Q3 2021 CES Energy Solutions Corp Earnings Call
[music].
Thank you for standing by this is the conference operator.
Welcome to the CES Energy Solutions Corp, third quarter, 2021 results conference call and webcast.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to Tony <unk> Chief Financial Officer. Please go ahead.
Thank you operator, 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 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 MD&A and press release dated November 11, 2021, and in our annual information form dated March 11, 2021. In addition, certain financial measures that we will refer to today are not recognized under current general.
Accepted accounting policies and for a description and definition of these please see our third quarter MD&A.
At this time I'd like to turn the call over to Ken Zinger, our president and CEO.
Thank you Tony on today's call I will provide a brief summary on our financial results released yesterday, followed by our divisional updates for Canada and the U S. Along with a brief update on the international businesses. We have entered into recently I will then pass the call over to Tony to provide a detailed financial update and an update on capital allocation.
Patients will take question and answers and then we will wrap up the call.
I'm going to begin this call today by highlighting the fact that our leader at CES and my business partner of 22 years.
Tom Simons has decided to retire as announced last month.
I want to thank Tom sincerely on behalf of our employees our board our shareholders and myself. It is with a heavy heart that I wish Tom all the best for his future.
Tom and I began working together at a small private company 22 years ago, it's been a great ride with a great friend and a great man Tom guided C. S. Through 15 years of mostly great times, but also with a steady hand and outlook through some very challenging times.
He has helped place our company in the current fit financially stable position, we find ourselves in today. Tom leaves he is very well positioned and perhaps the most optimistic time that the industry has seen in seven years.
I will truly Miss Tom in my business life, but we will forever be friends.
On behalf of the Cvs team and our shareholders I want to once again, thank Tom and wish him all the best for the future.
I'm honored to have the support of the board the executive management team and our employees to have the opportunity to lead our great company.
I wanted to take this opportunity to clearly lay out my priorities with regard to corporate strategy I will continue to run our decentralized business model by making major decisions with the executive management team. This is what Tom and I have always done since going public.
Richard Baxter Vern Disney Tony Allott, Geno and I will continue to meet regularly to the come to consensus on major decisions before I recommend them to the board for approval.
As always our main priority will be to grow our main business lines faster than our competitors at all times and we'll keep a keen eye on margin targets. We will continue to invest in ourselves through opportunities that meet our minimum IRR and provides a strategic advantage.
We will continue to look for opportunities to expand internationally, we will continue to evaluate M&A opportunities as they're identified and we will continue to evaluate the potential diversification of our platform into other chemical markets.
Yeah.
Next I will commence with the results summary by noting that for the first time in near years, I see optimism and excitement in the oilfield space in North America and worldwide at CES, we share that optimism and the macro outlook for our industry I met a very constructive oil and gas supply demand balance Q.
Q3, 2021 was a great quarter for CES revenue of $314 million EBITDAX of $42 million and EBITDA margin of 13, 4.4% were all at their highest level since pre pandemic. All three of these key metrics were back in the fairway of our recent pre pandemic levels since the low point of the.
Pandemic in Q2 of 2020, we have seen a step been on a steady path of recovery with revenue growing each quarter sequentially.
I'm extremely proud of the executive management team and of our employees for cautiously guiding the company through the uncertainty of 2020 and for positioning us for success in a much stronger market, we find ourselves in now.
Our outlook for the rest of 2021 and 2022 is very optimistic as we anticipate a market, which will allow us to yield significant free cash flow.
In order to meet the man created by this enthusiasm we have strategically invested in inventory and commitments across our business. So we can supply our customers in a very dynamic supply chain period, our best in class supply chain team recognize the signs of upcoming issues early in Q1 of this year together with.
Developed a strategy to minimize our exposure to the risks of key raw material shortages and higher product costs.
This has been a monumental challenge, which we have met with a monumental effort security of supply for our customers on both sides of the border has been the focal point of the strategy. We continue to work with our customers to emphasize the importance of accurate forecasting in all parts of the business gone to the needs of 711 shopping models, where you could simply call in place large orders in <unk>.
Expect immediate delivery lead times and planning are critical to supply in the current environment.
Yeah.
We moved quickly to Opportunistically buy lower priced inventory through Q2, and Q3 and in Canada. We did so aggressively to ensure we can get through the winter drilling season, I want to thank our customers and our marketing team for supporting CES by generally working with us to offset cost increases on both product and labor largely in real time.
We have done this by focusing specifically on affected products and rates not through across the board price increases.
Although these have been difficult conversations for all involved and not all conversations have yielded the ideal outcome. It is allowed CES to largely offset overall margin erosion supply issues and adequately staff our business.
With that said I'll now move on to summarize Q3 performance in Canada Canadian drilling fluids made another strong contribution for CES in Q3, our customers in Canada are experiencing a strong market in CES has been there to support them as always we are doing what it takes in a demanding market in order to support our.
Customers and contribute to their successes in.
In light of a tight labor market, we have managed to hire sufficient staff to support increased activity. Although this has been a significant challenge as well today, we have 67 jobs underway in Canada.
Yeah.
Our pure Kim our Canadian production chemical business, we had another solid quarter in Q3, both financially and operationally.
Each month in the quarter was at or very near all time record revenue levels similar to the drilling fluids group margin erosion and security of supply have been the main focus area. We are working with our customers to ensure we have accurate forecast of anticipated volumes. So that we can guarantee them delivery of the products and services, which are critical to their businesses.
We continue to see nice contributions from our Frac chemical and stimulation groups. Although there is there has been significant cost escalation in both of these business lines and now more than ever. It is critical to have inventory on the ground to support them. We view these business lines as low capex low manpower and sustainable, although obviously variable depending on commodity.
Rising these lines, both fit nicely over our existing infrastructure and supply chain and our flexible to scale up or down as required.
The other three Canadian business lines, including C. Alco clear an equal all continue to contribute to the financial and strategic success of the two primary business lines in Canada.
Now I'll move on to the U S. A S. R. U S drilling fluids group once again delivered a very very strong quarter as well as a solid market share. It has been a long road back from the depths of the April 2020 oil storage crisis, Richard Baxter, who manages our U S drilling fluids group and has committed team had.
Proven through another crisis that they have the ability to guide the business through the toughest of times, we're not chasing market share on either side of the border and continue to have a focus on working with the right customers in the right basins for the right returns as in Canada, our customers in the U S. Generally have worked with us to ensure we keep up with the current cost of good increases.
So that we can manage margins in real time today, we have a market share of approximately 17, 5% in the USA with 96 jobs underway, including in an industry, leading 27% market share in the Permian.
Next up is J Cam catalyst our U S production chemical business. This division also had another great quarter as it continues to profitably gain market share despite a very competitive environment.
The Permian region continues to backstop the business. However, we have additional strong contributions from the rest of Texas as well as the Rockies, which obviously includes the Bakken, although we have faced significant supply chain challenges in this division as well we are proud to have the advantage of being the basic manufacturer of a lot of our products. So we were able to avoid.
Disruptions that leased less capable companies could not afford avoid overall, we are very confident in our J Cam catalyst business and look forward to more of the same consistent growth in revenue and earnings.
I will finish with a quick update on our recent forays into new international markets. The drilling rig and one man has completed its first of two wells. The drill was successful and the learnings by CES for significantly once the customer evaluates the success of the current well a further tender for more drills may be initiated but.
This is a long fairway and we are in very early stages.
In Nigeria, our partner company Pearl has now taken delivery of the first three containers and production chemical concentrates that we have shipped to them as we speak they're preparing another order for three more containers likely to be shipped in Q1 as with Neil Man business. This is a growth opportunity in the very early stages of a long runway to making a meaningful contribution.
In conclusion I want to personally thank each and every one of our 1700 employees for their commitment to the business culture and success at CES as well I want to of course, thank all of our customers for their commitment to CES in good times and bad with that I will turn the call over to Tony for the financial update Thanks, Ken.
<unk> third quarter demonstrated a continuation of strong financial momentum through 2021, and reaching distance of pre COVID-19 levels key financial metrics improved across divisions, including revenues margins and surplus free cash flow generation underpinned by our focus on strategic investments in working capital.
And preservation of strong balance sheet and liquidity metrics.
<unk> realized improvements throughout its business lines amid strengthening industry conditions as it was able to leverage its established infrastructure strong industry positioning committed employees and strategic investments in key raw materials. The continued positive momentum demonstrated in the quarter has been.
Courted by improvements in rig activity higher production volumes pricing increases and strategic procurement initiatives that are expected to continue through the balance of the year and into 2022.
As industry activity levels continue to improve.
<unk> remained disciplined on capital expenditures during the quarter retaining substantial liquidity, while also making strategic use of its balance sheet to finance key surplus raw material purchases in order to meet the increasing needs of existing and new customers.
Manage product cost inflation and mitigate the effects of global supply chain constraints.
We exited the quarter with a net draw on our senior facility of $51 million versus a net cash position of 12 12 million on June 30.
The increase was primarily driven by a working capital build associated with strong increase in sequential quarterly revenue combined with strategic surplus raw material purchases driven by unique global supply chain environment.
In addition, <unk> repurchased approximately 863000 common shares for $1 $4 million or $1 66 per share under our in CIB program. <unk> has continued to realize strong demand and also invest in our surplus inventory.
Since the end of the quarter and our current net draw on our senior facility is approximately $81 million.
<unk> Q3 revenue of $314 million represents an increase of 89% from Q3, 2020, and a sequential increase of 24% from Q2.
Revenue generated in the U S was $197 million or 63% of total revenue for the company I would note that Aes continues to effectively operate on the right jobs and with the right customers as we continue to approach pre COVID-19 levels and continue to realize operational and financial torque in that business.
Similarly, <unk> catalyst our U S production chemicals business.
Which helped carry the business through the lows of 2020 has continued its trajectory and is getting very close to pre pandemic levels through increased volumes market share and improved pricing.
Revenue generated in Canada was $117 million in the quarter versus $52 million, a year ago and $78 million in Q2. Thanks in part to the seasonal increase in activity in the Canadian drilling fluids business.
Canadian revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac related chemical sales as revenue levels and production chemical surpassed pre COVID-19 levels and drilling fluids continued its steady March upward.
C. S achieved adjusted EBITDA of $42 million in Q3, which is more than double the $18 million generated in Q3, 2020 and represents a substantial sequential increase of $10 million or 31% from the 31 from the $32 million generated in Q2.
<unk> EBIT margin in the quarter was 13, 4% representing a significant improvement from the 11% recorded a year ago and a sequential improvement from 12, 6% in Q2 as the company benefited from stronger competitive positioning pricing increases and increased drilling and production.
<unk>.
I would also note that we are closely watching product costs and their potential impacts on gross margins. Our procurement team has been industry, leading in terms of strategic inventory purchases during the last year and our sales and marketing teams have been working very closely and respectfully as Ken mentioned with customers on <unk>.
<unk> increases however, we do anticipate a potential lag period as pricing catches up to increased product costs at CES. Our main financial priority continues to be surplus free cash flow generation I am very proud to report that during Q3, our funds from operations was 35.
Dollars.
Representing a substantial increase over $23 million in Q2, and actually above the $32 million generated in Q1 of 2020, which was prior to the COVID-19 related downturn.
<unk> has continued to maintain a prudent approach to capital spending through the corner net capex spend for the quarter was $9 8 million representing approximately 3% of revenue. We will continue to adjust plans as required to support existing business and growth throat or divisions for 2020, one we expect cash.
<unk> capex to be approximately $30 million of which $20 million is estimated as maintenance and $10 million is growth.
Our balance sheet continues to benefit from the attractive structuring and maturity schedules of our credit facility and senior notes. We ended Q3 with $372 million in total debt net of cash comprised primarily of $288 million in senior notes, which mature in October of 2024.
And a net draw of $51 million on our senior facility.
During the quarter, we successfully completed an amendment and a two year extension of the senior facility, which address the needs of the company is expanding U S business.
By shifting U S dollar 20 million of availability to the U S. While preserving total facility size and the Canadian dollar equivalent of $235 million, providing ample liquidity versus current draw levels.
As Ken mentioned, we are increasingly optimistic about the industry outlook and <unk> ability to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we revisit as a team on a quarterly basis.
In terms of capital allocation considerations, we continue to prioritize capital allocation towards supporting existing and new business through investments and working capital and modest capex projects that deliver IRR is above our internal hurdle rates.
We remain very comfortable with our current dividend, which represents a yield of approximately 3% at our current share price and is supported by a very prudent payout ratio in the mid teens.
We will continue to buy back at least enough shares to offset equity compensation related dilution year to date, we have repurchased seven 7 million shares representing 3% of outstanding shares which is approximately double our stock based compensation related dilution for the year.
As we are becoming more optimistic and comfortable with our outlook and free cash flow generation, we will revisit becoming more active in our N CIB program, especially at current valuation levels implied by our stock price.
And we will also continue to use remaining surplus free cash flow to reduce leverage to further strengthen our balance sheet opportunistically purchase our bonds and prepared to refinance our 2024 bond at an appropriate size over the next couple of years.
Throughout the 2020 downturn and into the recovery period over the last several quarters <unk> has consistently demonstrated as capex light and asset light decentralized business model, enabling generation of significant surplus free cash flow as our customers increasingly regulate their business models to maintain spending within cash flow.
We believe that <unk> will be able to leverage its established infrastructure business model.
And nimble customer oriented culture to continue its track record of strong financial performance.
At this time I'd like to turn the call back to Ken for comments on our outlook.
Thank you Tony our outlook for the remainder of 2021 and into 2022 remains optimistic as Tony pointed out an economic as economic activity has resumed from the lows of the pandemic. We are benefiting from a strong and significant increase in activity by our customers throughout North America amid a constructive supply demand balance our customers are back.
Back to pre Covid production levels in some of our most attractive basins and rig activity continues to trend upward the market remains competitive, but our business and employees remain hardworking nimble and well positioned in the market. We are very bullish on forecasted in that activity in our industry for the midterm and I love our chances to grow revenues cash flow earnings.
Within each of the divisions.
The future at CES is bright and I'm humbled to have this opportunity to lead our great team for many years to come.
Thank you for your time I will now pass the call over to the operator for questions.
Thank you we will now begin the question answer session.
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The first question comes from Aaron Macneil with TD Securities.
Please go ahead.
Thanks for taking my questions I'm, hoping you can give us a bit more of a detailed look at the U S production chemicals business.
I know youre, not going to get into specifics on revenues and stuff but.
You mentioned, the vertical integration or as you say being a basic manufacturer at least relative to my numbers it seemed like that fire.
The revenue strength occurred this quarter, so I guess I'm just wondering.
Has there been market share gains in this segment are you seeing other positive tailwind that you could maybe address that more specifically.
Yeah, Yeah Fair question Erin as you saw we did demonstrate solid growth in the U S and when you look at the available metrics rig counts have been improving but.
We're still marching up to towards pre Covid levels. So we did see significant strength in U S production chemicals as Ken mentioned, we were able to under a burn designees leadership gained market share in production chemicals in the U S and as Ken also mentioned when you look.
At <unk>.
Production levels versus pre Covid, although U S production in general.
Down from the $12 seven or so pre COVID-19 to about 11 five currently.
If you look at our most important market and our most significant market in the U S. The Permian.
Volumes production volumes are actually back to pre COVID-19 levels. So that gives you an indicator of increasing activity and on top of that Vern and his team have been able to source the required chemistry that our customers were looking for and we're also able to pass along pricing increases.
And you'll also see some people mentioned that over the last while in our in our disclosure we talked about some bulk chemical sales that that that business unit was able to put on at very at.
At reasonable margins as well so it's really a confluence of the industry coming back and some of the most important basins that we operate in and the team being able to outperform its competitors to win and gain market share and pass on pricing and they're still in the process of that.
Understood maybe Tony a quick one for you on the balance sheet.
The working capital grew quite a bit this quarter do.
Do you expect CES to sort of grow into the current working capital or do you actually see like maybe an unwind of inventory over the next couple of quarters is this.
Supply chain challenges.
Yeah look everybody has been able to observe our business model what happens when revenue goes down.
We harvest.
As Ken mentioned, we're carrying surplus inventory, especially in the Canadian drilling fluids business. So to answer specifically, we expect to grow into that working capital and given the.
Given the expectations that you have heard in the outlook.
Marie we expect revenue to grow next year and as we do that we expect to grow into that working capital level that is elevated at this point and as that happens you'll see very significant free cash flow generation.
Understood and Ken maybe one for you you are new to us, but not all of that new to the company or the industry. So I guess aside from the obvious stuff for an E&P capital discipline.
Maybe just give us your sense of your perspective on what Youre seeing in terms of the outlook.
Now this.
This cycle is shaping up from prior cycles, and I mean, you sort of addressed it in your prepared remarks, but if we can expect anything different from U.
Versus your predecessor, as you kind of take the helm of the company.
Yeah Erinn.
It's setting up to be an aggressive build and the biggest challenge is we keep hammering on and I think everybody's hammering on is supply chain.
So we've had to get really aggressive with putting inventory on the ground more so than we have in the past.
And that's led to the balance sheet, taking some some flock I am picking up some some dollars.
But we do see a balancing and the main reason for it was a Q1 in Canada really I mean, we can't Canada buys about half our inventory from China, and India, India has basically shut down shipping from China has been massively affected industries being a regulated there to only work a few days a week.
The Beijing Olympics are coming so they tried to control air quality.
Our Chinese new year's it's coming so there's just been a lot of headwinds that way combined with manpower in Canada, and the U S. But I would say morrisville in Canada, we've really struggled to find people we're.
We're competing with not only our competitors, but even the rig companies and it's.
It's made it made things tough people have left the industry and it's hard to get them to commit the coming back having said that where we are in pretty good shape and we're excited about what's in front of us I think it's going to be a.
Busy.
First half of the year for sure and probably a busy couple of years.
And then just anything you bring to the table that's different from your predecessor, I know you talked about.
The business units.
Running independently, but anything you want to.
Highlights well I mean, Tom and I worked together for about 25 years all in I believe so we see the world largely the same and in order to be totally honest.
When we were over the last bunch of years as we've been working together, we visited all the time and came to a lot of the same decisions at the same time so.
I'm not sure that there will be any massive changes.
My hope is to emulate him.
And on the leadership side, and maybe be a little more open to looking at M&A, if something good comes along but but that's that's really it other than that I think steady as the course for now and we'll see how that evolves over the next six months.
Understood. Thanks for your time I will turn it over.
Thanks Aaron.
The next question comes from Tim at Monticello, with a T V capital markets. Please.
Please go ahead.
Hey, good morning, guys and welcome Ken Congrats on getting that first prepared.
Ark section out of the way.
I just wanted to talk.
I just wanted to talk a little bit about.
What youre seeing on the supply chain front like I don't know if he can get into specifics but.
Are there.
Specific or certain regions or business lines that are that are most impacted it sounds like the Canadian drilling fluids space. Perhaps is the most you think you're ahead of that and are you seeing anything change on the margin.
Our supply chain getting tighter or looser.
Well I mean, I think it's the on the Canadian side, it's definitely the drilling fluids space that we've had to be its because its more seasonal we have this big ramp up into Q1 every year, usually we can by going into this year. We had the pre planned for it because were so concerned about not being able to get stuff in the coming months.
As far as pricing goes I mean, we're working on that all the time are I'm visiting with the customers I have our salespeople are visiting with their customers.
We're advertising on linked into bulk about supply chain crisis, we're doing everything we can I mean, we don't really have to.
Blasted from this from the rooftops because I mean, everybody in their everyday life is dealing with the same problem that inflation is through the roof and.
Selection is way down because its hard to get stuff. So it's it's a unique year in that regard I don't remember ever going through anything like this in the last whatever it's been 35 years in this industry.
And we're trying to make that case and I'd say by and large we're getting buy in from from more customers them or not but definitely not getting buy in from everybody and it's a challenge and it's kind of the business I've been living and breathing for the last 35 years. It's every day, it's a new fight in a new.
Opportunity to work with clients to come to something that works for both of us So I.
I guess to summarize where we're working on it every day and we're trying to get margins up as much as we can in line with what we're paying our what we're seeing an increased cost.
And as you go into a certain tightening market, especially in Canada.
And you've got this sort of egg of inventory, where perhaps some of your competitors don't are you being able to translate that into.
Better market share or new customer relationships.
Well, it's definitely a topic of conversation every time they go into a customer's office I mean supply chain.
Doing 100% of the work for them that we're not we're not pitching this but if it's a company we're not working with or we're doing a small percentage for supply chain diversification is probably key for everybody through this.
And then on our side, we're hoping that yeah. In Q1. This is going to be a big advantage that we see shortages I mean, I'm not going to telegraph, where we see them, but we believe there's going to be shortages of key products through Q1 in Canada, and we believe we positioned ourselves to not experience that.
Okay.
As you go forward and I know, it's a very dynamic situation, but can you provide some insight into how the companies I guess monitoring the supply chain issues and and <unk>.
As things, perhaps loosen through 2022, how do you make sure that you're not well.
Long high higher cost inventory.
Yeah.
We're doing that just by working with customers in getting accurate forecast with them and we.
Scribed to some publications on supply chain and then we have a supply chain, that's living and breathing it in real time and you know.
I'm constantly getting forwarded emails of communications between our supply chain team and our suppliers, where the suppliers are giving us Intel on what's happening in the space and what our competitors are doing so I think we are pretty in tune with it we don't foresee a massive shifts in any direction until mid 2022 at the earliest.
And we'll be prepared for that we're right now we're just trying to by about six months out and stay on that and if in Q1 as we get into a seasonally softer season, we'll have inventory levels coming down anyways, and we will make decisions at that time about what to do with the second half of 2022.
Okay.
And then last one for me.
Ken you've done a good job of it must have been credited for a lot of the good work that's been done in Canada, and turning around the margin profile, especially in the pure Cam business overseas.
What were seeing the whole company is there any lessons that you learned that you think could.
Can be applied elsewhere in the business and.
And if so how.
Do you see that progressing.
Well I think we're doing work.
Honestly, we're very satisfied with the margins that we're getting in the U S. I think they're fair to the operator and fair to the to the US as the service company, so and once again to be honest and to share credit you know that.
Some of the things I learned in working with the Canadian divisions I picked up from the U S Division so.
I'm not sure there's a lot of work to do there as the market gets strong if theres shortages are in people or if our customer base gets super busy and we can drive more efficiency than we will start to see some margin improvement there, but we're already heading in the right direction and I think everybody is doing a great job in the business now.
Okay great.
I guess I'll turn it back.
Thank you.
The next question comes from Keith Mackey with RBC.
Please go ahead.
Hi, good morning, and thanks for taking my questions just maybe to start out on the the international initiatives.
Mentioned that.
Things things progressed, well there do you foresee.
The current <unk>.
Product projects Youre working on.
Being the beginning of a snowball and the international AD based on how they have gone in and in the results and lessons that you've learned or or is this still a an entry point that will take.
Additional time to really flesh out.
I think it's the second part with a mix of the first part.
This is going to take time to play out but we.
We do have a lot of optimism around our chances for success in that market and growth into that market.
I've personally been spending quite a bit of time on this over the past three four years, we've looked at a bunch of stuff, including the Qmax.
<unk> when they were trying to sell off their Kuwait business I mean, we've been.
Quietly.
Monitoring that market for the last call. It five years and so it will be something that I will put emphasis on going forward and trying to grow it but it is contingent on you know first of all how this project goes that we're on now and second of all what we can directly pick up off that project, because we have to get not only a four.
Hold in the in the Middle East, but also kind of our reputation there. So that other companies will trust us and we are working on some other stuff in real time, right now that could turn into something but just nothing to announce at this time.
Got it thanks for that and maybe just as a follow on and then you mentioned you might be a little bit more open to M&A than than in the past are there any obvious gaps that you think the business has whether it would be more of the international type stuff or anything within North America to really.
Will drive the next leg of the business.
No I think we have no no holds at all I'm I'm I'm just talking in an optimum opportunistic sort of way I mean, we did something.
A year or year and a half ago. Once again during that qmax breakup of where we were able to buy some not some business off them, but just some product lineup awesome.
Because we took the time and through kind of a stink bid at it and one I would say that if there's opportunities that look so good we couldn't pass up on them, we'll take a look at them, but as of today no theres absolutely nothing on the table.
Got it thanks very much that's it for me.
The next question comes from Andrew Bradford with Raymond James.
Please go ahead.
Yeah, Good morning, guys and welcome.
You're welcome Ken.
Thank you Andrew.
Yeah.
In your comments you mentioned.
<unk> talked about some market share gain.
I'm speaking about.
Production sales.
And I'm just curious is this would you characterize this gain is sort of being through your involvement.
Newly constructed wells that are going on first production.
Or is this if you're grabbing share or.
In short our previously rather than legacy producing wells.
I think it's.
Combination with a big.
Emphasis on on the former on the first category.
As we've said over the over the calls over the past few years.
Volumes of production chemicals sold during that.
Initial production phases, obviously high.
But really it's been it's been the J Cam catalyst team doing more with existing customers and winning some new customers and gaining market share that way.
And and if you look at if you look at the trends as I mentioned earlier with high production volumes getting back to pre COVID-19 levels, especially in the Permian, where J Cam and catalyst, which we acquired back in 2016 had a very <unk>.
<unk> presence in that business has continued to invest.
Added a new lab last year, because we were committed to it has added some more real estate to support new business and it's paying dividends by winning more work from existing customers and winning new customers on <unk> on the new types of productions not the smaller.
Lower volume producing wells that youre, referring to.
Great. Thank you.
And.
As well.
When it comes to the drilling fluids.
So you have to include.
As well you know.
And as we think about market share outlook here I.
I appreciate you're really focused on customers that work.
Maybe more of a partnership with you.
But do you expect to sort of formula that.
That you met with these customers do you expect this formula that could facilitate market share gains in the near term or do you think.
You are sitting on our side here that we should just look at 17, 5% is sort of your baseline.
For the for the next few quarters.
Well I think the model we have doesn't.
Eliminate the opportunity for market share gains, although you know generally speaking half the rigs that are working in the U S are working in the Permian Basin, we've got a strong market share there.
And then the other half are working everywhere else, where we don't have that great of a market share. So every time you pick.
Pick up rigs and they're spread evenly through the through those two sort of regions call them. It dilutes our market share even though we're still doing equally as strong in the Permian, where we want to be and when I talk about where we want to be it's because it's more technical work and it's because we have infrastructure. There we've made an investment in that space.
And it's put US right in the middle of the play with the best equipment and the best people, which gives us a big advantage not only to our good customers, but also to pick up other customers there.
Problem is to invest that kind of capex into a play there has to be returns. There. So there has to be significant activity. There has to be technical enough work that we can make a difference and beat our competitors.
And so far you know there's a few places where we're doing that in the U S. You know the northeast being another one where we have have it in the Eagle Ford.
As far as places like the Bakken.
The wells are pretty simple the margins have been beat down there. We've tried to play in that space before we don't currently have infrastructure. There. So when we go in there we're working out of a third party warehouse and we're not competitive on price. So.
Yes.
The answer is that as long as this market share growth continues in the Permian, We will continue to capture around a third of that a.
Quarter to a third call it but when the rigs get picked up in some other places like what happens in Canada. It may dilute the market share we will just have to see how it comes back.
No.
Great and clear answer thank you very much.
Two are fairly disjointed here in fairly quick so.
So.
Labour constraints you described this as well, but it usually works pretty well Brookfield services kind of companies when it comes to pricing at least in other areas of the oil patch.
You're more of a product oriented combined with the service provider. So it's not clear to me how that works you think labor constraints can work.
There is certainly hard to deal with but do you think they could ultimately work in your favor margin wise.
Yeah Yeah.
For sure we will see how Q1 goes.
I think the problem with the labor constraints isn't just directly as a as it affects us.
How it affects all the other services like them the major ones the drilling rigs.
We've had we've had briggs shutdown for weeks at a time, even when they were staffed because of COVID-19 outbreaks. So between the COVID-19 risk on labor and just the lack of being able to find people.
That causes us a bigger problem than anything because I think theres demand and you know listening to.
My friends on the drilling side, there's demand probably to run 250 rigs this year, but I don't think theyre going to be able to find the people for it in Q1 so.
No.
Now on the road once everything gets adequately staffed and we can get enough rigs going that there is it starts to affect service company ability to get hands.
Then maybe we have room to move on margin, but the problem with the personnel pieces, we charge the man out on a day rate basis combined with the chemical so it's easily comparable so as long as our competitors are willing to not move that number.
It's a flat easy number that companies like the spreadsheet, it's really hard to move that number up until everyone does.
Okay. That's great. Thank you and the second.
<unk> was there.
It was just a small item here.
Oh yeah.
Growth capital in the quarter.
It's a small number but it still is larger than Canada.
We've seen for a while.
$5 million.
This was for site just outside of anything but I wonder if you could just sort of add some color.
Yes for sure so it's something that.
That we we discussed.
Discussed midway through the year and there was spearheaded by the Canadian group, we we made a decision to spend.
During this year, it will be somewhere between three and $4 million and a little bit more in the new year to expand our facility in this Q and.
That gives us increased capabilities from our logistics storage and manufacturing perspective to supply some of the very specific key raw materials and sorry chemistry that is in high demand. So it's.
It was a very targeted investment.
The IRR as presented and discussed as well well above our 15% to 20% internal hurdle rate and that's what it was for Andrew.
What we hope to gain with that Andrew to put a little bit more color on it even as days of safety stock our throughput as productions come back on in Canada.
Has it has gone up significantly and our days of safety stock had dropped significantly so it's to expand the amount of days that we have on the ground ready to go.
Yeah.
Yeah.
That's great guys. Thank you very much for taking my questions.
Thanks, Andrew.
The next question comes from core Pereira with Stifel.
Please go ahead.
Hey, good morning, guys congrats on the quarter.
So obviously the business continues to improve but there is some cost pressures can you just.
Add some additional colors on how we should be thinking about gross margins on a percentage basis over the next couple of quarters I mean, it sounds like they might compress near term, but I mean, obviously, there should be an inflection point as well.
Yeah.
Yeah, I'll I'll start with that coal.
Fair question, So really obviously, we're not going to provide specific numbers, but I would say directionally. We're talking the same the same trends as as some of our competitors specifically in the U S have talked about.
We are we have been seeing significant.
Increases in the cost of our inputs.
We've been very smart and aggressive by trying to get in front of as much of that as possible, but we are getting into the times now where the cogs costs that were realizing when we generate that revenue are creeping up versus a quarter or two ago. However, we are <unk>.
Creasing pricing as well and as I mentioned, there is a lag period. So directionally I think we're not getting back to the.
The higher levels that you saw the last couple of quarters I think what Youre seeing right now is indicative similar to what our peers are seeing for at least the next couple of quarters and I would like to be pleasantly surprised but that's what we're preparing for.
Having said that our objective is to make <unk> very surprised.
Okay perfect that's very helpful.
Just wanted to come back to your comments on your on the U S production chemicals market share gains.
It sounds like Youre, getting some new customers and winning some more work with existing ones I mean, what what are really the whats really the drivers of that is it really come down to performance or can you just be a bit more agile than some of your larger peers.
Okay.
Both.
That business.
That business first with J Cam and then with catalyst was was the catalyst no pun intended to the vertical diversification that we did not have before Tom and Ken and the team made the expansion into the U S by acquiring Jae Kim and then when we acquired catalyst.
Just and burn and the team came on board and in brand took on leadership of that overall business.
They continue to do what they did which is beat out some of the bigger competitors with customers that may be at first we're a little bit smaller but grew they were results oriented they were looking for the products chemistry vertical integration that the J Cam catalyst can deliver and then.
Our teams just continue to service the heck out of those customers.
Better than our competitors and we have the infrastructure. We've made the investments we continue to support that business with with capital for our Capex like the lab like some of the additional real estate.
As well as working capital requirements. So we talked a lot about.
Procurement, but.
Just step back and appreciate the fact that we have this north American footprint, allowing the U S and Canada to help each other out with new supply supply chain sources and to be able to manufacture molecules from from the rock chemistry level. So it's really all of those things in it.
<unk> of focus on the customer supported by the <unk>.
The infrastructure that we have.
Okay, Great that's helpful. Thanks.
And maybe coming back to supply chain as quickly. So I mean, obviously this remains an evolving issue, but fair to say based on your comments that you're fairly comfortable that in Canada. In Q1, you don't think they'll really be any business interruptions as a result of supply change and can you clarify as well.
Is this the is this both our business segments.
Yeah, it's both business segments and that's correct.
We have enough inventory on the ground now to get us through Q1, and while we don't have on the ground, we have take or pay.
Deals on so we are guaranteed supply as we need it because some of the stuff is just too cumbersome to store.
But.
Having said that you never know, what's coming next but right now unless.
I don't know some other catastrophe hits us I think we're in good shape on both sides of the business I mean, we're a little closer to the Sun on the production chemicals side on a on one particular product line like everybody in the industry is right now but.
But we have not dropped the ball yet.
I think our one of the only ones who have not and we think we're going to get through that one as well.
Okay, Great. That's all for me, Thanks, I'll turn it back.
The next question comes from Josef Schachter with Schachter Energy research.
Please go ahead.
Thank you very much good morning, Kevin congratulations on becoming CEO and.
First analyst.
The institutional conference call.
Please wish Tom much success in his retirement and it was a pleasure working with him in the past and are looking forward to working with you and Anthony in the future I have three areas that I'd like to cover one of them.
It would be the supply chain issues, you mentioned earlier about procurement initiatives for key raw materials.
Also mentioned, India, and China, because of the smog and things slowing down there are there any specific areas, where you have like.
Like rare Earth, and other things, which.
You need to maybe have longer lead times than six months of inventory or do you see when China gets back up after the Olympics that process of getting the materials, you may need or India, I'm not going to be impacted and how do you discuss all of the timeline issue related to items, you're bringing information.
Question, we don't have any.
Rare Earth mineral type stuff that is hard that hard to get a hold up we do believe that as China on Cogs and gets going in the U S ports on clog and get going will be able to get product I also want to clarify that.
We've been buying a lot of product from China, because the quality has been excellent and the shipping times had been consistent and the pricing has been better than what we can do in the U S. In some cases in some cases, we can only get it there but in a lot of cases, it's strictly a decision to buy from there because we can get things cheaper.
So as this is Hal.
It has unwound its put us in a situation of having to work with our U S counterparts, and delve into their supply chain from Canada, because Canada was buying more internationally.
And try and get local supply.
This we had to move really quickly and start sending some order to those guys because as it got busier than nobody was taking on new clients.
So we think we've done a good enough job with that we've reverted.
On the Barite front in Canada, we mine out of India for the last.
A bunch of years, we're no longer doing that we've switched to a mine in Canada.
And we're getting some from our own superior waiting down in Texas and Corpus Christi.
Because those two options used to be uneconomic, but currently with the supply and demand metrics in place combined with the difficulty in getting shipping on time.
Now our best choices.
Okay. Good thank you on that.
One we saw from pizza.
The rig count they're looking for an extra 5400 up from $46 50, a 16% increase.
Do you see those kinds from me a number.
Number is being.
Logical given your customer conversations about how much increased activity.
And how much more business, that's going to generate for you.
Yeah, I think in Canada over the last I don't know 10, 15 years, we've had a pretty consistent market share. So if the rig.
Days goes up we'll participate that in that to the same level, we always participate as far as whether it's possible or not I mean, I think where you can get the win on the contractor and operator side will be in Q2, and that's that'll be the decider I mean, there's been times when we've run.
Back in the good old days, we run 100 rigs through Q2 well.
And that CES not the industry, but the last bunch of years here, it's pretty slow in Q2, not because it has to be just because it's a little bit more expensive to drill during that time, but if operators really decided they wanted to get busy.
They can they can averaged 220 rigs probably through Q1 and you know they can probably averaged at least half of that through Q2, if they want to which is not what I think what most analysts are predicting right now.
Yes and.
Is your business pick up are happening more on the private companies, where which don't really have the market pressures for shareholder returns.
And are you seeing a more of a pickup on the private company activity in both sides of the border versus the public companies.
Hum.
On the Canadian side, I think it's the bigger companies I think just with us, but with capital where it is and WT I where it is.
65, or 75% of free cash flow for these big oil companies is growing it's becoming a bigger numbers. So we're seeing the growth.
In Canada, I would say, it's more on the public company bigger guys and in the U S. It's probably more on the independents and the little guys, but it's happening in both on both sides of the border.
And then last one for me treatment points you show the U S down, 7%, Canada is up 16%, where you're giving away low margin business in the states, where you didn't see the.
Sufficient margins and we're willing to.
Go down to levels that were unprofitable and do you see those treatment points growing up as activity picks up.
Yeah, I'll start with Darwin Joseph.
As we mentioned in the narrative before those graphs treatment points used to be.
Higher used to provide a higher correlation to actual revenues generated by those production chemicals businesses in both countries, Canada and the U S. What's happened that's that's actually benefited us from a.
A profitability perspective is as we've as we've evolved to treating higher volume producing wells and and.
And delivering chemistry to more and more <unk>.
Multi well pads number one the economics are better but number two especially if we have continuous treatment.
The actual volume that we're providing for every touch point or treatment point is higher so that graph. Unfortunately masks the true volume trends that we're realizing and that has to be the case, because we've seen increased volumes and frankly revenue.
That said so that's the biggest part and we're thinking about other information that's publicly available to provide.
More.
A better picture of the driving factors of the production chemistry business and the other thing as we mentioned I think in both the press release and the MD&A, we did benefit from some significant bulk chemical sales, especially in the U S and unlike previous cycles that obviously that mark.
<unk> is a little bit lower maybe at the gross margin level, but.
The team has been very smart about that business because it doesn't require significant increases in SG&A or more importantly, capex. So that's why you continue to see strong EBITDA margins and strong free cash flow generation, regardless, so long winded way of saying.
The treatment point metric isn't perfect. That's the best we have right now but over the last couple of years, we have seen.
A bit of a bifurcation between the true drivers.
And that metric.
Sure. Thanks, very much for taking my questions and Ken and welcome aboard and look forward to the next quarter and congratulations on a great quarter.
Thank you Joseph.
Once again, if you have a question please press star one.
The next question comes from Michael Robertson with National Bank financial.
Please go ahead.
Hey, good morning, Kevin Tony Congrats on the quarter and thanks for taking my questions.
Just a couple quick follow ups here.
Maybe start with one for Tony.
I believe you mentioned that they do.
The credit facility is currently around $80 million.
You touched on this a bit earlier, but based on your current inventory levels and expectations to move little product and convert that to cash flow. How do you see that trending into 2022.
Also anticipating incremental improvements in activity levels.
Maybe asking another way where would you expect the sort of peaks and valleys that just sort of shakeout.
Yeah. So number one we're very comfortable with.
At or around this level or again are our available line.
<unk> is $235 million Canadian equivalent so tons of room as I said earlier I do expect that to go up through the quarter.
As we catch up on collections for the increased revenue that we've seen sequentially and we're going to continue to see that in Q4 and Q1, especially in the Canadian business, that's a bit more seasonal.
And then if it is true that we are getting comfortable with our inventory levels in particular, and we grow into that working capital.
Youll see that starting to come down next year, probably not significantly at the beginning of the year, but mid.
Probably and towards second and third quarter for sure Youll see a deleveraging and again, it's a good problem to have because it does afford us options that that we're taking very very seriously.
In terms of capital allocation as I mentioned.
Got it got it.
Helpful color, Tony I appreciate that.
And then just a quick one related to the international.
From what Youre seeing does it looked like the shipping issues haven't all eased in terms of that.
Getting see cans from Houston to Nigeria, I'm, just wondering how much of that was hurricane.
Related versus how congested the supply chain is in general right now.
Well I think that we've only done one shipment of three containers to Nigeria and it went pretty quickly I mean hauling away from the U S is better than hauling to the U S.
As far as international shipping the stuff coming out of China, you know.
The prices are starting to come off a little bit on getting containers, but.
But getting containers onto ships is still a huge problem youre competing to get on and so the prices coming down a bit but even when you agree on a ridiculous price it doesn't necessarily mean, you're getting on a boat anytime soon.
Got it got it okay.
So I appreciate you taking my questions congrats on the quarter I'll turn it back.
Thanks, Michael.
Okay.
This concludes our question and answer session.
I would like to turn the conference back over to Ken Zinger for any closing remarks.
Thank you with that I'm going to wrap up the call by saying, Thank you to our customers and our employees for helping us produce another great quarter. We're pleased to be in a strong financial position and returning cash to shareholders coming out of Covid. We look forward to speaking with you during our Q4 and year end update in March. Thank you everybody.
Okay.
This concludes today's conference call you may disconnect your lines.
Can you for participating and have a pleasant day.
Okay.
Yes.
[music].