Q4 2022 Secure Energy Services Inc Earnings Call
Speaker 1: Ladies and gentlemen, thank you for your patience. Please do not disconnect. Secure energy will begin momentarily. Once again, please get you to stand by. Do not disconnect. The secure energy conference call will begin momentarily. Thank you for your patience.
Speaker 2: Pr pu.
Speaker 1: Good morning ladies and gentlemen and welcome to the Secure Energy Q4 2022 Result Conference call. At this time all lines are in the listen only mode. Following the presentation we will conduct a question and answer session. And in fact anytime during this call you require a immediate assistance please pass star zero for the operator. Also note that the call is being recorded on Thursday March 2nd 2023.
Speaker 3: or president and Chad Megas are chief financial officer.
Speaker 3: measures and ratios that do not have any standardized meaning prescribed by GAP, that may not be comparable to similar financial measures or ratios disclosed by other companies.
Speaker 3: The four-looking statement reflects the current views of secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by secure. Since four-looking information addressed future events and conditions, further very natureally involved in current assumptions, risks, uncertainties, and actual results could differ material from those anticipated due to numerous factors in risk.
Speaker 3: Please refer to our continuous disclosure documents available on the theater as they identify risk factors applicable to secure factors which many causes, as different material from any form of infatuation and identifying fine or non-gab measures. Today we will review our financial and operational over the results of the fourth quarter in 2022 year, followed by our outlook for 2023. I'll now turn the call over to Renny Furns opening remarks.
Speaker 4: which closed midway through 2021.
Speaker 4: Thanks to our exceptional employees who had raised the one team mindset and worked together, we were able to exceed our objectives in realizing the 75 million cumulative incineraries integrating the acquired business units and paying down debt while continuing to provide best in class customer service.
Speaker 4: In 2022, we handled record volumes across our critical infrastructure network, helping our customers to cost effectively manage their environmental liabilities. Our facilities shipped on average over 129,000 barrels of oil every day and processed 136,000 barrels.
Speaker 4: a produced water per day in 2022. Through our processes we were able to recover over 1.6 million barrels of oil from customer waste.
Speaker 4: At our 18 industrial landfills, we safely disposed of 4.6 million tons of contaminated solid waste. Adjusted evidaw increased by 44% over Proformer 2021 to 557 million, the increase was a factor of stronger industry fundamentals driving increased volumes to our facilities.
Speaker 4: as well as integration cost savings achieved as a result of the Turbade merger. We converted 62% of it, adjusted EBITDA to generate discretionary free cash flow of 348 million, which we primarily directed towards the repayment of debt, resulting in a reduction of our total debt EBITDA ratio.
Speaker 4: to 1.9x at December 31, 2022. With this success in the business, an astrologer financial position after paying down 300 million of debt in 2022, we're pleased to pay an increased quarterly dividend of 10 cents per common share in January of 2023.
Speaker 4: a 13 times increase over a previous dividend payment. We've also been active on our normal course issue of bid implemented at the end of last year. To date, we have repurchased nearly six billion common shares and a average price of $7.78 per share for a total spend of $46 million.
Speaker 4: We continue to progress our commitments to ESG. We're currently working on our annual sustainability report and not in our inaugural climate-related disclosure report for 2022. What sets out our expected governance strategy, risk management metrics, and targets as they relate to climate impact. We look forward to sharing these with you in May of 2023.
Speaker 4: In January , we were pleased to appoint Mick Delver to the Board of Directors and as Chairman of the Board. Mick was formerly CEO and Director of Hem and Applied Line Corporation from 2014 to 2021, creating tremendous shareholder value during this time. Chad will now go through the financial highlights from the fourth quarter of 2022.
Speaker 5: Thanks, Renny, and good morning to everyone on the call. Our fourth quarter results continue to demonstrate the enhanced scale of our business since Emerger with Turbida, our ongoing focus on managing costs and reducing debt and the strength of the underlying markets. During the quarter, we recorded net income of 32 million or 10 cents per share and generated an adjusted e-bid of 150 million before 48 cents per share.
Speaker 5: an increase of 33% in the fourth quarter of 2021. The fourth quarter of 2022 saw the full run rate of our 75 million target synergies realized in relation to the Tervida merger, the remainder of the increase to the stronger energy, environmental and industrial markets. Despite extreme cold weather during December , our infrastructure
Speaker 5: received higher production water, processing, recovery, term-link, and pipeline volumes into fourth quarter. We generated strong discretionary, three cash loads, 74 million, the majority of which was directed towards the repayment of debt, bringing our principal debt balance down to 911 million, nearing the midpoint of our target balance of 850 million to 950 million.
Speaker 5: which represents a level that provides a stability through all business cycles. Our impressive adjustity with a margin of 37% increased from 34% to fourth quarter of 2021.
Speaker 5: Do the positive impact on the cost savings and higher revenue which contributed to it improved fixed cost absorption?
Speaker 5: Conflation has had an impact on our costs, so we have been mostly able to offset this through operational efficiencies and price increases.
Speaker 5: In October , we raised prices across business to keep pace with higher input costs. In the midstream infrastructure reporting segment, our fourth quarter segment profit increased to $107 million, 32% higher than Q4 2021 due to improved overall production levels in higher waste processing volumes.
Speaker 5: Additionally, improved benchmark coil prices positively impacted our revenue from a covered coil. The environmental and fluid management reporting segment, our fourth quarter segment profit increased 11 percent to 59 million this higher year-over-year gilling activity positively impacted our fluid's business.
Speaker 5: and increased demand for waste services. We're extremely pleased with our fellowship management since completing of the merger and improvements made to our capital structure. In 2022, we repurchased 138 million US, the 11% notes assumed an attribute of merger, saving us approximately 10 million of interest on an analyzed basis.
Speaker 5: and leaving just 162 million US of the senior secured note-of-statement. This balance is down 67% from the 500 million US assumed upon closing of the merger.
Speaker 5: We also renewed and extended our $800 million revolving credit for the fourth quarter at more favorable terms in our previous facility.
Speaker 5: And subsequent year end increased our unsecured letter of credit facility guarantee by export development Canada from 30 million to 50 million, which will improve our liquidity on the revolving credit facility. Our capital structure consists of no near-term materies with the first fixed note buturing in We retain a strong liquidity position.
Speaker 5: approximately 400 million availability in our credit facilities, which also mature in 2025. Our focus on debt repayment and positive operational results give significant lead to improved overall leverage metrics. Our total debt to be with a covenant ratio built one foot nine times, now from 2.2 times at the beginning of the quarter, and now from 3.4 times at the end of 2021.
Speaker 5: Our stronger financial position, along with our significant reliable cash loan, provided the platform to allow us to begin executing our agreement to deliver increased shareholder returns. Both through our increased dividend and share repartments, which also, while also allowingutaana
Speaker 5: A stronger financial position, along with our significant reliable cash loan, provided the platform to allow us to begin executing on our commitment to deliver increased shareholder returns. Both were increased dividend share repartments, which also while also allowing us to reduce current past violence measures.
Speaker 6: A mental breakdowns provide operational highlights. Thanks, Chad. Good morning, everyone. As Rhenia and Chad have mentioned, strong industry fundamentals continue to drive increased activity in our operating areas. In the fourth quarter of 2022, overall volumes across our infrastructure network were higher than the prior year compared to period. As expected, the typical December holiday slowdown along with the pool.
Speaker 6: production levels and higher waste processing volumes corresponding to increased drilling and completion activity. During the quarter, our facility network processed on average nearly 138,000 barrels of produced water each day, an increase of 2% over the prior year of quarter consistent with expectations at same store sales.
Speaker 6: on produced water volumes, trans-higher over time. Our oil-termoline and pipeline volumes increase 12% in the quarter from the prior year, which also helped contribute to strong crude oil marketing results.
Speaker 6: Overall, utilization across our processing infrastructure remains at approximately 65%. We have noted in the past we continue to have capacity to handle additional volumes requiring processing disposal recycling, recovery and terminal with minimal incremental fixed costs or additional capital. In our environmental reporting segment, we also benefited from higher benchmark oil prices.
Speaker 6: Grace Columbia, Alberta, and Saskatchewan seek to speed up the rate in which inactive wells and facilities are abandoned and re-plained. These programs are expected to result in incremental volumes at our industrial landfills and waste facilities, metal recycling facilities, and overall higher demand for our environmental remediation. In the fourth quarter, our waste transfer sludge pad facilities volumes increase compared to the same period of 2021 driven by higher norm sludge volumes from our produce.
Speaker 6: moderated over the third quarter of 2022 and decreased from the prior year. The impact of reduced pricing was partially offset by a 24% increase in volumes.
Speaker 6: Due to the transport availability and through operational efficiencies. For non-fares metals pricing has not been impacted as type of metapaterial dictates pricing due to greater variety of material sold. Non-fares volumes also increase significantly by 63% through operational changes which facilitated its approved access.
Speaker 6: of existing facility which is backstop by a commercial agreement. Sustaining capital was primarily spent on well-in-facility maintenance, landfill cell expansion, and asset integrity inspection programs. In total, we spent 27 million of growth and 69 million of sustaining capital in 2022.
Speaker 6: We continue to focus our growth capital on opportunities that provide reliable volumes and reoccurring cash flows, generally through customer partnerships with long-term contracts and take our payment volume commitments. In 2023, our planned growth expenditures are approximately 50 million and really primarily to the construction of a new oil terminal and pipeline infrastructure.
Speaker 6: higher production volumes. This new infrastructure is backstopped by three long-term commercial agreements, providing secure with reliable revenue to take or pay obligations to meet our investment hurdle, and significant upside through production and increasing in their identifications.
Speaker 6: We expect to encourage 60 million of sustaining capital and 25 million of capital related to landfill expansions in 2023. The additional landfill expansions are anticipation of increased abandonment spending obligations driven through government regulations. As Renny mentioned, we are currently working on our fourth annual sustainability report and are excited to provide enough
Speaker 6: One of the ways we foster our proactive safety cultures through engagement at all levels.
Speaker 6: In 2022, we expanded our leadership safety program to include hazard hunt and safety inspections, increasing the number of interactions between leaders and frontline employees on relevant safety topics. In total, we had over 1,000 leader safety interactions during the year.
Speaker 6: One of our short-term goals established last year was to reduce fresh water uses by 5% in 2022. We successfully exceeded this target and reduced our uses by 8.7% during the year through streamlining operations and optimizing our facility process. During 2022, we refreshed our every drop matters campaign to reinforce best practices and reduce the risk of reducing fresh water use by 8.7% during the year through streamlining operations and optimizing our facility process.
Speaker 6: short-term target of reducing greenhouse gas emissions by 15% by 2024, primarily through energy efficiency projects at our processing facility. From a social perspective, we were honored to give back over 780,000 in 2022.
Speaker 6: to the communities where we live and work. A highlight from our 2022 was our annual Stampede charity fundraiser. To cure along with our industry partners raised 620,000 for the Calgary Food Bank, Providence, the Alex Kittsport, and the Canadian Red Cross in support of Ukraine.
Speaker 6: Additionally, in the fourth quarter of 2022, secure was the proud winner of the top fund razor across the oil and gas sector, and the oil rig rumble challenge as part of the November campaign in support of men's mental health and physical health. In total, our employees donated or raised over 170,000 for the cause, which was talked up by secure for a total of over 345,000. In 2022, we rolled out an educational program for our employees under his name.
Speaker 4: another strong quarter for secure capping off. Thanks, extremely successful year.
Speaker 4: We generated record-adjusted EBITDAW, nor disciplined in our strategy of directing discretionary, free cash flow towards debt reduction to strengthen our balance sheet for future flexibility. In 2023, the corporation expects to see continued momentum across all business lines of stronger energy, environmental, and industrial markets continue to drive.
Speaker 4: higher volumes activity levels and overall demand for secure infrastructure. Our strategy will continue to focus on growing volumes and existing and new infrastructure with contracted or reoccurring casmos. We see a great cost savings and helping our customer experience with our digital transformation of the business. The energy sector continues to evaluate the supply and demand.
Speaker 4: Outlook as it faces macroeconomic factors such as inflationary pressures, the possibility of a near-term recession overall demand globally and the geofoletical risk premium. However, the current price environment continues to drive robust producer cash flows.
Speaker 4: and increased energy industry activity in our operating regions. New government regulations will increase environment to cleanups and reclamation in all our business units. With our support about the benefit from the full run rate of realized synergies from the Tervida merger and improvements made to our capital structure in 2022, we expect to see higher year-over-year discretionary free cash flow in 2023.
Speaker 4: Given this backdrop, we remain confident in executing our previously announced capital allocation priority to return more capital to shareholders while maintaining our principal balance debt target of $850 million to $950 million, a level that provides a significant financial flexibility through all business cycles. We are excited by the future of secure. All segments of our business continue to see strong demand and we are making good progress on our ESG goals. With our strong results today, we're demonstrating that our enhanced scale better positions us to optimize existing assets in operations so that we can add more value to our customer.
Speaker 4: and provide greater optionality in allocating capital through all market environments. We have the right assets and team in place to deliver cost-effective and value added solutions to our customers who have been able to achieve some of the highest ESG standards in the world. Together with our customers, we are ensuring we create sustainable energy and environmental solutions for many decades to come.
Speaker 1: That concludes our prepared remarks. We would now be happy to take your questions. Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch on the phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two.
Speaker 1: And if you're using your speaker phone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from John Gibson at BMO Capital Market. Please go ahead. More and all and can grab some on another strong quarter here.
Speaker 4: When you think of a return of capital moving forward, are you willing to put a percentage target in terms of discretionary fee cash will allocated to the dividend lineback given your now very close to your debt target? Yeah, I don't have a question. I mean, we do want the financial flexibility here that we can, you know, whether it's increasing the dividend buying back shares or...
Speaker 4: You know what we've said all along, John , that if we come across a great growth project that has reoccurring cash flow contract, it takes your pay volumes, then we can always have the flexibility to bump up our capital program. So no real set formula, just trying to balance all three of those and making sure that we still have flexibility to make sure that it's ultimately enhancing shareholder value. Got it kind of least being in my next one, you know, in terms of growth opportunities along the line.
Speaker 6: the clear water announcement this morning. Have these conversations picked up with later or do you still expect the cadence of gross paying to be in sort of that $50,000,000,000 per range you've spoken to previously? Morning, John . Now I'm here. Yeah, you know, there are a few opportunities in the hopper. You know, whenever you're dealing with longer term contracts on infrastructure does take time to get everything signed up and ready to...
Speaker 6: get contract signed throughout the year as it has into 2024. We'll announce if we believe it's a great project and it's backed by contracts, we'll announce that increase in our girls' capital at that time. But I would say it has picked up just with activity levels and consolidation within the base and that more opportunities on a volume.
Speaker 5: the pretty strong uptick in activity levels.
Speaker 6: Yeah, I would say if we look back to the third quarter of 2022, you know, we were probably in the high 50s, low 60s in terms of utilization and we definitely saw that tick up.
Speaker 6: Q4 up to that mid-65% range on utilization. And we're continuing to optimize our facilities. And so we're not spending any capital to increase utilization. But as we optimize some processes, it does allow for increased capacity in some of these facilities. And so.
You know, our expectations is that 65% will continue to grow here in 2023 at a higher utilization level. We have seen the start of 2023 be very, very active, so I would expect we'll be higher than 65% as we get through 2023.
So our expectations is that 65% will continue to grow here in 2023 at a higher utilization level. We have seen the start of 2023 be very, very active, so I would expect we'll be higher than 65% as we get through 2023. Great, appreciate the color I'll turn it back.
Thank you. Next question will be from Aaron McNeill at PD Cowan. Please go ahead. Morning all, thanks for taking my questions. Now that you've pivoted away from a singular focus on debt reduction towards a more balanced capital allocation approach, can you frame...
you know what your investment hurdle rate is on your growth capital or even your sense of how it would compare from a return perspective to the NCIB.
Morning. Good question. I think, you know, when we look at our opportunities in our offer today, a lot of them are what I would consider brown field expansion. So it's really building off either.
Our customers infrastructure and we're adding to their infrastructure or it's our only internal infrastructure that we're bolting on additional capacity via a disposal well via a pipeline. And I think when you think about those type of projects, typically on the brown field because you already have some capital deployed.
Typically, the IRR after tax return are higher on those projects and that's what we're focused on currently are those higher brown field expansions. I think through the 18 month merger process and we obviously close down facilities and we've got the capacity we think are best.
use of capital is to put more towards making sure the utilization of these facilities are at max level, that's where you get the highest rate of return. So that's where our focus is in terms of the capital allocation. I think it's back to Renny's comments a few minutes ago that.
You know, we want to give ourselves a little bit of flexibility here as we navigate what the 23 market and 24 market are going to look like and how we want to look at our share buybacks. I mean, currently we feel the shares are under value. That's why you saw us buy back a lot of our stock. We continue to drive a lot of discretionary free cash flow. We feel like that's our our our I would say.
great use of capital currently and we'll continue them to manage it here as we get through P1 and Q2. Chad, you addressed some of this in your prepared remarks, but what sort of the end goal in terms of what the depth profile should look like?
And I'm not really focused on the range, which you've obviously provided, but what's kind of the ultimate split between unsecured notes, credit facility or any other.
That instruments, I mean, it's spec you'll continue to chip away at the tribute and out here but just trying to get a bit more color on what we should expect on that front going forward.
Good morning. Good morning. Good question. You know what?
Obviously going through this merger, we inherited some things that became a part of our capital structure and we've been slowly modifying that. I think this will continue to be an evolution over the next couple of years. But obviously we want to eliminate 11% notes at some point.
First call date is December of this year, where we call the WOT 105 and we're oxygen monitoring that as well as the main call right now. We do like having non-secure depth in our structure and we have some of that now with the 7 and 4 percent notes.
I think if we fast forward into several years out, I think you'll continue to see how the revolver and that ability to repaint that along with an unsecured component. That split right now, I think that's something we're still considering, but it would be in that.
You can call it 50-50 between 6th and 6th and 6th but obviously that back-to-change over time depending on what on the opportunities we have in front of us.
You can call it 50-50 between 6th and floating, but obviously that back to change over time, depending on what on the opportunities we have in front of us. Understood. Thanks. I'll turn it over.
Thank you. Once again, ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one on your touch-dome phone.
And your next question will be from Keith McKay at RBC. Please go ahead. Hi, thanks and good morning.
So, just wanted to start off on the landfill ARO. There's about 25 million for 2023. Can you just talk about the run rate of that as far as what percentage or what number that should be within your capital allocation?
16 ready here.
You have to give that ARO as a mixture of things and probably a bigger chunk of that for the next couple of years will be related to the capping of our landfill cells that are full. So that just makes good sense all day long.
Obviously, when the cells are open, there's more leachate that gets generated. And so the capping of those cells actually reduces your opus. So that's kind of a great win-win in terms of producing your live built with at the same time.
you're reducing your off-cost. You know, we're, you know, we've obviously, through this process, we have various locations that are either suspended. You know, so it would be obviously looking once...
Once we get the decision from the tried you know, you know, looking at how we currently Shut down some of those operations and then obviously there's the remediation reclamation aspect of it. So you know the next couple years that's probably not a bad number. It will diminish over time, but
Obviously, what we just went through from a merger point of view, the next couple of years will be a little higher and then you'll probably start to see it reduce over time. Okay, thanks for that. And just to follow up on the tribunal, can you give us an indication of where you are in the process and
and you mentioned maybe suspending or decommissioning some suspended facilities as part of that review, is that the extent of what you'd expect to happen given what you know so far or can you just maybe run us through the latest in terms of things?
Yeah, nothing's really changed since the hearing was completed last June . So it's really just a function of that...
So, the weight, the weight of the decision based on that decision, it's, you know, it's, it's a, it could be, you know, many, many different outcomes, but right now we still maintain and based on our legal advice that we don't expect any material impact to our even dark.
or balance sheet. So I think, a hurry up and wait, it's been almost two years since we applied to the Bureau. So this is...
This is how government is done in Canada. Okay, thanks very much for me.
Thank you. And at this time we have no other questions registered. Please proceed with your closing remarks.
Well, thank you for being on the conference call today. A tape broadcast of the call will be available on Secures website. We look forward to providing you with updates on Secures performance at the end of April after the completion of the first quarter. Thank you and goodbye.
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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