Q4 2021 Secure Energy Services Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the secure energy Q4 2021 results conference call. At this time all lines are in a listen only mode, but following the presentation. We will conduct a question and answer session and in fact anytime during the call you require immediate assistance. Please press star zero for the operator also note that.
It's being recorded on March 3rd 2022, and I would like to turn the conference over to Emil alcohol VP Treasury and Investor Relations. Please go ahead Sir.
Thank you Tony welcome to secure Energy's conference call for the fourth quarter of 2021, joining me on the call today is there any MRO, our president and Chief Executive Officer, Alan Graf, Our Chief operating officer, and Chattanooga, Our Chief Financial Officer. During the call today, we will make forward looking statements related to future performance.
We'll refer to certain financial measures that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures disclosed by other companies. The forward looking statements reflect the current views of secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by secure since before.
Looking information to address future events and conditions by their very nature, they involve inherent assumptions risks and uncertainties and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR and Edgar.
By risk factors applicable to secure factors, which may cause actual results to differ materially from any forward looking statements and identify and define our non-GAAP measures I will now turn the call over to Randy for his opening remarks.
Thank you Neil and good morning, everyone.
On this call and their families are healthy it's great to see the restrictions being lifted here in Alberta, and other places in Canada. It looks like we're on a path to.
New normal and learning to live with this virus.
We have secured continued to be proactive in our approach is the health and well being of our workforce and our communities remain the company's priority.
Before I start I'd like to acknowledge what is happening in Europe , obviously, it's a terrible situation and our thoughts go out to all the people of Ukraine suffering through this unnecessary conflict on behalf of team secure we are planning and hoping for a speedy and peaceful resolution.
This morning, we will review our financial and operational results for Q4, followed by our outlook for 2022.
The fourth quarter was another strong one for secure and our results in 'twenty one demonstrated the efficiencies.
Resilient Z that our increased size and scope has achieved.
This continues to generate significant EBITDA and discretionary free cash flow, which we are using to improve our financial position and enhancing our ability to deliver strong returns to our shareholders.
Our Q4 results reflect strong performance in both our midstream infrastructure and environmental and fluid management business, our disciplined and focused on executing on regional excellence managing costs and achieving business efficiencies helped drive a 208% year on year increase in Q4 adjusted.
The dot 111.
We're extremely pleased with the results and progress of the integration with Davita, which is proceeding on track with our plan in Q4, we achieved $11 million of cost savings that was over and above the Q3 B C.
Savings of $7 million for a combined $18 million and $40 million on an annual run rate basis for realized savings up 53% of the original 75 million target. After just six months since the closing of the merger.
Including savings on our bond refinancings, we achieved $49 million run rate free cash flow savings by the end of 'twenty one.
As we've always done we take our commitment to ESG seriously to complement our long term environmental targets of net zero by 2050.
And a reduction in half our <unk> intensity by 2030, we have set short term targets to reduce water usage by 5% this year, the greenhouse gas intensity by 50%.
Percent by 2024, we are encouraged by continued strong momentum throughout our operations with increased free cash flow generation capabilities and a strengthened balance sheet, we're well positioned to meet our debt reduction targets at the same time able to capitalize on growth through our existing facilities and the continued pause.
<unk> trends of our industry.
John will now walk us through the key highlights of our Q4 results then Alan will review, our integration plan update and operational highlights and finally, I will move into our outlook for the year.
Thanks, Randy and good morning to everyone on the call.
The fourth quarter results reflect the second full quarter since the merger with Davita and demonstrate the strength of our combined entity, our constant focus on cost reductions and underlying market conditions continuing to improve resulted in strong margin across all of our operations.
Adjusted EBITDA of $111 million increased 208% from the prior year, primarily due to the acquisition.
Higher oil prices also drove increased activity levels in the areas, where we operate which led to higher processing and disposal volumes that are midstream infrastructure facilities higher disposal volumes for our landfills and increased demand for drilling and completion services.
Additionally, oil and gas activity higher metals prices, our aviation the reclamation project work contributed positively to our environmental business.
Adjusted EBITDA margin of 34% increase from 30% in the fourth quarter of 2020, mainly due to the positive impact from the cost synergies.
For the year adjusted EBITDA of $286 million increased.
110% compared to 2020, primarily due to the same factors that impacted the quarter.
Adjusted EBITDA in 2021 benefited from the cost savings achieved from the acquisition of the <unk> business and the cost reduction measures taken in 2020 to reduce and align our fixed cost structure to levels consistent with industry activity levels.
And midstream infrastructure Q4 segment profit margin of 59% was relatively flat compared to the prior grew 60%.
Strong profit margin was due to our expanded facility footprint and synergies realized from the transaction as well as higher crude oil pricing and more stable market dynamics.
Which led to increased drilling completion and production volumes, which were up.
So somewhat offset by inflationary pressures.
Higher crude oil pricing in the fourth quarter also positively impacted recovered all revenue and increased oil purchase and resale revenue by 185% to $1 billion.
Environmental and fluid management Q4 profit margin of 28% increase from 26% in the prior year.
Due to the positive impact of the combined businesses and improved fixed cost.
Sure.
Higher activity levels also resulted in increased drilling waste volumes at the corporation's landfill.
Positively impacted our drilling fluids and production chemicals business.
Those prices also remained strong in Q4 as did the math for environmental work.
Secure generated $171 million of discretionary free cash flow in 2021, which includes $47 million in Q4.
Throughout 2022, our capital allocation priority will continue to be debt repayment.
Beyond 2022, once our leverage target you guys have been reached capital allocation decisions between continuing to pay down debt spending on growth capital and increasing returns to shareholders will be assessed with view to taking a balanced approach.
Our focus on growing the business, maintaining a strong balance sheet and rewarding our stakeholders for their investment.
We recorded noncash impairment charges of $247 million in the fourth quarter and $269 million for the full year, which was the primary reason for the net loss of $203 million for the year.
Impairment, mostly related to facility rationalizations that are critical in order for us to achieve our synergy targets. As an example, we have suspended facilities and Eric.
Where there were more than one facility in close proximity to each other which result in hiring delays utilization and no impact to our customers.
Counting impairment does not harm our capital capabilities, rather the rationalizations will enhance our profitability.
Return on assets going forward as well.
Lower ghd emissions intensity as the continuing facilities will operate more efficiently.
With respect.
Back to our financial structure in Q4, we redeemed we redeemed 100 million you asked a 11% notes with an additional private placement of $140 million up 7.25% notes.
We've made improvements to our debt profile by extending long term maturities.
Producing more flexibility into our capital structure lowering our cash interest cost by approximately $9 million since we completed the merger redeeming in replacing 40% of our 11% U S. Dollar senior notes with 7.25% Canadian dollar unsecured notes.
Our capital structure consists of no near term maturities with the first fixed note maturing in 2025.
In addition at December 31, we had approximately $280 million of availability on our credit facilities maturing in 2020 for providing ample liquidity to the company.
Since the end of 2021, our liquidity position continues to improve as we have paid down $47 million of debt outstanding on our revolving credit facility to the end of February .
This is due mostly to capital from operations, the unwind of the working capital position.
Built up in the fourth quarter.
We are pleased with our balance sheet management since the merger and remain on track to achieve our initial debt reduction targets and we'll continue to look for ways to optimize our capital structure as we move forward.
I'll now pass to Alan to provide and update on the integration with Davita and operational highlights.
Thanks, Chad good morning, everyone.
With regards to the update on our integration with <unk>. We're extremely pleased with the progress made in 2021 and after six months, we have already realized 40 million or 53% on an annualized basis over $75 million of synergies target.
The $40 million approximately $27 million related to corporate overhead and G&A.
And the remainder of our operational efficiency.
During the fourth quarter, we suspended 17 facilities and during 2022, we'll be working on up to another additional tend to potentially 12 locations. We.
We are confident on being able to reach a minimum of 75.
A minimum of $75 million of synergies or more by the end of 2022, we expect costs to achieve these synergies of approximately $30 million of which we have spent $14 million to the end of 2021 now.
Now that the majority of our corporate overhead reductions have been completed the focus for cost savings in 2022 will be on further facility rationalizations operational.
Operational optimizations, including increased facility utilization.
Expertise in savings and operating cost efficiencies.
We expect we could see an additional savings through these initiatives and our work on our capital structure to provide incremental discretionary cash flow beyond our 75 million cost saving target.
Looking at our operational highlights in Q4, our midstream infrastructure segment saw continued improvement on oil prices and higher drilling and completion activity.
The positive volume trends that we saw in Q3 continued for the most part in Q4 with the exact with the exception of the ended the quarter, where we experienced the slowdown at the end of the year from the impact of extremely cold weather.
Our expectations and midstream processing facilities are experiencing an increased utilization as higher drilling and completion and production volumes from increased activity levels require more treating processing and disposal.
Our water disposal volumes increased to 138% from Q4 2020 due to the impact of the merger as well as the combination of higher activity in 2021 and production shut ins in 2020 that has since been reverse <unk>.
Processing volumes increased 223% from 2020 as a result from improving production levels higher waste processing volumes due to increased drilling and completion activity.
Environmental and fluid management also continued to benefit from higher commodity prices and increased activity levels. Our landfill volumes were up 4% sequentially from Q3 and up 25% year over year over Q4, 2020 pro forma volumes as a result of more drilling and reclamation activity tailwind.
We're continuing to see increased demand for drilling and completion services within our fluid management business, our waste metal recycling a real emergency response businesses all performed well in Q4.
Recycling ferrous prices remain strong, which helped drive higher volumes and we're also pleased with the progress we made on abandonment remediation and reclamation activity work from government stimulus packages to help fund the closure in recognition of our orphan and inactive wells.
Overall, our facility utilization from the high <unk> high 30% in 2022 currently in the high 50%.
We have a lot of capacity to handle additional increases in volume without the need to invest additional capital in 2022.
We are seeing the impact of inflation on our cost, but increases overall continue to be manageable with our vendors and customers. We have seen the highest cost pressure in areas such as chemicals transportation electricity and fuel and we expect these pressures to continue some of these cost increases we have been able to flow through to our customers in Q1.
We also repurchased inventory, mainly in our drilling and production chemical business, where we anticipated higher costs in 2022.
Labor availability for our mobile crews in our environmental and fluid management business remains challenging mainly for project work, but we anticipate.
We'll continue to we'll continue to progress throughout the year, we have mitigated these challenges by offering sustainable long lasting work as well as higher wages. Fortunately in our larger midstream segment labor is not much of an issue.
Due to the nature of our fixed facility network and facility Rationalizations, where we have utilized our workforce at other locations.
We expect increased abandonment remediation and reclamation activity to positively impact all of our Canadian operations over the term of the program in terms of the federal programs. So far $627 million out of the 1 billion allocated to Alberta has been granted and Saskatchewan has now extended its 400 million program to February of 2023.
<unk>.
In addition, the Alberta energy regulator has targeted spend of 420 $422 million in 2022, representing 4% of inactive gain liability and this target increases to $513 million by 2026.
<unk> is well positioned in the environmental business segment at the landfills will likely see more volume as a result of this regulatory change.
ESG is a top priority of our company. In addition to the short and long term targets. We have set we are actively evaluating opportunities to participate in carbon capture infrastructure, which could be an area of growth for us and help reduce overall emissions our expertise and deep wells building theatre pipelines in the geographies in which we operate should help enhance our <unk>.
Operating on carbon capture opportunities in Western Canada.
In Q4, we spent a total of $17 million, which included $13 million of sustaining capital total spending in the second half of 2021 of 30 million comprised primarily of sustaining capital puts us on a run rate similar to our 2022 guidance.
We spent $7 million on growth capital in the second half of 2021 and as we focused on integration, which will continue to be the case as we move through the rest of this year.
In terms of 2022 of the capital spending our growth budget will continue to focus on opportunities to connect producers to our existing midstream infrastructure to further increase volumes and utilization on a long term basis with respect to sustaining capital, we expect to spend $55 million in 2022, including three landfill expansions.
We expect to spend 45 million on growth capital opportunities in 2022, and we will continue to be mindful of our growth spending and our focus will be on customer back longer life opportunities as we continue to prioritize debt repayment.
I will now turn it back over to Randy to address for our <unk> our outlook for 2022.
Thanks, Chad.
We are extremely pleased with the results in Q4 and the progress made to date with the tribute merger and we continue to see the benefits we expected from combining the companies the.
The company has a strong deleveraging plan in place that should reduce our debt position significantly this year, our enhanced scale better positions us to optimize existing assets and operations. So that we can add more value to our customers and provide greater optionality unallocated capital through all market environments with rig.
Guards to the competition Bureau process, we continue to work cooperatively with the competition Bureau, and the competition tribunal to resolve any concerns relating to the transaction. We expect the resolution to be immaterial to secures asset base or EBITDA based on recent cases, we expect that decision will be forthcoming.
<unk> closer to the end of this year.
Turning to our outlook in 2020 to the near term focus will be on continued.
Continuing to strengthen our business deleveraging our balance sheet and we anticipate looking to increase returns to our shareholders. After this is completed we expect to see continued industry improvement, which will support our strong momentum and drive higher year over year discretionary free cash flow in 2022.
Chad mentioned in the first two months, we were able to pay down our debt by $47 million you can expect more of that throughout the year I would also like to take a minute to welcome Mark why to our board of directors Mark is an energy executive with over 35 years of operational and safety experienced Mark is currently the chair of the board.
At <unk> energy and I'm looking forward to working with Mark and a number of areas, including continuing to advance our ESG initiatives and as North American perspectives.
Higher crude oil and natural gas prices should continue to provide significant improvement in overall industry activity in 2022 oil and gas producing countries, including Canada have under spent on developing oil and gas resources since 2014.
<unk> support for the higher prices we are experiencing.
Our expectations for increased discretionary free cash flow. This year are based on the following factors.
Increased drilling and completion activity is expected to continue for the remainder of the year. So far this year the average active rig count.
In the western.
Canadian sedimentary basin is 2% higher than the first quarter of 2019, which was the last quarter. There was no COVID-19 related impacts. There is also a substantial increase of 20% compared to 2021, we expect producers will continue to add production to offset natural declines that occurred in 2020 to maintain.
Flat production levels or increase production modestly.
Second we expect to see contributions to our adjusted EBITDA from the realization of the $75 million of annualized synergies third we anticipate increased utilization at Ms. Dee midstream processing facilities in landfills as higher drilling completion and production volumes from increased activity levels required treating <unk>.
SSE and disposal and finally higher abandonment remediation reclamation activity from the government stimulus package to help fund the closure and reclamation of orphan and inactive wells.
In closing in 2021, we significantly strengthened our business and demonstrated the resiliency and efficiencies achieved with our strategy to consolidate capacity in our markets, while managing our costs.
Our focus up to now on completing the integration with Davita as efficiently as possible and we're very pleased with the progress made in making the combined business stronger we expect to benefit from a continued fundamental recovery in 2022.
Our key priorities remain on operational excellence and efficiencies progressing our ESG initiatives and paying down debt with free cash flow, while leveraging opportunities to grow and provide value for shareholders and customers.
I would I would.
I'd like to thank all their secure employees that have contributed to finding ways to make a merger successful and all aspects. We still have a lot of work in front of us, but having a great team will ensure a successful execution of our 2022 goals I would also like to thank all our customers and stakeholders for their continued support and partnership.
Yes.
That concludes our prepared remarks.
Now I'll be happy to take your questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one audio Touchtone phone you will then hear a three pronged acknowledging your request and if you wish to withdraw your question simply press Star followed by two and if Youre using a speakerphone, we ask that you please lift the hands.
Before pressing any Keith. Please go ahead and press Star one now if you do have any questions.
And your first question will be from Aaron Macneil at TD Securities. Please go ahead.
Hey, good morning, all just wondering if you can comment on the type of facilities that were closed in the quarter and I guess I'm just.
I'm wondering how many were mst's disposal wells landfills or something else entirely and can you say, where they were located geographically and I know how sneaking in a lot of questions here, but I guess I'm also wondering with these closed facilities have been in any areas that faced high price competition in previous cyclical downturns.
Do you think that bringing.
Supply out of the market in these areas would have any impact on pricing at any point in the cycle.
Well good morning, Erinn Alan here, So I think when we looked at facility Rationalizations and we've spoke about this before it was really in conjunction with our customers and monitoring what what levels of activity in which areas. They were going to be most active.
In 2022, and so we wanted to have those conversations which is why we pushed a lot of those facility rationalizations into Q4, and there will be some here into 2022.
When you look at the type of facility.
Pretty pretty well spread out in terms of full service terminals, SW DS and landfills.
Primarily in the geographical areas.
If we look at say grandparent Grand Prairie for example, it's very busy.
That area, we wanted to make sure that we had the capacity for our customers.
Typically what I said before is our utilization if you look back in 2020 was around 30 low 30.
And then as we move through 2021 and moved into the <unk> and now in Q4 here. We're in the 50% utilization. So we have the capacity to serve our customers. We wouldn't close down a facility where they are now going to be tracking those volumes to a greater depth.
And so.
As we close down the 2017 I think.
We'll make sure that all our customers are going to have that capacity at our various locations.
To be able to handle the volumes here that we expect in 2022.
And then just on the pricing.
I recall from a couple of years ago.
Areas, where pricing was competition was higher than others.
Do you think.
The closure of any of these facilities alleviates some pricing pressure in those areas.
Aaron it's really the bigger picture here is that.
Our true competition as the oil and gas producers themselves. So we've always taken the perspective that.
We need a reasonable rate of return on our services and our investment in but we have to be.
More efficient and try to provide a cost effective service here to our to our customers or they will do it themselves.
So really the what we're trying to do by the consolidation is get more efficient and so it really isn't a function of price. It's a function of how do we reduce our costs.
And can we pass that onto to our.
<unk> so that they don't go in and take their free cash flow and built more mark facilities are more disposal wells more treatment facilities and pipelines and so on so that's really the strategy that hasnt changed and will continue for the next 10 to 20 years because this is all about.
Western Canadian producers getting their cost structure down so they had the most cost efficient in the world with the highest ESG standards.
We're part of that partnership to make sure that we're going to win in the long run. So that's our sole focus that's our vision and we're just going to make sure it happens.
Great perfect.
Mentioned noncore asset sales and the disclosures. So I guess I'm just wondering if you could.
Elaborate on what that could mean in terms of in terms of magnitude and I guess I'm wondering more specifically.
Any entire business lines, either that you'd previously announced sales processes as part of secure or that you acquired through to your beta okay.
I guess on the table in a divestiture scenario.
Sure.
So our main focus through the first six months of the merger was to consolidate all the assets and I think our goal was to look at what we had in surplus equipment. So that was our main focus in selling some of our surplus equipment. When you start bringing all the assets together Theres also some real estate.
That also is redundant in terms of us moving to emerge businesses together I think as we get into <unk>.
<unk> 2022, we're going to evaluate all of our service lines.
I think what we wanted to do first is achieve our synergies get to the $75 million optimize all of the locations all of the facilities. All the service lines. Once we do that and we have a core understanding of what do we believe this noncore what do we believe this quarter I think we'll have more clarity in the back half of this year as we go through that process.
In terms of these smaller equipment sales real estate and so forth.
It can range anywhere from $10 million to $20 million in terms of I'll, let dollar value, but relatively small in the grand scheme of things, but I think for us.
The main focus is everything is going to be directed towards paying down debt being as efficient as we can with all our facilities.
Driving that free cash flow number.
Okay great.
One housekeeping question and I'll turn it over you mentioned the $14 million in one time costs related to the transaction.
$39 million on the income statement I know some of that is just the transaction cost side.
Was wondering if you could split that.
39 million into the various buckets.
Hey, Aaron.
Youre right.
The mix of the.
The costs of these rationalizations so.
Severance et cetera, and then there is the one time transaction costs as well.
Related to our advisors and all.
Ongoing.
Legal advisers in connection with the competition Bureau review.
But I don't have the I don't have the specific breakdown for you. Okay. That's fine.
I'll turn it over thanks guys.
Thank you for your question.
There will be some KOL Pereira at Stifel. Please go ahead.
Hi, good morning, everyone.
Wanted to start on midstream quickly obviously.
Large synergy number in the quarter, but haven't really seen it translate.
To the financial performance side sequentially, yet I mean is that largely a function of the synergies occurring late in the quarter or was it some of the oil price volatility or was it some of that lower than expected December activity that you touched on.
It's primarily due to the closure of that facility late in the quarter. So it will take time, it's not like you get that immediate.
Impact to our bottom line.
Starting Jan first it will take time to flush through.
As we look to even close other facilities throughout 2022, you can expect a full run rate until we get to the end of the year was flat meaningful contribution into 2023, and they call it $75 million plus so.
And then if you look at the financial performance in terms of rig count I would say we are quite comparable Q3 to Q4.
The cold weather in December did.
Did impact.
Some of the activity of these rigs just can't operate when you get to temperatures of minus 40 and so.
A slowing slow December five.
We see now Youre heading into Q1 do you see the rig count is up call. It 25% of activity is really really busy in January and February as these guys are completing more and more wells and we're just seeing the price of oil stimulate more and more activity. So you will start to see as we get through 2022.
More free cash flow to the bottom line and more realization of synergies.
The posture of the system and the only thing I'd add is.
We still are predominantly reoccurring revenue production based in that division right. So when you have that increased drilling in Q1.
Reduction comes on later in Q2, so the real impact of that.
You produced waters your oil treatment internally shows up kind of late Q2 going into Q3 is always remember there is probably at 90 to 120 day lag between.
What.
Alex describing from drilling point of view versus the sheer amount of produced water in an oil condensate that shows up at our facilities.
Okay got you know that that makes sense and that's helpful. Thanks, and just as well just wondering if you can kind of give some details on the growth Capex I mean is it largely just in the realm of additional tie ins.
Yes, that's exactly what it relates to as we think about.
Reducing transport costs for our customers and then having certainty that theyre looking at pipelining into our existing water disposal facilities tiny in this infrastructure.
We said that all along it makes a lot of sense to take trucks off the road and reduce <unk> emissions and so we've got a number of these projects that we're working on that will come to fruition, the timing as to whether or not it hits it.
Later, this year or even some of it creeps into 2023 is difficult to predict but we've always said if we can add tie into our existing infrastructure thats, our highest rate of return.
What benefits our customers and our benefits ourselves. So that's a continued focus of ours and as Randy mentioned the producers can do it themselves and so when they're looking at their ability to take away their water or treat their oil and we want to make sure we're competitive and making sure that we can offer the best price for them as we look at these growth capital opportunities but.
As we've said multiple times our main focus here for 2022 is to take this free cash flow and pay down debt as our number one priority.
Okay got it no that that sounds good that's all for me. Thanks, I'll turn it back.
Thanks.
And your next question will be from Patrick Kenny of National Bank. Please go ahead.
Thank you good morning, guys.
Just zooming out a little bit here, given where we are in the commodity cycle, obviously theres strong interest from private equity to increase their exposure to western Canada.
Also a bit more of a willingness here from certain public companies to partner up with PPE.
To expand their footprint. So I'm just curious perhaps after you get through the <unk>.
Competition process.
But how are you thinking about this opportunity to JV with private equity or perhaps even.
Larger producer customer.
Just as a way to expand your footprint, even further and accelerate your growth within this commodity cycle.
Yes, that's great question, Patrick and something that we've talked about strategically is that as we get through this year next year and you look at something like.
Injecting cotwo and related pipelines and whatnot.
Capital.
Could be quite large so.
Whether it's partnering up with a producer of partnering up with private equity or another public company. We think we have a rollout there in terms of helping that junior to midstream.
Gather whether it's again oil or water seal too.
And.
And trying to do that in a cost effective way and obviously you need a low cost of capital to be able to make these projects work. So we're definitely open to those type of things I don't see anything short term.
Going down that path, but as we get into these larger projects.
Definitely.
Somebody bring something to the table that we don't have it's certainly Annapolis Avenue for us.
And then I guess really looking through that capital allocation lens beyond 2022, or once your balance sheet is where you want it to be.
What percentage of your free cash flow or do you see being directed towards organic growth or JV slush M&A versus share buybacks.
Or further deleveraging.
What you see as being the right balance here for shareholders.
Yes.
By Board asked me that every quarter.
And any.
Think of it as three leavers and what we're going to try to do and what will recommend to the board as we've got three leavers there as you described.
If you could tell me what my share prices in December 31 of.
This year I can tell you exactly what I'm going to do but for my debt position, but so just think of the three leavers I don't think we shut off debt repayment for instance in 2023 I think I think.
It's going to be a combination of those three that you just described and what percentage.
Hopefully, we'll be a little smarter here in Q3 Q4 as the cash flow comes in free cash flow comes in and get and pays down the debt as you described a more a more normal or a more acceptable level.
Thanks.
But.
We're just not we don't have that producer model, where you run a strip and say X percent schools. This X percent goes to that.
I think it will be a lot smarter going into Q3 Q4.
That's great really appreciate it.
And then just last one from me guys I'm wondering if you could help us to understand or.
Perhaps even quantify this potential opportunity.
From Saskatchewan.
Enacting a similar mandatory spending program on Arrow come 2023, and what that might mean for your business.
Well I think it's definitely positive I mean, our environmental side of our business continues to.
Get inbound requests on opportunities for reclamation bonding that in the back.
The government is stepping up and putting these programs in place to entice.
Our customers to continually do more on an annual basis, just means our beta testing is going to perform better on an annual basis I mean, we've seen it all through 2021.
Our groups in the environmental side, we are seeing more landfill volumes, we're seeing more more demo and reclamation work and as these programs get extended and new regulatory.
Programs come out.
It could be quite meaningful for us in 'twenty, three and 'twenty four and it's a great thing.
To do this on a more recurring basis so.
We're pretty excited about it because we've got the team and we've got the assets in place to execute on it and we've got a track record.
Being able to deliver on this for our customers. So I think it can be meaningful meaningfully positive for us.
The only thing I'd add.
Is what why we can't give you maybe even at a number of range is that.
They decide the producer decides whether I want to do downhole or background, obviously, we don't do the downhole or Adam inside of it and so what alan's what Alan was trying to portray to you is that as they kind of.
Dictate to us what they want to do downhole versus surface that will determine kind of that capex per year, but.
I think the good news with this is think of it you had some one time government programs I think of it as really is.
20 year annuity here and bolsters gas from Alberta in terms of cleanup, whether it's below or above and that's what gets US excited is that it doesn't stop in 'twenty five.
It's literally a 20 year annuity.
Alright, Thats great color. Thanks, guys I appreciate it.
Thanks, Patrick Thanks, Patrick.
Question will be from Andrew Bradford at Raymond James. Please go ahead.
Good morning, guys.
Good morning.
I've got a couple here for you I just wanted to just maybe revert back to the growth.
Capital question here and just to round that out.
The anticipated spending I understand that you don't you don't necessarily know when it's going to land and you have a few projects that are <unk>.
<unk> here, but you don't necessarily not locked down on them quite yet.
Just a little additional color or is it.
Is it.
Thanks.
Kind of a little bit here and a little bit there or is it mostly allocated to a couple of two or three larger projects.
They're mostly smaller projects.
Mostly concentrated around water disposal, so pipelining and additional water disposal infrastructure and oil terminalling in oil terminalling infrastructure. So it's basically half of handling more oil and more water at our various locations and and <unk>.
Relatively small dollars not one massive project.
Okay. That's perfect. Thank you.
And then secondly, just.
For additional clarity on the synergies.
Given the.
You've identified a few more facilities.
Our targeted for suspension or shutdown late.
Do you anticipate that the pace of synergies.
Are the remaining synergies will be realized in the front end loaded basis through the year or do you think it's going to be fairly evenly balanced through the remaining portfolio.
It is going to be fairly evenly balanced throughout the quarters when.
When we talk about the facilities some of the facilities are partial shutdown. So we may be just looking at waste at one location, where we will shut it down and divert it to another location to increase utilization lower lower those op cost. So it's not necessarily the full facility shutdown and as we go.
I know the question came up about geographical locations on our website, we will update on which facilities, which locations are operating and what their capabilities are at that location, but as.
As we go through this process it will be in conjunction with our customers because we just want to make sure. We don't disrupt what they need in terms of their disposal intriguing throughout that 2022 period.
Perfect. Thank you for that.
Then shifting gears a bit.
Sure.
You have a target.
Debt ratio in mind.
Exit 'twenty two here.
Can you remind us if you have sort of a targeted range or a target number.
Where you'd like to sustain.
Your debt ratio going forward.
At the end of the year well.
Remember, we press release, when we announced the merger we want it to be below two five.
By the middle of 'twenty three.
<unk> be a little ahead of that.
But.
Here's what we debate internally is there is there is different different ratios for different parts of the cycle. So we're not naive enough to think that we will never ever be non cyclical. There is always going to be a portion of our of our cash flow thats cyclical to some degree.
So what we're trying to figure out is understand these assets understand what has more.
Variability due to commodity prices and Westwood one.
Business unit <unk>.
And then try to come up with a model so that.
Youre looking looking at a ratio.
It doesn't matter, what part of the cycle and Youre in a comfortable range from a <unk>.
Debt to EBITDA ratio so.
Give us time on that Andrew we just.
Again as Alan described just pulling all these pieces together and understanding where the money is made where it comes from will help us determine.
Some of those.
Some of the better.
Better accuracy or better range of what that becomes both peak cycle in the low part of the cycle.
That's perfectly fair and Thats actually where I was going with the questioning in the first place.
And because it relatedly.
We look at your <unk>.
Your discounted cash flow and how you're planning to allocate it.
You've made comments in the disclosures and on this call.
And.
It seems like the two that point is it just.
Discretionary cash flow is itself going to be have some measure of cyclicality to it.
And the opportunities for growth come along.
And.
These discrete lumps and may not be necessarily regular and.
Your desire or willingness to engage in the NCI.
Well, it's healthy dependent upon share price, but the one thing that you start and is more or less should be thought of as locked in as a dividend.
And so I'm just wondering is that sort of your starting point and if it were is there you have it in the back of your minds.
Sort of like that.
Maximum payout ratio or something along those lines.
Is there.
Is it the kind of thing that you really want to achieve certain debt targets first before you really engage in this or as we close in on the targets.
We might anticipate willingness to sort of opening the dividends make it a bit.
Yes.
That's a great question I think it's all part of that analysis, because once you understand the stability of your cash flow versus what's variable.
And you can start.
<unk> again.
If I knew my share price in 12 months I can tell you exactly what we're doing when it comes to buybacks, but.
Sure.
That's the three levers it definitely it's debt repayment.
Share buybacks, and obviously looking at our dividend and.
It's.
It's one that.
I think the commitment there is that we will look at returning capital share shareholders, where it makes sense, but we also are going to be listening to our customers and trying to figure out.
What we can do with this existing network. The good news is balanced described is that a lot of what we're doing.
That little.
Three $5 $7 million project to optimize it even makes that returns with that facility better getting getting the trucks off the road and obviously, we don't own any trucks. So that's that's a win win for us and the producers so.
That will be all part of that analysis, Andrew, but you're bang on with where youre going with that is that.
We were.
We're picking up shareholder returns so that'll be part big part of it.
Okay. So thank you very much for that.
Second last question for you on that.
Another topic here is just with carbon capture.
Transmission sequestration.
So we're talking about that a little bit more now.
Is this a cost of capital business or is it one where you can compete instead of on cost of capital.
With more niche service offerings.
I think right now I think.
Everyone is really in this evaluation stage of carbon capturing I think.
What we've highlighted in the past is look we have the expertise on pipelining and deep disposal.
When you look at the geology, and where youre going to put carbon.
Downhaul, so we have the expertise, but I think what really needs to be understood is is this a good return for shareholders and we want to evaluate to make sure. If we're going to put in infrastructure and we are going to be part of.
This space is.
Does it make sense from a return perspective, and can we look out long enough to to be comfortable to make that investment. So.
Sure. It's a cost of capital at this point I think as we get through.
The rest of this year and into 2023 is that evaluation and just understanding all the different pieces of it.
To make sure that investment makes sense. So I think it's very early days Andrew and.
As we continue this evaluation process will continually update the market on <unk> is this something that we see viable for secure.
The only thing I'd add to that as well.
We're not going to be going out and building trunk lines. So think of us no different than what we do with the water and oil gathering lines for that junior debt.
Mid cap so that's our niche.
We'll see if we can find some some right sized projects with the right return to to make this a real but we're not we're not going to be doing the big trunk clients, but the permanence of transcanada's.
That seems very reasonable. Thank you last question promise here is.
Are you and are you as you reduce debt or are you in the market on the 11% bonds. It doesn't really matter all that much because the yield isn't materially different angle.
Perhaps there are other facilities that you could look at but.
Just out of curiosity is that something that you're focusing on.
Andrew.
No. It is not something that we obviously, we pay attention to where it's been trading.
But at this point, we're just focused on paying down our revolver.
Dylan.
We'll plan to deal with those as a whole.
Move forward, but we're not actively in the market with those.
Okay that's perfect.
And that's it for me. Thank you very much guys.
Thanks, Andrew.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone and your next question will be from Keith <unk> of RBC. Please go ahead.
Good morning, and thanks for taking my question, just maybe wanted to start out on the capital I appreciate the $45 million, you've got out there on a preliminary basis.
It sounds like there is some some additional projects that you may be looking to add on to that.
So curious if you can give us maybe a confidence interval for what you might be looking to spend on a growth basis for for the year is at 45 now, but you could go up to 50 or is it 45 to 60, depending on on how discussions go with with customers.
Yes, so think of it this way is one.
Since 2016, we've taken a strategy that a lot of this capital doesn't get spent unless we have some sort of long term contract with the customer. So you know what the business is like as those things don't happen overnight. So thats the variability.
Even if the economics are great returns at rates that Alan described part two of this is.
We've got supply chain disruptions, whether it's.
Wondering anything steel related or.
Pumps and stuff like that so we do have some surplus, but we will have to order some new stuff. So.
We may spend some capital in Q2 and the project doesn't get go until December of the year, just because we want to make sure. It's there when we need it so lot of variable factors in terms of how that.
How that.
What corner gets spent and also.
How much is how much could potentially carryover into 'twenty three because we we know right now that we're comfortable with 45 some of that could carry into 'twenty three or if we have to.
Pre orders stuff it could go up to $50 55.
On that kind of basis so.
Each quarter, what we'll do Keith is just update you on that and those are the variables that go into trying to give you a better forecast as to what is that capital range.
Got it okay appreciate that and after you spin the 45 or after you complete the projects for that you've got slated for this year, how many more tie in will you have that you could potentially do across the asset base.
Yes, that's a great question.
The thing that I love about the cycle. We're in right. Now is we've spent a lot of time with our customers trying to understand.
What they want to do with to replace their high decline production, but also are they going to grow by 2%, 3%, 5%, obviously, a headwater and accounts or an illegal by themselves in terms of growth rates, but if you look at.
A lot of the ones we are dealing with so it's a pretty disciplined approach. So that we can look ahead and say do we have.
Do we have to flip capital aside for this tie in or even extending out our <unk> system.
Those type of things so.
We're constantly talking to the to the to the producer as to what you see coming.
What's an offset to your high decline in what is an actual increase in your production and so probably we're going to have to go back to the customers in Q3, and just see if there if their forecast changes at all so it's really big data. This disciplined growth then next year, if you're looking for a number its probably.
That $45 million range, just the amount of opportunities coming through the door.
Got it.
And you mentioned.
Two companies in your in your response there any so maybe I just wanted just wanted to follow up on on that and talk about the clear water, which certainly is getting a lot of drilling and a lot more production.
Being brought into the area can you just remind us of your facilities or exposure in that area and is there is there a need im assuming there is for additional infrastructure in that area and.
Would that be in in your wheelhouse or is it something that the producers themselves or other companies would would be more suited to.
Yes, that's a great question, because it's a clear illustration of.
When companies have lots of free cash flow.
They're going to look at.
It's not a question I don't have the capital so I'm going to outsource to secure its what can I do it for versus what secure can do it for and so we're having those conversations as we speak as to or is there the right opportunity for us in terms of our rate of return.
Alan you can give some color in that area. We've got our we've got our slave lake or mid Sault facility that are high prairie facility in.
We also will have.
Lots of things that we're taking a look at but.
It's definitely a growing area and we're just trying to understand what that looks like yes, I think a lot of our capital decisions as we think about tying into our existing infrastructure, our partnering up with a producer in the area. It's about.
This opportunity is there now because they need it they see growing volumes coming out of that area. They need infrastructure and so if there is a role to play and we see that there is value for the next 10, 15, 20 years, whether or not it's adding on to slave lake or <unk> or some other location a battery or a producer where we can.
Can add value, that's where if we get if we did not being that we just work all the opportunity and move forward. So you are in the discussion you don't you don't know how long, it's going to take to progressing and what it looks like in terms of the capital spend but we're definitely in those discussions because it is such a meaningful play to a lot of criticism of getting great results.
Perfect. Thanks for that and final one for me you mentioned potentially 10 to 12 more closures to come.
Facility Wise should we expect the impairment to be.
Commensurate on a pro rata basis, with what you've already done or or is it too early to tell.
Thank you.
Those.
The impairment we recorded at the end of this year contemplated our planned closures for 2022 as well.
So those are already reflected.
And our year end impairment number.
Got it okay. Thanks, that's all for me.
Thanks Pete.
And at this time gentlemen, we have no further questions. Please proceed with your closing.
Alright, Thank you all for being on the conference call today.
<unk> broadcast of this call will bill will be available unsecured website.
We look forward to providing you with updates on secures performance in April after the completion of our first quarter of 'twenty two.
Thanks, again and look forward to chatting with you here in about two months.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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