Q4 2022 Trican Well Service Ltd Earnings Call
Speaker 1: As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Brad Fedora, President and CEO of Strycon Well Service Limited. Please go ahead Mr. Fedora.
Speaker 2: Thank you very much and good morning everyone. I'd like to thank you for attending the TriCan Well Service Annual Results Conference Call. Here's a brief outline on how we intend to conduct the call. First Scott Mattson, our Chief Financial Officer, will give an overview of the quarterly results. I will then provide some comments with respect to the corridor, the current operating conditions, and our outlook for 2023. We'll then open the call for questions. They are Todd Tui, our Chief Operating Officer, Daniel Opuschinski, our VP Planning and Analysis, and Brian Lean.
Speaker 2: our VP sales and marketing. So we should be able to answer any questions that may come up. I'll now turn this call over to Scott. Thanks Brad. So before we begin, I'd like to remind everyone that this conference call may contain full statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward looking information section of our annual MD&A for 2022. The 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 2022 annual information form.
Speaker 2: and the Business Risk Section of our MDNA for the year ended December 31st, 2022, for a more complete description of business risks and uncertainty spacing track-in. These documents are available on our website and on Cedar. During this call, we will refer to several common industry terms and use certain non- GAAP measures , which are more fully described in our 2022 annual MDNA. Our quarterly and annual results will be released after close of markets tonight, and are available both on Cedar and our website. So with that, we'll turn our results, turn to our results for the quarter. Most of my comments will draw comparisons to the fourth quarter of last year, and I'll provide some commentary about our annual activities and our expectations going forward. Revenue for the quarter was 236.5 million, an increase of just over 50 percent compared to Q4 of 2021. Our activity levels for the fourth quarter by our
Speaker 2: were generally higher across the board than the prior year comparative period as industry activity in the basin increased driven primarily by stronger commodity pricing. This led to a significant improvement in demand for pressure pumping services and our services in general which resulted in a more constructive pricing environment and an improvement in margins in Q4 of 2022 compared to the prior year. Adjusted EBITDA came in at $59.4 million, again a significant improvement over the 28 million we posted in Q4 of 2021. And I would also note that our adjusted EBITDA figure includes expenditures related to fluid end replacements which totaled $1.2 million in the quarter and were expensed in the period.
Speaker 2: Adjusted EBITDAS for the quarter came in at 60.1 million or 25 percent of revenues, a significant improvement again compared to the 27.6 million or 18 percent of revenue that we printed last year. To arrive at EBITDAS, we add back the effects of cash-settled share-based compensation, recognizing the quarter to more clearly show the results of our operations and remove some of the financial noise associated with changes in our share price as we mark-to-market these items. We recognized about $700,000 in expense related to cash-settled stock-based comp in the quarter. On a consolidated basis, we generated positive earnings of $26.2 million in the quarter or about 11 cents per share and generated free cash flow of $47.1 million during the quarter as compared to $17.9 million in the same period last year. Our definition of free cash flow is essentially EBITDAS less non-discretionary cash expenditures, including maintenance capital, interest, cash taxes, and cash-settled stock-based comp.
Speaker 2: Our CapEx for the quarter totaled about $33.2 million, split between our maintenance capital of roughly $11.3 million and upgrade capital of $21.9 million. Our upgrade capital was dedicated mainly to our ongoing Tier 4 capital refurbishment program, which Brad will touch on later. The balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $169.4 million, including cash of $58 million. Finally, with respect to our return of capital strategy, we were quite active with our NCIB program throughout the year, and repurchased and COVID-19.7 million shares at an average price of $3.50 a share, equating to approximately 8% of the companies issued outstanding shares at the beginning of the year. We've remained very active as we moved into 2023 and have repurchased an additional 7.7 million shares since January 1. And as you saw from our announcements last night, we've added an additional component to our return of capital strategy in the form of a quarterly dividend.
Speaker 2: Board of Directors declare a dividend of four cents per common share to be paid on March 31st of 2023 to shareholders of record as of close of business on March 15th of 2023 and I would note the dividends are designated as eligible dividends for Canadian income tax purposes. So with that I'll turn things back to Brad for some comments on our operating conditions and our outlook going forward. Thanks Scott. Overall the quarter went as expected, I mean it was I think will generally happen every year. As you know Christmas comes every year and there's typically weather events as we transition from fall to the winter and so our quarter went almost
Speaker 2: We did continue to see some cost inflation and subsequent price increases to offset that inflation. You know inflation really seems to be moderating and it's still happening, but it's certainly happening at a much lower rate of change than certainly the first half of 2022. So overall market feels quite stable from a pricing and cost perspective with just little tweaks here and there. In the fracturing division which represents about 70% of our revenue, the market feels very much balanced and stable and I think it's been like this now for a few quarters. There's approximately 30-31 staffed fracking crews operating in Canada and at this rig count, you know 250 rig counts give or take, it feels like we're fairly balanced. We are still operating seven frack crews. I think in the past we had mentioned that we may go to eight in the quarter, but I think given that we think the markets in balance, I don't, we made the decision not to add another crew and I think we'll stay stable at seven crews for the remainder of the quarter.
Speaker 2: On the cementing side, we're very happy with our cementing division. Cementing business in Canada is running at absolute capacity for the active and crewed fleet that is out there. There's three main companies including us that provide cementing services immediately post a well being drilled. We added four cementing units to the field which is about a 22% increase and that allowed us to maintain our market share as the rig count went up and we're very much focused in the deep technical areas of the basin and so overall we probably have a 50 to 55% market share in the Montney and Deep Basin and a sort of a 35% market share in the basin as a whole but very much focused in the Montney and the Deep Basin. And our market share gains in this division are really only limited by our ability to add staff and so we're always looking to add more qualified crews in the field but in this labor market that certainly takes time. On the coil side, the coil market for us is more lumpy but the pricing and the demand for our coil units has been at levels that we're generally happy with.
Speaker 2: you know a fairly significant shock absorber to commodity price volatility and as I think everybody knows LNG facilities will be online in 2025 and the drilling to fill that production has started and will also provide some stability in the market in particular in Northwest Alberta and Northeast BC.
Speaker 2: The recent announcements by First Nations and Northeast BC is also a big positive for our basin. We think that will result in incremental activity, but not until the second half of this year. Licensing are just coming out now, so there's really not a whole lot of field activity that we're expecting between now and late summer, early fall. But we believe our fracturing technology is very well suited to these types of wells. We provide high pressure, low emissions fracturing equipment with a small footprint. And as we know, the small footprint, less access, less disturbance seems to be a topic of conversation. I think our services are fitting in very well to that type of future.
Speaker 2: People are still the bottleneck in this industry and will continue to be a bottleneck in all divisions. You know we're expecting slow, moderate growth going forward over the next few years and the market I think will stay very stable. You know our ability to staff crews is very limited, takes a long time. The training is more important now than ever. We obviously, and it's growing, and so our ability to add staff to the field has slowed and you know we'll continue to take our time and we won't put crews in the field until we're absolutely ready and they've been trained properly. So you know we think that'll be a limiter to the
Speaker 2: growth that can happen in a rising market. The supply chain is still very much at or near capacity. We don't expect that to change anytime soon. We actually do expect sand shortages, you know, temporary in nature, but still shortages this year. You know, the well intensity continues to grow, and I'll talk a little bit about this, and sand volumes continue to grow, and anytime you have, you know, weather interruptions that can have a big impact on rail. And so we still are looking at ways of mitigating our exposure to those type of short-term interruptions, and we'll continue to work through that. Third-party trucking and logistics very tight, very expensive. You know, I think we've seen a 50% increase in the price of third-party trucking this year, and similar in sand. I think sand is up 40 to 40%.
Speaker 2: Western Canada is an attractive basin to focus our business on. We'll stay focused here for the time being.
Speaker 2: We believe plays like the Montney combined with oil and LNG exports will provide a long-term base of activity for us to provide our services. The Montney is very frack intensive and getting more so. And with the recent announcements in Northeast BC by the First Nations, that access has become more certain.
Speaker 2: we think all of that drilling will be incremental to what we've seen in the last few years. Frac intensity is still increasing, you know larger sand volumes and more stages. We just got off a three well pad where we had 80 stages per well and a hundred tons per stage so that's you know eight that's a lot of sand, you can do the math on free cash flow and return on invested capital. You know these drive all of our decisions. You know we're investing for cash flow growth and we're doing so in our equipment, in our services. We're trying to differentiate ourselves from our competitors. Difficult to do in the
Speaker 2: but I think we've been very successful at that over the last couple of years. We're very fortunate to have a clean balance sheet. We sort of have an unlimited ability to make investment decisions, and as a result, we had a very good head start on bringing new technology into our company. Our strategy is differentiation and modernization, and we want to own the Montney, and we're lucky. We have state-of-the-art equipment. We're upgrading our systems. We're very focused on ESG. I think we're ahead of the game there. We're very focused on creating long-term indigenous partnerships. We think that will be very important to creating a sustainable service offering in northwest Alberta and northeast BC. We make investments with the guiding principle of clean air, clean water, and certainly we think that's going to play very well into the development of the Deep Basin and the Montney over the next few years. As we discussed before, we rolled out our first low-emissions frac fleet.
Speaker 2: over a year ago now, we've been very happy with the results. That equipment has been operating in basically 100% utilization of students that comes out of the shop. And we haven't stopped there. We have the lowest emissions fleet in the basin with our tier four pump conversion, but from there we've gone on to electrify the ancillary equipment in the fracturing fleet as well. Things like the blender, the chemical add unit, even the data van and the sand belts. We've now converted to electric, which means they'll run off a natural gas fire generator. And this allows us to to displace 85 to 90% of the diesel on location. And so certainly when you look at Canada's abundance of natural gas, you know, our customers more and more are trying to use natural gas as a fuel source. And I think we're very much ahead of the game in that regard. We now have four tier four fleets.
Speaker 2: and we'll continue to add electrical equipment to those suites, which by means that we are a leading provider of services in this basin. So I'll just touch on return on capital before we go to questions. Again, we generate significant free cash flow. We have a clean balance sheets. Our priorities are to build a resilient, sustainable, and differentiated company. We invest in our equipment. We invest in our people and our service offerings, including our systems. We pursue strategic and creative M&A transactions if they're available. Those are few and far between in our space.
Speaker 2: lastly and very important is that we want to provide a consistent return of capital to our shareholders. You know to date we've very much relied on the NCIB, we've been very active in the NCIB in the last six, eight months but we also want to provide a sort of a multi-layered strategy and because of that we've added a dividend this dividend will be stable and very sustainable over the next few years. It's four cents a share, 16 cents a year, pays at the end of the quarter and we even given the dividend we still intend to participate in the NCIB but we'll do so on a more opportunistic basis. You know we've heard from shareholders that they wanted a defined return of capital strategy and I think we did that with the dividend and so that'll be our base for the shareholders and we'll rely on our NCIB on a
Speaker 1: So I think I'll stop there and I'll hand the call back to the operator and we'll take questions. Thank you. We will now begin the question and answer session. To join the question queue you may press star then 1 on your telephone keypad. You will hear tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We'll pause for a moment as callers join the queue. The first question comes from Aaron McNeil from TD Securities. Please go ahead.
Speaker 2: Hey, morning all. Thanks for taking my questions. Brad, you mentioned that your shareholders were looking for a more defined return to capital strategy. I guess that leads to the question if you have a target in mind and maybe one that youíd be willing to share in terms of the capital that youíd like to return to shareholders this year or on an ongoing basis, either in terms of absolute dollars or a percentage of free cash flow or some other metric. We donít. Itís because every day, every quarter, every year we sit down and look at the opportunities that are in front of us and we invest in the highest return opportunities. To date, that has been an easy decision. Thereís no better investment that you can make than taking old equipment thatís not working and upgrading it to be the state-of-the-art equipment.
Speaker 2: in the basin and we've done that with the Tier 4s, but you can only go so fast on that, but every year is different and so from there we cascade down to the next opportunities whether it's the buyback or M&A or the dividends and what we did here is our NCIB has been active but inconsistent and that was fine last year or even in 2021 investors get more comfortable with this basin and the opportunity in front of
Speaker 2: you know, they've been looking more for okay, what exactly is the plan and that's very hard to do. I mean, you can't commit to an NCIB from a volume perspective because it's very price dependent. And so we've migrated over to the dividend. We've put in an amount that we think is attractive and very sustainable and defendable through various cycles. But we really did not start with a percentage return perspective. We look at that as one of many different uses of cash and we sort of figured out an amount that would be left at the end of the year going forward over the next few years.
Speaker 2: Yeah, makes sense. You mentioned or you reiterated that you continue to expect this year to be busier than last year and this question isn't you know meant to challenge that view at all but I guess hypothetically if we were to see some weakness and completions activity this year do you think we see the producers rain it in during breakup or are you essentially locked in there? Do you think it'd be a later in the year phenomenon? I guess how do you think a weaker outlook scenario might play out in terms of how capital is allocated to the quarters by your customers?
Speaker 2: Good question. It probably would be a second path impact. I think certainly Q1, probably Q2 is pretty much almost in the books at this stage. I mean, obviously you can always speed up or slow down. But if we're still having low gas prices come the summer, you know, we get a cool summer, something like that, I think you probably would see the impact starting in the second half. But, you know, I'm not the right person to ask. Sure. Okay, maybe I'll sneak one other quick one. And you mentioned the potential for sand shortages. And I think you were speaking to fuel surcharges from the rail companies in last quarter's conference call.
Speaker 2: I guess my question is, are you getting any sort of deflationary release in those rail search charges now that pricing is moderated? No. But we may see some in Q2, but there has been no relief to date in 2023. Thanks, Brad. The next question comes from Cole Pereira from Steele. Please go ahead. Morning, all. Just wanted to go back for your outlook for Q3 to be busier. I think this would have been most outlook before the natural gas price decline. Can you just talk about what gives you confidence in this at this juncture? Are you seeing meaningful plans related to energy and blueberry and none of the public's pulling development plans left?
Speaker 2: is still very attractive.
Speaker 2: And I think this gas price weakness would have to continue on for a lot longer than sort of a couple of months for it to impact programs. But again, we are not an authority on our customers' CapEx plans that are 6-12 months out.
Speaker 3: Got it, that makes sense. And so you activated another tier four, you know, this quarter, and I believe you have a chance for another, call it mid-2023.
Speaker 2: Is it fair to say based on your comments about that eighth fleet that you'll be flexible in these additions and that you'll bring a tier four into the field, but if there is an incremental demand you'll just kind of put another diesel fleet back in the yard? Yeah, and that's exactly what we've done. This time last year we would have expected that we would have had more than seven eight crews even and I think last conference call we expected to have eight crews in Q1. Don't get me wrong, we're having a very good quarter so far, but yeah, we are responsible. We don't bring equipment into a market unless there's demand for it. And so we've been feathering our tier four equipment into other frack spreads and it doesn't always need to be complete.
Speaker 2: FRAC spread in the entirety of Tier 4 equipment. A lot of people want to try a couple of pumps here and there, and the demand for the equipment is very high. But yeah, to your point, we've been sort of displacing older equipment with our new low-emissions equipment, and will probably continue to do so.
Speaker 3: Got it. And then just coming back to the dividend, so based on your comments it kind of seems like you're fine with a dividend sort of remaining at this level on a permanent basis given its sustainability and that any perhaps incremental free cash flow would just go to the buyback over the current to medium term? Yeah, well Scott, you know our intention is that we put in a layer of a very sustainable return to our shareholders to provide a bit clearer of a window in terms of what we're going to spend there and then yes, remain opportunistic in the buyback but it's still a part of our core strategy.
Speaker 3: you'll still see us be weighed in and out of the market from that perspective. And we'll look at this every quarter in terms of what we've got from an opportunity set in front of us and allocate cash accordingly. Got it. And then just one more quick one. How should we be thinking about the timeline for cash taxability over the next few quarters and years? Yeah, you probably won't see cash tax leaving the system until early next year. And then it'll be more regular from there.
Speaker 3: So we'll likely move into a taxable status at some point this year, but our first installments will likely go out the door next year. Okay, got it. That's all for me. Thanks. I'll turn it back. Thanks. The next question comes from Wakhar Said from ATB Capital Markets. Please go ahead. Thank you and good morning. Brad, I saw in the MDA that you also ordered a fifth TFO fleet. Could you maybe provide some color on the cost associated with it and what's the size of the fleet? The size of the fleet is consistent at 14 pumps.
Speaker 3: likely move into a taxable status at some point this year, but our first installments will likely go out the door next year. Okay got it, that's all for me thanks I'll turn it back. Thanks. The next question comes from Wakhar Said from ATB Capital Markets. Please go ahead. Thank you and good morning. Brad, I saw in the MDNA that you've also ordered a fifth TFO fleet. Could you maybe provide some color on the cost associated with it and what's the size of the fleet? The size of the fleet is consistent at 14 pumps, 3,000 horsepower per pump.
Speaker 2: The cost has grown significantly for a couple of reasons. First, there's a lot of inflation by our suppliers. And as we go deeper into our equipment fleet, the quality of the equipment that we're upgrading is lower. And it's important to me, we didn't talk about it this conference call, but the parked fleet in Canada is hardly ready to go. And so as we go deeper into the inventory, there's more things that need to be replaced versus rebuilt or refurbished, and that just ups the cost. And so the cost of these fleets now is in the $35 million range to refurbish a fleet into a low-emission standard. Okay, great. And then in terms of, you mentioned that activity could be up, like, single digits or so in Canada.
Speaker 3: in 2023 to convert that into revenues for a track end in 2023. There is inflation as well. How would you kind of, I should be thinking about the revenue range year over year growth from a year over year growth perspective? Well, roughly 15%. Yeah, and then help from.
Speaker 2: Look, it feels very similar.
Speaker 2: But it's also very dependent on who your customers are. But I think the industry as a whole, Q2 will be very similar to last year. And we expect our Q2 to be similar to last year. And when you say similar, you again mean that activity would be relatively similar
Speaker 4: revenue basis were a little bit lower.
Speaker 3: Was it just like, you know, seasonality that impacted that? Or is there something going on with the tier four or new equipment that you're getting that those costs have started to trend lower? Yeah, exactly right. As we re, as we upgrade our fleet with...
Speaker 2: whether it's rebuilt or new equipment, there is a temporary decline in maintenance costs, and we're experiencing that. Okay, great. Thank you very much. That's all I had. Thanks. Thanks, Carl.
Speaker 3: Once again, if you have a question, please press star then one. The next question comes from Andrew Bradford from Rainbow James. Please go ahead. Thank you very much and thanks for taking my calls. Hey Brad, you mentioned in your preamble there that you were looking at expanding the coal...
Speaker 2: cementing division are opportunities for growth.
Speaker 2: You know, we historically have been the number one seminary in Canada. I don't I don't foresee that changing But I think we've fallen behind on coil and I think we could do a lot better job with with our coil division and We should be able to achieve big percentage gains Just because frankly it's it's only sort of seven to ten percent of our revenue
Speaker 2: So it's, you know, the opportunity there is to grow it significantly from a percentage perspective, but you know, it will still be a fairly small division compared to the other two, even if we experience good growth. And that is just going to come from, you know, more of a focus on sales and marketing and providing, you know, value-added services to our customers. And it's, you know, it's frankly, it's fallen behind as we've focused on other things over the last few years. It's still the case that there isn't necessarily a lot of marketing synergies between coil and fracturing, is that correct? No, there is, if you take advantage of them, and frankly we just, we haven't. There's lots of synergies there actually that, you know, we need to do a better job of.
Speaker 2: or we need to do a better job of exploiting. So. Okay, I'm gonna ask you a basic question now then. So are you running any any non-dual fuel spreads right now? Oh, yeah. There's always a place for a good old-fashioned diesel pump. You know, there may not be you know, it may not be access to gas or the well may only take a day and it just isn't worth the set up time. You know, it's it's like but it's only sort of one or two spreads now. The rest of our fleet is low emissions. When you bring in the fourth spread here, the fourth tier four spread, is it displacing the fuel?
Speaker 2: we need to do a job, a better job of exploiting. Okay I'm going to ask you a basic question now then. So are you running any any non-dual fuel spreads right now? Oh yeah, there's always a place for a good old-fashioned diesel pump. There may not be a day and it just doesn't work to set up time. You know it's only sort of one or two spreads now. The rest of our fleet is low emissions. When you bring in the fourth spread here, the fourth tier four spread, is it displacing what kind of
Speaker 2: fuel system is it displacing? Dual fuel. So the basin switched to Tier 2 diesel pumps with a dual fuel kit added to them and that provided about 40 to 50 percent substitution of that was the best product that we had available at the time. What we found with doing studies is that it's great from a cost savings perspective because obviously natural gas is so much cheaper than diesel but it was terrible from an emissions perspective. The amount of methane that was going into the engine that wasn't being burned was fairly significant and so if it emitted into the atmosphere and as the industry evolves that's no longer acceptable and so we're typically displacing our new gear. We're typically displacing the old Tier 2 dual fuel equipment with our new gear. Okay, no that's perfect and I guess my customers, the customer mix that you have today when we're thinking about, you know, from the outside looking in at your natural gas orientation or the natural gas orientation of your customer base, for most of these
Speaker 2: fuel system is it displacing? Dual fuel. So you know the the basin switched to tier two diesel pumps with a dual fuel kit added to them and that provided about 40 to 50 percent substitution of diesel for natural gas and you know that was the best product that we had available at the time. You know what we found with doing studies is that it's great from a cost savings perspective because you know obviously natural gas is so much cheaper than diesel but it was terrible from an emissions perspective. The amount of methane that was going into the engine that wasn't being burned was fairly significant and so you know if it wasn't combusted in the engine it's emitted into the atmosphere and you know we just as the industry evolves you know that's no longer acceptable and so we're typically displacing our new engine our new gear we're sorry we're typically displacing the old tier two dual fuel equipment with our new gear. Okay no that's perfect and and I guess my next question would be oriented towards the customers the customer mix that you have today when we're thinking about you know from the outside looking in at your natural gas orientation or the natural gas orientation of your of your your customer base for most of these customers are you like
Speaker 2: when you're using gas right from the pad, you're taking a lot of trucks off the road. And that's a big deal in a lot of these communities, right? They don't want fuel trucks rumbling up and down the roads in the middle of the day, especially when kids are out going to and from school. So, we've really designed our product offering.
Speaker 2: And one last question for me would be if you look at your, well maybe this is looking too far down the road, but we obviously focus on the third quarter a lot. It's usually your busiest quarter and if you were to sort of characterize.
Speaker 2: the job board, if you will, today versus what the job board might have looked like a year ago today. How do you, does it look fairly similar? More full, less full, give you pause, anything like that? It would look similar. But I would say,
Speaker 2: there's more long-term activity discussions happening than a more than a year ago. So we're we are very, you know, we're still very optimistic about, you know, the Canadian story. Follow up, then, is that when you say long term, is that necessarily LNG oriented? Yeah, I think not, maybe not. You know, it's not black and white, but of course it has to be.
Speaker 2: LNG is a significant issue, right? It's two BCF a day going to four BCF a day and we've got wood fiber in Squamish being built as well. I mean, it's smaller, but it's, all of that adds up and it's, the long, those are 50 year assets. The world wants more Canadian energy, just like the T-shirt says. So we, there's always gonna be bumps in the road, right? Like we're experiencing now with gas prices, but we don't, we don't operate this business with a three month forecast, right? We build a sustainable and resilient business because we think the long-term environment is really attractive.
Speaker 2: Okay, thank you very much. 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, thank you everyone. Thank you for your interest. Thank you for your time. We tried to wrap this call up quicker than normal because I know it's a reporting season and everybody's busy. Scott and I are available for questions throughout today and tomorrow if there's any follow-up questions. Thanks for dialling in. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. Thank you.
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