Q3 2022 Trican Well Service Ltd Earnings Call
Thank you for standing by and welcome to the Tri Ken well services third quarter 2022 earnings 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 Mr. Brad Fedora, President and Chief Executive Officer of Tri Kanwal services. Please go ahead Mr. Fedora.
Thank you very much and good morning, everyone I'd like to thank you for attending the <unk> well service conference call for the third quarter of 2022, a brief outline on how we intend to conduct the call is first Scott Madsen, our Chief Financial Officer will give an overview of our quarterly results.
I will then provide some comments with respect to the quarter current operating conditions and our outlook for the future and then we will open the call for questions. Several members of our senior executive team are in the room today in order to available to answer any questions that anybody may have.
And I'd now like to turn the call over to Scott.
Thanks, Brad So before we begin I'd just like to remind everyone that this conference call may contain forward looking statements and other information based on current expectations or results for the company certain material factors or assumptions that were applied in drawing conclusions are making projections are reflected in the forward looking information section of our third quarter 2022 MD&A.
A number of business risks and uncertainties could cause actual results to differ materially from these forward looking statements and our financial outlook. Please refer to our 2021 annual information form and the business risks section of our MD&A for the year ended December 31 2021.
A brief description of business risks and uncertainties facing <unk>. These documents are available on our website and on SEDAR. During this call. We will refer to several common industry terms and certain non-GAAP measures, which are more fully described in our 2021 annual MD&A and in our third quarter 2022 MD&A.
Our quarterly results were released after the close of market last night and are available both on SEDAR and on our website.
So with that let's move onto our results for the quarter. Most of my comments will draw comparisons to the third quarter of last year and also provide some commentary about our expectations going forward.
Revenue for the quarter $258 million, a substantial increase from last year, a 57% increase compared to Q3 of 2021, our activity levels in the quarter were generally higher across the board than the prior year comparative period as industry activity in the Western Canadian sedimentary basin increased fairly significantly driven primarily by strong.
<unk> prices this.
This has led to significant improvements in demand for all of our pressure pumping services, which then resulted in better utilization across our service lines in Q3 compared to last year and a much more constructive pricing environment.
Adjusted EBITDA came in at $70 9 million again, a significant improvement from the $32 1 million. We generated in Q3 of 2021 and I'd also note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $3 8 million in the quarter and were expensed in the period adjusted.
Adjusted EBITDAX for the quarter came in at $72 1 million again, a significant improvement compared to the $33 $2 million, we printed last year to arrive at EBITDA, we add back the effects of cash settled stock based compensation recognized in the quarter to more clearly show the results of our actual operations without some of the financial noise.
We recognized about $1 $2 million in expense related to cash settled stock based comp in the quarter.
We continue to make progress in monetizing stranded assets, where the number of transactions closing in the quarter, bringing in about $3 $4 million in cash proceeds and generating about a $5 million net gain on disposal.
So that brings us down on a consolidated basis, we generated positive earnings of $38 $2 million in the quarter or about <unk> 16 per share.
We generated free cash flow of $64 9 million during the quarter as compared to $29 9 million in the same period of last year. Our definition of free cash flow is essentially EBITDA less non discretionary cash expenditures. Those would include our maintenance capital program.
<unk> cash taxes and cash settled stock based comp.
Capital expenditures for the quarter totaled $24 6 million split between our maintenance capital program of about $5 5 million and our upgrade capital of $19 $1 million, primarily dedicated to our ongoing tier four capital program.
Our balance sheet remains in excellent shape, we exited the quarter with positive working capital of approximately $125 million, which includes cash of about $10 million and no long term bank debt.
Finally, with respect to our ongoing NCI program, we were pretty active throughout the year and repurchased and canceled approximately 11 3 million shares at an average price of $3 41 per share about 5% of the company's issued and outstanding share base.
Continue to view share repurchases as a solid investment opportunity in an effective way to return capital to our shareholders.
So with that I'll turn things back over to Brad who will provide some comments on our operating conditions and our outlook going forward. Thanks, Scott. So overall Q3 was a very busy quarter, even though we had a wet start in late June early July and we really didn't get started until almost mid month, we still were very happy with the overall act.
<unk> in the quarter we are.
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We chased inflation for the first half of the year from a pricing perspective, and finally in Q3, we were able to catch up and actually get net pricing gains and as everybody knows in this industry.
Have significant operating leverage both in the upturns and downturns and so finally that kicked in and worked to our advantage and so youll see expanded operating margins in the quarter.
We still see cost inflation in Q3 in all facets of the business, whether it's products chemicals third party trucking et cetera, but definitely the rate has slowed compared to the first half of the year or the rate of change has slowed compared to you know we don't expect this to go away, but I don't think we're going to see the sort of week after.
Weak price increases that we saw in the first half of 2000 22022.
In particular, we're still.
Seeing fuel surcharges from the rail companies they base their fuel surcharges on U S diesel prices and so that has a big impact on our sand prices and chemistry prices for once it gets landed and in northwest, Alberta and northeast B C.
Customers are generally I would say very cooperative on accepting the price increases it's easy to show them, where they are coming from and to justify them and so they.
They worked with us throughout the quarter and as a result, we were able to get better margins overall I would say the frac market is very balanced at these activity levels. There are approximately 30 stacked frac crews operating in Canada.
Yep.
Drilling activity of 200 to 220 drilling rigs those 30 Frac crews are basically operating at capacity.
Any activity above sort of 220 drilling rigs would tip the frac industry into an under supply situation and we will talk about next year, but I think thats where were heading currently we're operating at about seven Frac crews.
We expect to be operating with eight Frac crews early in Q1 of next of next year, we certainly have the demand on the board for it today.
So this means we're still only operating about 60% of our crude capacity comparison to our competitors that are basically operating fallout.
So when you look at the upside of this basin, we still own over half of the spare capacity that exist in Canada today and as the basin demand grows we're in a great position to provide this industry with incremental incremental frac crews.
We're very happy with our cementing division spending business in Canada is running at absolute fallout capacity for all of the crude equipment that exists today.
At <unk>, we have about 17 to 19 crews, which means we have about 30% to 40% market share and their overall deep basin, but they are in the overall western Canadian basin, but likely this is a much closer to 50% when you look at the more our market share in the Montney and deep basin.
And our market share gains are limited only by staff.
We certainly have more demand than we're able to supply and cementing and unfortunately, it's been a frustrating experience keeping people working in the field. There is a significant pull back into the into towns and cities and so hopefully we will expand our market share as drilling activity picks up next year.
Oil market, we're very happy with our coil business as well, it's a little more lumpy than than the fracking and cementing, but overall pricing and demand for our coil coil division has been really good and that too where we're basically limited by our ability to staff that and today, we're operating at about 7% with about seven coil crews.
The outlook for Q4 and next year.
Naturally we expect Q4 to be sequentially lower than Q3 as is typical.
Tober in November our good months.
But the quarter.
He does experience the typical weather delays as we transition out of fall and into winter and once December arrives lots of customers have exhausted budgets and then we basically lose half the month to Christmas So.
It's natural to see a little bit of a dip down in Q4, but it'll still be a good quarter Q1, 2023 looks very busy.
Our board is booking up well into the spring.
Very active we're scrambling to try to add people in advance of what looks like a very busy quarter. We expect full year 2023 to be modestly busy year than 2022, and it really depends on the customer, but I mean generally everybody is telling us there.
Theyre going up sort of between three and 10% in.
And activity levels compared to 2022, and there they're well economics are still very attractive, especially natural gas wells in the montney, they're paying out in a matter of months and Thats, obviously, a good thing for the for the industry.
The frac market in particular is balanced today, and so any incremental activity over 2022 levels would lead to higher activity pricing and margins.
So we're excited about next year.
Our customers thankfully our customers remained very disciplined with respect to the capital budgets, even though activity is going up you're still spending less than 50% of their free cash flow in drilling and completions and so this market feels very sustainable for the next few years. It hasnt odd orderly predictable feel which is unusual for the oil patch in western.
Canada.
So we're we're very positive about the next few years it allows us to plan well in advance.
We're expecting lots of good things coming LNG drilling activity has started.
LNG, Canada is adding production they've got rigs in the field drilling and this project has a 50 year life. So this this is a great base level of activity for for Canada in the future people will definitely be the bottleneck.
For growth, particularly in things like cementing.
But we're working hard to attract people back to our industry, we're paying more.
We have had some some.
Some success recruiting across Canada.
We're fortunate that our staff take great pride in the work to do and we're proud of the work that they have done so far this year under very busy conditions, we're very fortunate that people that not just in the field, but in the office as well are very committed to the success of the company. We've got a great safety record, which our customers have been noticing and us.
More and more important as.
As the world transitions to a more of an ESG focus.
Companies like LNG, Canada, focusing on safety records as well as as well as the local operators as well and I think our people have embraced and advanced safety culture in the field this year.
Our employee retention is obviously our top priority at this stage.
Not just attracting new people to the industry, but keeping them and if we can keep our people and add some people next year will be will be very busy and prosperous for us supply chain.
There are concerns on supply chain supply chain does operate at or near capacity, particularly sand coming out of the U S.
So our our procurement group has done a great job and not just managing this on a day to day basis, but making sure that they get ahead of what we predict will be shortages months into the future.
The market for third party trucking is very tight.
Theres less drivers today than there used to be.
<unk> tonnage per well has grown and so it takes a lot of time planning to ensure that we maximize logistics efficiency and we minimize the delays for our customers, especially in when we get to quarters like Q1, which we expect will be will be stressing the system.
It's important to note as an industry in the last in the last few years, we've become extremely efficient with their operations and we're starting to capture some of the financial gains of those efficiencies over the past seven years. The customer has been benefiting generally as we as our pump times have changed from <unk> to 'twenty two 'twenty three our record.
Or.
Pump times, we continue to set records for the number the amount of sand placement in 24 hour period.
Well laterals are getting longer and stage count is increasing and so.
In order to maintain the sufficiency, we have to make sure that our logistics Department, our planning department or dispatch are all working in sync to ensure that we provide in a very efficient service to our customers.
We've made great strides with technology and innovation, we have a guiding principle of clean air clean water and so we've made the capital investments into into areas like our tier four engine upgrades and into our chemistries that allow us to use less freshwater more produced water and cement blends that half.
Make sure that they protect freshwater sources.
So we're going to continue to focus along along those lines just from a tier four upgrade and a corporate strategy perspective, we're very bullish on the industry in Canada, We believe that Canada will play an important role on the global stage and providing the world with clean reliable energy, particularly natural gas we view western can.
It is a great basin in which to grow our business. The Montney is a world class resource and it's in the early stages of development and so we when we think about our corporate strategy over the next three 510 years, we're very focused on Western Canada, and certainly the Montney deep basin is a focal point of of where we plan on deploying.
Our people and our equipment.
LNG, Canada developments of the LNG facility on the West Coast is almost done and they're already talking about expansion.
So we look at that as a great base of activity for natural gas drilling in Western Canada over the next 10, 2030, 40, 50 years and all of that drilling all of those well developments are very fracturing intensive and as everybody knows.
Very little natural gas or oil come out of the ground without a frac. So all of our divisions, starting with cementing our fracturing in coil will be absolutely essential to developing that natural resources in Western Canada.
The future, we're very focused on growth free cash flow and return on invested capital certainly free cash flow and return on invested capital are really all that matter at the end of the day.
And they underpin every decision we make.
And we are investing our cash flow for growth based on predictable long term returns, we're not overly concerned with market share, but we are very concerned with things like free cash flow and return on invested capital. We're fortunate enough to have had the balance sheet to invest.
<unk> 18 months ago, and our strategy is basically differentiation and modernization, while meaning while maintaining a conservative balance sheet. So we focused on adding state of the art equipment getting our systems and processes.
Up to a modern standard.
Deploying ESG strategy and our department to make sure that we're ahead of that and working with indigenous partnerships and all of this is to ensure that our growth is sustainable throughout the cycles.
<unk>.
With the with what's changing with the public with respect to emissions et cetera, we want to make sure that we're on the forefront of providing equipment and services to our customers and one of the ways of course that we differentiate us with our with our new equipment and we rolled out our first tier four spread back in early early this year and we've been extremely happy with the results.
We put out our second tier four spread in the summer and we just activated our third tier four spread into the field.
And our fourth tier four spread.
As planned for late in Q1, 2023, 2023, so clearly we can all see the trend and where this is going we're going to continue to invest in this technology.
We now have the newest most modern efficient fleet in the basin, we're very proud with the performance in the operating results. So far I think we have over 33000 hours on our tier four pumps.
They provide lower emissions from the state of the art engines the high performance pumps.
Provide high pressure continuous duty performance that allows us to operate very efficiency very efficiently on location and what that means is we have less people and less equipment.
<unk> 22 to 23 hours per day of pumping is the norm now regardless of pressure on rates and if we use natural gas on site to provide fuel to these pumps that takes not there. It takes diesel trucks off the road the natural gas Burns clean.
It makes for a very efficient operation and all of this leads to higher profitability for our for our business. When you compare operating tier four equipment to the conventional equipment.
To charge a premium but at the same time our customers.
Are benefiting from a significant fuel fuel cost savings and so it's been a win win for both us and our customers and we expect this technology to be the standard in the in the Montney and deep basin in the future and we're very fortunate that we were able to move on this early.
And as a result, now we're sitting here in Q3 with almost half of our fleet with tier four technology by far the most state of the art up you know up to date efficient fleet in Canada.
Our strategy is to continue.
<unk> converting our equipment over the coming years, we will have an entirely new fleet of fracturing equipment within next four years.
And these fleets will either be incremental as the as the industry demand growth or they'll go to replace our existing equipment and whether it's diesel or diesel tier two dual fuel.
It will depend on the time of at the time, but either way there are more efficient more profitable they provide the customer with better service.
Lower emissions, both public is happy to have them in the.
The customers happy to use them and we're certainly happy to provide them.
So we look forward to developing this as time goes on.
On our return of capital basis, we generate significantly significant free cash flow and we can only spend a portion of it intelligently on growth opportunities and so we subscribe to a diversified return of capital strategy and to date, the best way of doing that and providing that has been to buy our shares in the market.
We've been using our buyback now for a few years and we think it's been the most effective way to return return our capital, especially it at sort of historical share prices I think we bought up to 55% of our outstanding shares in Q3 alone and now when you look back a few years.
We purchased almost 35% of the company back.
In the last few years. So we continues we plan to continue this we renewed our CIB.
In October for the 20 late 2022, and 2023 year and we remain committed to this program for the foreseeable future and.
We both have a consistent monthly allocation and sort of a reserve fund for when the market disconnects.
And our views of the future.
Our positive so we'll use that when we can but we stay committed to returning capital to our shareholders.
I think I'll stop there and we will go to questions. So we'll go back to the operator.
Thank you we will now begin the question and answer session.
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Speakerphone, please pick up your handset before pressing.
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Our first question is from Aaron Macneil with TD Securities. Please go ahead.
Hey, good morning, all thanks for taking my questions.
Brad you sort of touched on this in your prepared remarks, but.
One of your competitors suggested in their Q3 disclosures that.
Q4 utilization will have some gaps.
Fears around supply adds and I know youre going from seven to eight, albeit in Q1 Q4.
Bit of a different view on supply and demand but.
I thought it might be a good opportunity to kind of.
Talk about what your approach will be going forward.
And specifically how youre treating these new.
These new additions through upgrades.
As it relates to the dynamic gas blending engines, so maybe I'll turn it over to you.
Okay. Yeah. Thanks, Yes, theres always gaps in the schedule and in late Q4. It seems like these last few years.
Our views of returns pricing.
Price levels at which we left the equipment leaves the yard they do not change just because we have a bit of white space.
We're fortunate we run a very conservative balance sheet.
Very profitable company and you know we don't panic, just because there is a bit of white space on the board.
So our pricing views, they don't change and from a supply and demand perspective.
Other it's December or next July .
The price the marginal price of.
Supply is determined by the supplier.
Not the customer.
And so we don't let equipment go to work unless we can get a reasonable return on it because of the wear and tear on that equipment is real.
And so the market the market is priced based on on where the service companies set the price not knock the reverse.
So, but whether there is a little bit too much of equipment from one month to the next or.
This is a long term game, we make our decisions on on long term returns.
And know that this equipment only has a finite life to it and we need to get the most out of it that we can and at the end of the day our customers just want.
Efficient predictable services using state of the art equipment and the best people.
We will give that to them but.
We need to make sure that we are paid appropriately.
So we don't let the.
A month, the variations in supply and demand determine our pricing behavior.
Thanks total sense.
From a labor perspective.
I'm not really thinking about how much you pay people but.
More about how you pay them and I guess, specifically you guys used to pay guarantees over the second quarter to retain talent and I know you're tight labor.
Today so thank.
Thank you I guess I'm wondering like what's the what's the model is it fixed through the kind of weaker periods of the year or is it still variable.
Sure it's variable but.
Everybody is so busy.
Very predictable.
Certain times, we have to make minimum commitments on the number of day rates that they receive for shift we're happy to do that because it frankly doesn't cost us anything.
And as we are now like Q2 is not what it used to be when they give anything December as the new breakup.
Our Q2 is busy.
It's between getting equipment ready for Q3, because Q3 is the busiest quarter of the year now.
Between getting equipment ready and the amount of work that.
We expect that we will have to do.
When people start taking holidays as things warm up in kids kids come out of school et cetera. So it's it's it's not what it used to be Q2s actually easier to manage and in a little bit of a slowdown in December that's not a bad thing either right because the guys have been working hard.
Since since the spring and so that people can start to take a bit of a break for the second half of December before everybody gets back to work again in January I think it would be welcomed by all so thankfully the level loading that's occurred in the last few years.
Has really helped us manage that.
That component of the business.
And we have to keep up and we've obviously, we've given raises over the last few years numerous times.
And we got to make sure that our people make a good living because we obviously rely on them.
But the level loading is making our job a little bit easier now.
And like I say, it's weird, it's almost like December is the new breakup and that's that's actually sort of a welcome change.
Sure.
Okay great.
Thanks for the answers I'll turn it over.
Once again, if you have a question. Please press Star then one.
Our next question is from call Pereira with Stifel. Please go ahead.
Morning, all so obviously return of capital has been focused on share buybacks, thus far.
How are you thinking about a dividend I mean, I think we can all agree share buybacks have been a success.
But you know why why does it need to be just one what are the other as opposed to both.
Yeah Youre right.
It's just been such an easy decision up until now.
I think we've telegraphed to the market.
Pretty well that the.
The multiples when we think about spending our excess free cash flow.
It's pretty simple we look at additional growth opportunities.
M&A share buybacks and dividends.
There just arent additional growth opportunities that we think we can get a decent return on or if there isn't a supply chain to provide the equipment to pursue them anyway. So we can only spend so much money on our operations and I think we're going as fast as we can just given the supply chain constraints and on the M&A side. There is still a bit of a disconnect between what public companies are trading.
Aiding at and what private companies are expecting.
And that that gap is never easy.
To close.
So we haven't had any opportunities there and so that leaves us with the buybacks and the dividends.
And the buybacks frankly are just so they've just been so attractive that the share prices. We've had since the spring. So it was kind of a no brainer.
If we if we break if we sort of hover at current levels and break into the fours, yes, it's getting tougher to justify purely the buyback.
<unk>.
We wouldn't be afraid to pay a dividend at all.
We're very optimistic about the future.
We think our cash balances are going to continue to grow so we'll just play it by year.
Basically a mathematical decision and we're not biased either one frankly.
Got it that makes sense. Thanks, and can you just remind us how many crews could you theoretically activate and can you just comment in Q3, you know what kind of utilization you would've realized on the active crews you did have.
Well the utilization is.
Yeah.
Okay.
Pretty pretty full but I mean, it's we don't change customers every month to make sure.
Our board is perfect right I mean, we have long term loyal customers and we got to roll with the punches a little bit so.
We do have down times.
At any quarter, whether it's Q3 Q1 Q4, whatever but.
Q3 is the busiest quarter of the year now so it was it was pretty busy but sure. We had we had downtime. So I don't know what the utilization was but that was about 85% quarter.
On the Frac side of the business.
Okay.
We're right on that edge here at these at this number of drilling rigs, we're right on that edge of where we're not really in an over or under supplied situation and like I said, we're fortunate to have sort of long term customers and so.
It'll be interesting to see what happens next year, when I think we're going to be above the 220 drilling rigs and.
Things could be a little tighter.
Got it and then so for the incremental fleet in Q1, you'll obviously be getting improved pricing for that fleet, but I mean are you are you fairly confident you will see higher pricing across the board as well and I mean that additional fleet.
Should we be thinking that that's going to work with the series of long term customers or do you have a little bit of spot exposure, how do you think about that.
No.
The answer is always.
Ideally both.
Not going to have much spot exposure, just because of the schedules getting sort of full.
So the tier four equipment will go to our we don't have a huge customer list, but.
So we consider them all to be good loyal long term customers, but.
It'll probably go to our existing customers.
Okay.
Got it that's all for me, Thanks, I'll turn it back.
This concludes the question and answer session I would like to turn the conference back over to Mr. Fedora for any closing remarks.
Okay. Thanks, everyone for joining the call. We appreciate the time you took it.
We'll sign off now, but the management team here at <unk> will be available today and tomorrow for any follow up questions. Thank you.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a presence.
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