting more work.
You know ideally you want a lot of customers.
But the upside of this is this is going to squeeze the mom and Pops.
They can't possibly work at any of these places.
And how long can and private equity guys that are just trying to stay alive, hoping someone will buy them. How long can day play that game for these big guys and sell big volume at a loss.
They hit the wall at some point.
We just look at them deal by deal Keith Nothing has happened so far that's a death blow to us.
We have to give them a reason to keep us on location just like all the other service guys. Some will break our way and some will break against us like it will for everyone and there'll be people that don't like us. It's just how it goes but so far and none of the mergers have been a disaster, we haven't lost a big customer we also.
Havent had a big win out of it either to be clear, that's not where one of the gains came from its just mostly all been our gains have been organic and you and I'll say that the big one recently in Canada, it's probably neutral for us and.
And the big one and the U S. Because we work so the two big ones recently, we work for all four of those operators and they look pretty neutral.
Understood.
Okay.
And the U S and then the big one and Canada I'd call it neutral.
And if you know what the real win is is if the one and Canada can borrow money at 2% instead of 6% every person on this call benefited from that.
Got it okay. Thanks very much for the color Tom appreciate it that's it for me.
Okay.
Thanks Keith.
The next question comes from Paul Pereira with Stifel. Please go ahead.
Good morning, everyone.
Maybe starting with the champion that price increase are you able to comment on how pricing has sort of performed prior call. It in Q4 and Q1 and.
And whether you're seeing any cost inflation on our U S production chemicals business as well.
We hope they get all of it.
We could use some too so.
Some customers are resisting the handshake agreement that you would go back up some.
Some have honored us.
And we are seeing some cost increases because of.
Just inflation pressures and the storm has costs and disruptions for the whole industry. Nobody's asked this so I'm going to tell people. We think we lost eight to 11 days and Texas in February a blend of drilling and production. So we were.
You know, killing it.
We still will have a great quarter, but.
And the state was down for a long time, so everyone should know that.
We need them to get the increased call because everyone needs it.
Yeah.
Gotcha.
That's helpful. Thanks, and then.
So it kind of seems like we're moving towards a permanent drilling ban on U S. Federal land I think we're all aware that a lot of operators have multiple years' worth of permits but I'm. Just wondering if if this is created more conversations over the medium term about optimizing existing production.
Yeah, Our Stim works group Ah is hiring people because people can spend 50 Grand and go do some old stuff.
Guys are I think and a drill that acreage soon but you know what is really starting to come to the surface is that maybe the Midland basin.
Is actually better anyways.
I don't the Permian is.
Do people want assets stranded in the Delaware of course, not there'll be plenty of wells still drilled and the Delaware, It's not dead.
There's going to be confusion over whether people can get amendments to leases. So they can.
You know make us subtle change to how they drill it they still don't know things like back so it's causing a lot of confusion.
But the rig count Hasnt changed and people will move those rigs down into the Midland Basin and keep working.
And I hope it doesn't become permanent but coal we've seen what's happened in Canada. We know where this is going we've had six years of Trudeau standing on our chest.
Uh huh.
In Canada. The Americans are savvy business people, they know how to make money, they're decisive they're going to work through this and it really savvy operators here they'll just take the money that would go into those plays and take it somewhere else.
Okay got it thanks.
And then Tony the the earnings power continues to improve here as well as the free cash flow profile, obviously, you need to invest and some growth and some working capital, but you know how do you think about the remaining free cash flow here.
It's a it depends it and again, we've talked about capital allocation you've seen Us Act.
And and where we're not a utility and we're not and midstream where we can tell you exactly what percentage of that surplus free cash flow will go to those different buckets of capital allocation, but what we will do US continued coal co and we're gonna sum this up for US again for everyone could you let us do it then.
Yeah, that's yeah.
That sounds good to me I'll turn the call back then that's all my questions. Thanks.
Sorry, Tony.
The next question comes from John Gibson with BMO capital markets. Please go ahead.
Good morning, Al I'm, just first sort of activity levels.
And you could talk a little bit of all of us in your preamble and it seems like most of the leaders and they've been on the for our smaller cap producers or private side.
It seems like comedy from the commentary from the larger producers indicate that they're holding a line on activity levels now that are sort of looking at broader oil demand and could increase and down the road in tandem with our recovery I'm. Just wondering if you share that view and if so maybe what type of timeframe and we're looking at.
Your Intel us probably a sound azhar's drawn our customers find out.
No sooner than you do but so we don't have any greater visibility I would say than you are.
Probably 40% of our activity and the states us privates.
So the stuff, you're seeing and the news about who's working we're on those rigs.
And we hope that.
Exxon puts 20 rigs to work.
And a year, because we'll have a lot of them.
We hope that Chevron and gets busy down here, we hope that conoco and control keep a lot working because we'll be busy.
But we're busy without them being busy anyway, so and in Canada.
Okay.
I don't know what's going to work this summer 150 rigs.
We don't know 140 30.
We were able to make money if that many work we've got a variable cost structure, it's a little tough on people but.
We'll get through it we will get our people through it will be fair to them.
And.
So.
It's going to move around and it's volatile and that's why we need all of these other sales lines. If you were just selling one thing gets awfully tough.
Need to have four or five ways, you're dribbling revenue out the door.
Coming off a common platform otherwise I don't know how you make this go around.
Okay. That's fair just lots and for me, it's kind of leading on Cole's question and you know you might just save it for the year and like you said, but inventory levels hung in there.
And when you compare it for 2014, 2015 and recovery with and we saw a pretty big draw down and I'm, just wondering where your supply levels sit relative to expectations for incrementals and the atmosphere and.
Maybe also in relation to some supply chain issues, which I'm assuming are impactful for us.
Yeah.
Oh well we.
And our goal is to keep working capital say 35 cents on the dollar for less.
And there might be times, where it will spike up because we might get a deal on two boats aboard and maybe we'll go spend $15 million because it will save three.
So everyone should just know that that might happen and we're going to act like business people non.
Not.
Running a spreadsheet people.
And make good decisions, we bought some inventory and the fall at a discounted rate it throughout the ratios, but we made money for everyone. So we're going to continue to be capitalists non accountants.
Think we can stay at 35 cents drawn and that I think that's a reliable number we've got.
Systems in place I hate those words, but we have systems in place to prevent slow invoicing.
And we're working for customers that thank God didn't have oil storage Phil.
A year ago, I thought we might lose everything if oil companies didnt get paid how can they pay their vendors.
And.
You know how is that going to go and now that that's behind us with.
We've proven that we get paid when everything goes to zero.
So long as you get paid.
And keep the customer you can rebuild and were.
And we're gonna be careful with the cash we have we're going to deploy it and in ways. We think creates the best long term value work and a frame that for everybody at the end.
And as we build out more mud accounts build out some more frac accounts.
As pure Kim and Jae Kim catalyst expand more permanent production accounts, we can tolerate that working capital requirement and.
And I'll, maybe ideally hardly use any of the banks money at all.
Okay, great. Thanks for the figure it out there and congrats on the software and I'll turn it back.
Okay.
And once again, if you have it.
Question. Please press Star then one.
And next question comes from Matthew Weekes with I E capital markets. Please go ahead.
Good morning, Thanks for taking my questions. I was just wondering you know you're you repurchase shares and the quarter and subsequent to the quarter at varying.
<unk> prices I was wondering if you'd be able to provide any sort of color or disclosure on.
And what sort of prices are would you consider prioritizing ribeye and repurchasing the shares are at what point would you consider maybe doing more buybacks.
And it's.
Hum Tony do you want to talk about how that worked and then Matthew we're gonna save capital allocation for summary, but.
We think we did a pretty good job going into blackout and I'm going to let Tony described that because that was his brainchild and I'm gonna.
Say, both on the bond and the equity.
Yeah, and again, it's a it's really predicated on.
And two things number one is do.
Do we have the cash and or are.
Are we expecting to generate that surplus free cash flow based on what we know about our business and it's not ignore it and do we believe those shares or bonds are trading at a at a discount and the second part is it's a bit of a nuance where me and Tom and senior.
Management get together and look at the information to determine and so in that case, and Q4 and a big Big way, we're buying at 91 cents per share.
And you that we were aware undervalued and we knew that we were going to have for cash in hand, and so we spent it same thing in Q1 and same thing with the bonds again were a single B rated.
D I b flat each of our two credit rating agencies, which is one of the best and with first sector and we believe that if we can pick up those bonds at a discount that was accretive.
And Tom will give you a summary of the company's thoughts, but those are the exact.
Types of of our considerations, we're gonna us going forward here as well.
Okay. Thank you that's everything for me and I'll turn it back.
This concludes the question and answer session I would like to turn the conference back over to Tom Simons for any closing remarks.
So in conclusion, I'm going to talk about capital allocation.
And I'm, just going to thank our customers and our employees and so on capital allocation.
We are going to continue to dedicate excess free cash flow to buying shares.
We're going to buy enough to not dilute people through compensation.
And we're gonna quarterback buying above that so we're going to watch the price.
And buy it when we think we should.
We're going to keep an eye on the bond and try and shrink the bond.
And I'm, just going to say that we're very mindful.
Of the change and the U S government.
We've had firsthand experience is a Canadian domiciled company, how politicians are using climate change and.
Not as a science issue, but it's a political issue and.
And galvanizing young people to vote for that.
And we're a little cautious debt.
Maybe some bond buyers are going to get their hands tied and not be able to buy energy bonds and.
So were motivated.
To be sensitive to that.
And so we're going to likely build some cash.
And look to shrink the bond when we refi at.
We're gonna look to buy it when it trades.
And maybe have a bit of a bias to the bond over the equity.
Over the next while but we aren't going to let shareholders get diluted paying ourselves and our employees.
And if we think the stock's cheap we're gonna buy it we believe and this company management and staying in this company we want our employees to know we're staying so we're going to put our money where our mouth is.
And then and summary.
We'd like and we're also going to hold some cash guys for opportunities we're capitalists.
We've got things cooking and this business that we'll talk about if we pull them off and so we weren't walks and powder for that.
Our customers aren't going to take what bidens down lying down and they're going to go make money and we're going to go with them.
And what our story and that's why we have this great company and so we want some money and the bank to grow with them and make us some money. So that'll be one of the other reasons why if there's a little bit of caution on share buybacks.
Not that we're afraid of our shares.
And we wanted to make some money so that could be one of the other uses of capital. If we have things coming down the pipe and these arent 50 million dollar spends it would be a mud plant some worse and an example for a five or $10 million spend tops.
And then I want us summarize by thanking our employees, we made it Canada is not even close but I'm in Houston today, I can tell everyone and Canada. It is coming once we get these vaccines will be able to get back to having a life, it's nice to be.
And somewhat free here guys, it's coming for us too and to our customers. We're so thankful that you didn't have to make the choice not to pay us and that you're all stored didn't fill and we need you to pay us for.
And we're thankful you kept us on your work through this we're thankful that we're getting some pricing back.
And we just hope we can keep it rolling together.
And without them and wrap up the call.
And this concludes today's conference call you may disconnect your lines.
And for participating and have a pleasant day.
Yeah.
Yeah.
[noise] [music].
Yeah.
Okay.
Uh huh.
Yeah.