Q4 2022 CES Energy Solutions Corp Earnings Call

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Speaker 3: I would now like to turn the conference over to Tony Alachino, Chief Financial Officer. Please go ahead. Thank you, operator. Good morning, everyone, and thank you for attending today's call. I'd like to note that in our commentary today, there will be forward-looking financial information and monthly judgments.

Speaker 3: and that our actual results may differ materially from the expected results due to various risk factors and assumptions.

Speaker 3: These risk factors and assumptions are summarized in our annual information form.

Speaker 3: fourth quarter MD&A and press release dated March 9, 2023. In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies and for description and definition of these...

Speaker 3: please see our fourth quarter MDNA.

Speaker 3: At this time I'd like to turn the call over to Ken Zinger, our President and CEO .

Speaker 3: Thank you, Tony, and welcome everyone. Thank you for joining us for the Q4 and 2022 Year-End earnings call. On today's call, I will provide a brief summary on our record financial results released yesterday, followed by divisional updates for Canada and the US, along with a brief update on our international business.

Speaker 3: and then finally a short outlook on what we see for 2023. I will then pass the call over to Tony to provide a detailed financial update. We'll take questions and then we'll wrap up the call.

Speaker 3: 2022 was a transformative year for CES Energy Solutions. We believe the company has now evolved into one of the leading chemical solution providers to the North American onshore market. In our estimation, we exited 2022 tied as the number one drilling fluid provider in the United States with around a 21% overall market share.

Speaker 3: Additionally, we are now clearly the number one drilling fluids provider in each of Canada, the Permian Basin, and North American Onshore, as our North American Onshore rig count has grown to 243 rigs or 24.8% of the active market, which is up from 19.7% a year ago.

Speaker 3: In production chemicals, we estimate that we are now the number two production chemical company in the United States onshore market and roughly in a three-way tie for number one in Canada.

Speaker 3: Looking back, 2022 was filled with challenges including inflation, labor shortages, tight supply chains, and lingering COVID effects, to name a few. But with those challenges came opportunities that CES capitalized on.

Speaker 3: CES and our employees overcame these challenges and significantly grew our revenues, profitability, and market shares throughout the North American onshore market to grow our business to unprecedented levels. Some of the major financial accomplishments we were able to achieve in 2022 included revenue growth from $1.2 billion in 2021 to $1.92 billion in 2022.

Speaker 3: we beat our prior record from 2019 of 1.28 billion by 50%.

Speaker 3: EBITDA growth from $156 million in 2021 to $257 million in 2022. And we beat our prior record from 2014 of $177 million by 55%.

Speaker 3: After starting the year with just 10.6% EVA-Dot margins in Q1 of 2022, we were able to quickly improve them by Q2 and achieve north of 14% EVA-Dot margins throughout each of the remaining three quarters in 2022.

Speaker 3: This allowed us to achieve an overall 13.4% annual EBITDA margin, our best annual EBITDA margin since 2017.

Speaker 3: Although we increased total debt to support this growth in 2022, we were able to lower the total debt to EBITDOCK ratio throughout the course of the year from 2.97 times in Q1 to 2.17 times by year end.

Speaker 3: The draw on our credit facility peaked at $220 million at the end of Q3 as growth started to stabilize, and then fell to $209 million by year-end, despite the fact that revenue grew in Q4. We have further reduced this level to $158 million today as the free cash flow starts to gain momentum.

Speaker 3: Finally, I will note that cash capex came in at $49.8 million in 2022, or 2.6% of revenue, which was directly in line with our forecasted estimate of $50 million.

Speaker 3: This number facilitated an expansion to our Nisku H2S scavenger plant in Canada, as well as opening the Midland Invert Plant in the Permian and starting construction on our Permian Bear Right Grinding Facility, while also supporting the maintenance and growth in the existing business and infrastructure as well.

Speaker 3: In summary, during 2022, we grew the company to a much higher revenue level and we are now beginning to see the free cash flow harvest that comes with this more steady market versus the incredibly rapid growth of the past couple of years.

Speaker 3: Our working capital level had increased to $697 million by year-end 2022 to support that rapid growth. I will note that this level was well within our targeted historical range of 30-35% of current annualized run rate revenue at approximately 31%.

Speaker 3: Now to summarize our Q4 performance. I'm proud to report that the fourth quarter of 2022 was yet another record quarter for CES Energy Solutions. For the sixth consecutive quarter, quarterly revenue increased, and for the fifth consecutive quarter, it increased to a new record level. This time at $563 million with an associated record EBITDA of $80.3 million and a margin of $14.3 million.

Speaker 3: This was our ninth quarter in the last ten quarters where revenue increased quarter over quarter and eighth quarter in the last ten quarters where EBITDA increased quarter over quarter. The working capital build we experienced to feed the revenue growth throughout the past 24 months finally showed signs of subsiding as it only represented less than a four

Speaker 3: This compares to the almost 16% build we saw from Q2 to Q3 and the 50% increase we experienced during 2022.

Speaker 3: In Q4, we opened our Midland Invert Facility on the eastern side of the Permian Basin. This was done to diversify the rigs we are servicing between it and the Kermit Facility, which is on the west side of the basin. Our rig count in the Permian has grown from 96 rigs to 115 rigs since we made this strategic decision just seven months ago.

Speaker 3: It is one of the reasons for how our market share in the Permian has grown from 26% to 33.2% during 2022. As well, we expect to be operating our new barite grinding facility in the Permian within the next few months. We believe this will only further drive our market share growth in the region.

Speaker 3: The barite market in North America has further tightened in recent years, and we believe this critical input for drilling wells will be a bigger and bigger differentiator over time, making CES one of only a couple of mud companies with a reliable supply and the capability to grind and package internally. This is a commodity that we believe is becoming more and more strategic as you cannot drill most wells without it.

Speaker 3: I'll now move on to summarize Q4 performance by division. The Canadian Drilling Fluids Division continues to be the number one drilling fluid supplier to the WCSB by market share. Today we are providing service to 86 of the 229 jobs under way in Canada for a market share of 37.6%.

Speaker 3: This market share has been stable for years and we anticipate continuing to hold the same 33-40% of the Canadian market in the coming years as well.

Speaker 3: Purechem, our Canadian production chemical business, continued to see growing contributions from our frac chemical, stimulation and H2S scavenger groups as we further penetrate each of these end markets and gain market share while utilizing our current infrastructure and supply chain to support it. These sectors of the Canadian oilfield continue to be very active now and for the foreseeable future.

Speaker 3: And, of course, our primary business production treating continues to grow and evolve as well.

Speaker 3: AES, our U.S. Drilling Fluids Group, is providing products and service to 157 of the 749 currently active rigs in the United States for a 21% market share. This total is up from 147 rigs and a 19.1% market share at the time of our last call in November .

Speaker 3: This includes a base and leading 116 rigs out of the 349 listed working in the Permian by Baker, or a 33.2% market share, which is up from 29.8% on our last call.

Speaker 3: We are continuing to increase our use of our second Permian invert facility in Midland to support more rigs. The facility offers a logistics advantage to our customers on the east side of the Permian Basin while taking a little bit of the pressure off our primary facility in Kermit. Our second Barrett grinding facility which we are constructing in the Permian Basin continues to be on schedule and on budget.

Speaker 3: Finally, J-KAM Catalyst continues to provide the manufacturing and production that supports the entire business with the plant in Kansas.

Speaker 3: They do this while growing market share and providing retail sales to support our US customers. The plant continues to operate at a very comfortable output level of approximately 65% of what we believe to be the current maximum capacity. This number varies based on the ratios of different chemistries being manufactured with some being quicker and easier to produce than others. But safe to say we continue to see no capacity issues in the foreseeable future.

Speaker 3: We continue to actively pursue several opportunities in the Middle East and I will comment further on these should any.

Speaker 3: come to fruition. We remain focused on growth prospects in this region and are spending significant time and energy evaluating multiple potential opportunities.

Speaker 3: Currently, our outlook for 2023 has us moving into what appears to be a more stable environment for our company and our industry. At CES, we anticipate that oil prices will likely be somewhat range-bound in the $70 to $90 levels throughout the bulk of 2023, with the prices likely to edge to the higher side of that estimate in the second half of the year.

Speaker 3: We continue to believe that the North American natural gas market will be a bumpy ride until there is more takeaway capacity. At CES, we remain well positioned to take advantage of natural gas related to activity as it evolves over the next few years. However, our current primary focus remains on oil and liquids producing basins throughout both countries, and we estimate that the natural gas related revenues only...

Speaker 3: and Tony will speak more to our capital allocation plans during his portion of the call today.

Speaker 3: I want to note that all these great results do not mean that all is easy. As always, challenges remain throughout the businesses.

Speaker 3: Shortages of certain chemistries, inflation, customer pricing fatigue, and competitor pricing pressures are all very real and present in the market. Even though these factors may lead to some lumpy margins throughout 2023, we remain optimistic about growing top line and EBITDA year-over-year and expect for margins to hover near recent historical levels in the 13 to 15 percent rate.

Speaker 3: activity growth rate appears to have crested for now, service intensity will continue to play out over time. We note that producers continue to seek to improve drilling, completion and production performance through any means possible, including higher volumes of performance enhancing chemistries. CES will continue to prioritize spending our efforts in areas where we have

Speaker 3: 2014 on January 1, 2022 to 2122 at year end. This is an increase of 308 employees during the year or approximately 17%.

Speaker 3: As always, I want to finish this portion of the call by thanking all of our customers for their trust and commitment to CES and good times and bad. With that, I will turn the call over to Tony for the financial update.

Speaker 3: Thank you, Ken. As Ken highlighted, CS's financial results for the fourth quarter and full year represent all-time high record levels of revenue, adjusted EBITDAQ and funds flow. These impressive results were realized amid continued growth in industry activity, targeted pricing increases and disciplined spending.

Speaker 3: Most importantly however, the fourth quarter and ensuing months represent the onset of significant surplus-free cash flow generation driven by stabilizing industry activity, unprecedented revenue and EBITDAAC levels, our CapEx light asset light business model and improving working capital metrics. Thank you for listening.

Speaker 3: We have been able, we have been talking about cash flow prioritization since our run rate revenue of $1 billion a year and a half ago and are now beginning to realize that anticipated strong cash flow generation from our run rate revenue level of approximately $2.25 billion.

Speaker 4: Revenue of $1.9 billion for 2022 represented a 61% increase over $1.2 billion in 2021, while adjusted EBITDAAC of $257 million represented a 65% increase over $156 million in 2021.

Speaker 4: Adjustity of the dock margin for the year was 13.4%, up from 13.1% for 2021, as the company continued to realize increased pricing and scale associated with higher activity levels.

Speaker 4: These significant improvements were underscored by impressive gains in funds flow from operations of $195 million in 2022 up from $117 million in 2021. Our cash capex of $49.8 million in 2022 remained in line with our original

Speaker 4: $50 million guidance and consistent with our unique CapEx light, asset light, consumable chemicals business model throughout the cycle.

Speaker 4: During Q4 2022, the company purchased 1.4 million common shares at an average price of $2.60 per share for a total of $3.7 million.

Speaker 4: During the entire year of 2022, CS purchased 2.1 million common shares for $5.2 million or $2.46 per share under our NCIB program and increased the dividend by 25% to $0.08 per share on an annualized basis.

Speaker 4: Our fourth quarter represented record revenue exceeding the company's previous high water mark in Q3 2022 and another consecutive quarter of solid adjusted EBITDAQ and surplus free cash flow generation amid a constructive supply and demand backdrop for the energy industry.

Speaker 4: In Q4, CES generated revenue of $563 million and adjusted EBITDAQ of $80.2 million, representing a 14.3% margin. Q4 revenue of $563 million represented an increase of 53%.

Speaker 4: from $368 million in Q4 2021 and a sequential increase of 7% from $525 million in Q3 2022.

Speaker 4: Revenue generated in the US was $378 million or 67% of total revenue for the company and up from $350 million in Q3 and $234 million during the prior year. And record revenue levels...

Speaker 4: driven by increased industry activity, higher production levels, and improved pricing year over year.

Speaker 4: Revenue generated in Canada was $184 million in the quarter, up from $175 million in Q3 and $134 million a year ago. Canadian revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac-related chemical sales.

Speaker 4: CS's adjusted EBITDAQ of 80.2 million in Q4 represented a 68% increase from the 47.8 million generated in Q4 2021 and a sequential increase of 7 million or 9% from the 73.3 million generated in Q3. Thanks everyone.

Speaker 4: Adjusted EBIT-DOCK margin for the quarter was 14.3%, representing a significant improvement from the 13% recorded in Q4 2021 and in line with the 14% achieved in Q3 2022.

Speaker 4: At CES our main financial priority continues to be surplus free cash flow generation.

Speaker 4: I am proud to report that during Q4 our FFO was $67 million, representing an increase of $18 million over Q3 and a near doubling or 100% increase over the $34 million generated in Q4 2021.

Speaker 4: CES has continued to maintain a prudent approach to capital spending through the quarter with net CapEx spent for the quarter of $15 million representing approximately 3% of revenue.

Speaker 4: We will continue to adjust plans as required to support existing business and growth throughout our divisions. And for 2023 we expect cash capex to be approximately $55 million, split evenly between maintenance and expansion capital.

Speaker 4: We exited the quarter with a net draw on our senior facility of $209 million versus $221 million on September 30th and $110 million on December 31st, 2021.

Speaker 4: The year over year increase was primarily driven by working capital builds associated with the increased financial scale of the company and associated revenue growth.

Speaker 4: We ended Q4 with $557 million in total debt net of cash.

Speaker 4: comprised primarily of $288 million in senior notes, which mature in October 2024, and a net draw on the senior facility of 209 million.

Speaker 4: Our total debt to adjusted EBITDAQ declined to 2.17 times at the end of the year, down steadily from 2.52 times at Q3, 2.7 times at Q2, and 2.97 times at Q1, demonstrating our continued deleveraging trend.

Speaker 4: I would also note that our working capital surplus of $691 million exceeded total debt of $557 million by approximately $134 million and demonstrated continued improvement in respective quarter-over-quarter metrics, with cash conversion cycle improving.

Speaker 4: and working capital as a percentage of annualized revenue declining to 30.9% from 31.9%.

Speaker 4: At this point, I believe it's very important to step back and highlight the relative financial positioning of the company.

Speaker 4: We were able to strategically use our balance sheet to support the working capital needs related to this growth by increasing our credit facility size to $425 million from approximately $233 million at the end of 2021 to provide ample liquidity to support current revenue levels and beyond.

Speaker 4: As these strong levels have begun to stabilize at more muted growth rates, we believe that CS's incremental working capital requirements should decline materially and usher in an era of strong surplus-free cash flow generation.

Speaker 4: fueled by these record-setting revenue and adjusted EBITDAAC levels. And this is exactly what we are beginning to experience in real time.

Speaker 4: For context, from December 31, 2022 to March 9, 2023, our draw declined by approximately $51 million from $209 million to $158 million.

Speaker 4: driven by prioritization of surplus-free cash flow generation. This very strong surplus-free cash flow trend over the past two-plus months will vary with some lumpy outflows over the next couple of months, but it is indicative of the cash flow generating potential of CES in this environment.

Speaker 4: In terms of capital allocation considerations, we continue to prioritize capital allocation towards supporting existing and new business through investments in working capital as required.

Speaker 4: modest capital expansion projects and CapEx maintenance that deliver IRRs above our internal hurdle rates.

Speaker 4: We remain very comfortable with our current dividend which represents a yield of approximately 2.9% at our current share price and is supported by a very prudent payout ratio in the low teens. We will continue to buy back at least enough shares to offset equity compensation related dilution.

Speaker 4: We will continue to use remaining surplus-free cash flow to reduce leverage to further strengthen our balance sheet.

Speaker 4: And in this current environment, as our deleveraging continues, we will revisit increasing our dividend and share buyback levels.

Speaker 4: At this time, I'd like to turn the call back to Ken for comments on our outlook.

Speaker 3: Thank you, Tony. As you and I both noted, the Q4 and 2022 results once again represented significant record results for revenue and EBITDAQ to cap off a massive step forward in 2022. We accomplish this while maintaining strong EBITDAQ margins within our targeted range, all while expanding our market share throughout our footprint in North American Land Market.

Speaker 3: Thank you to all of our employees for contributing to these spectacular results that Tony and I have had the privilege of presenting here today. I'll now pass the call over to the operator for questions. Thank you. We will now begin the question and answer session.

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Speaker 2: The first question comes from Erin McNeil with TD Cowen. Please go ahead.

Speaker 5: Hey, morning all. Thanks for taking my questions. Candidate relates to the U.S. drilling fluids business.

Speaker 5: I know you mentioned the invert facility as well as the barite grinding facility under construction that has and presumably will continue to facilitate market share growth. But I'm wondering if you can sort of.

Speaker 5: characterize those gains a bit differently and specifically I'm wondering if the market share gains are a function of onboarding new customers and increasing your share of work with your existing customers or you know

Speaker 5: Are your customers just comprising a larger proportion of the overall rate count? And if you are winning incremental work from your competitors, what do you think you are offering those customers that your competitors are not?

Speaker 6: Thanks, Sharon. I think that the growth

Speaker 3: has been because we're picking up more new customers. I mean lately we picked up six, seven rigs here in the last few weeks that got us to that number and those rigs were kind of smaller guys that were waiting for windows or openings to pop up on rigs and we're just looking to drill a well or two so it doesn't look like the 157 number is going to last all that long.

Speaker 3: good, fair cost of goods that's in line with what the market's used to seeing. We are reactive, we provide great service. I don't think we've ever had a customer that spent any time with us that's that hasn't pointed out the fact that when there's an issue at a rig, whatever it is, we're all over it, which helps limit non-productive time for them and lowers our overall cost of drilling. So I mean it's all of those things, it's our people, it's our infrastructure,

Speaker 3: Yeah, we're always looking at that. I mean, it's been an initiative for a couple of years now to investigate other markets or other end markets. And I mean, some of that's been done already. Both Canada and the US. We've gotten into selling a bit of fracturing chemical and I know that's not brand new for us, but it is something that we've grown a lot over the last year.

Speaker 3: We talked a lot about our plans over the last year or two where we were primarily funding our own growth and getting to this level. We're here now. The market seems to have crested for the time being and things will be more stable, which for us is awesome because that means pre-cash flow will really start pouring out of the business. We can get our debt down a bit as we talked about and then at that point I think all doors are open to look at everything.

Speaker 5: Okay, thanks Ken. Maybe I'll sneak one more in for Tony. You highlighted obviously the debt reduction year-to-date in your prepared remarks.

Speaker 5: I guess I'm just wondering, have there been any meaningful changes year to date in your working capital balances that would have assisted or hindered that harvesting of cash? Or, you know, is this just really as simple as a direct flow through of operational cash flow into your bank account? It was the latter. It was the latter, as you expect.

Speaker 4: category which is improved working capital metrics will just further accelerate that surplus free cash flow. So what you saw over the last quarter.

Speaker 4: was a slight improvement in working capital metrics for sure from Q3 to Q4. What we've seen over the last couple of months, still a little bit early to tell, it's a combination of purchasing cycles and in an environment where revenue isn't growing at the staggering rate that we've experienced for the last six months.

Speaker 5: Thanks, guys. I'll turn it over.

Speaker 2: The next question comes from Jonathan Goldman with Scotiabank.

Speaker 5: Please go ahead. Good morning, guys.

Speaker 5: Morning. Good morning, Jonathan. So circling back to a couple of those questions just previously, on thinking about new markets, I was wondering if you guys had any updates on the Proflow acquisition. Is there any progress on getting some of those RFAs out and getting into those markets? Or maybe if there's a timeline into...

Speaker 7: when some of those projects may come online for you guys.

Speaker 3: We're making some progress through their footprint and their people. We've gotten some trials on some platforms of late. But we've talked about it a bit, Jonathan. It's a slow, long process, much like the Middle East. We're focusing effort on these things, but nobody moves fast.

Speaker 3: these RFPs and processes take long times. But safe to say we have gotten some opportunities to try out some product and solution on a couple of platforms we're not working on, and those opportunities would not have come along had we not

Speaker 4: Yes, I might add that from a financial perspective, over the last, it's been just a year of that acquisition. We knew it well when we looked at it. And frankly, we, and by we I mean the entire team, are learning more about that business. It's got...

Speaker 4: technical and quality and supply chain requirements that are unique versus land production chemicals. And that's something that we've been learning and getting better at. But that's really, really important because us being able to do that over the last year gets us to the point where we can start delivering and realize that we're going to be able to

Speaker 4: What you see from some of our competitors can be very, very attractive margins and revenue growth levels. Yes, that's fair. I mean, it's probably not a light switch.

Speaker 7: And then just maybe moving on, you know, we've all been reading about the demand side and the rig and the production environment, but with WTI prices coming off and activity level stabilizing.

Speaker 7: Can you maybe talk about what you're seeing from your competitors in terms of pricing and maybe how that translates into your margin expectations for the year? I know you said it might bounce around through the year, but still staying in around that 13 to 15 percent, 14 percent at the midpoint. What kind of gives you confidence or visibility that that's attainable with the current market dynamics?

Speaker 3: Well, I think first and foremost history, like even in the worst times we've been able to kind of maintain those other, I shouldn't say that, I guess 2020 we were low, but in the past five, six years, the 13%, low 13s is where we've lived. And we've got some advantage right now with scale and size.

Speaker 3: And we're taking advantage of that. I don't expect, you know, I kept getting asked over and over again over the last year how we could get margins over 15. Just like I don't think that's very likely. I don't think it's likely at all that we'll have to go under 13. It's just constantly passing through the increases as we get them. We've been very open with our customers and we've had a lot of conversations.

Speaker 3: cost increases that may be coming their way. We go through a lot of volumes so we tend to see things a little sooner and we have a pretty sophisticated procurement group on both sides of the border. So you know maybe we're ahead of guys a lot of times when we're seeing price increases and that causes us some lag before we can get customers to accept it.

Speaker 3: But, you know, at the end of the day the inflation is real, we're seeing it in some major product lines, and we're going to have to pass that through, and it hasn't stopped. So, when I talk about if costing was staying the same, we'd be able to maintain the same margins. But because costing keeps increasing on a couple of products, you know, there's going to be a little lumpiness there as we lay getting the increases pushed through. Okay, that makes sense. Maybe if I could just squeeze one more in for you, Tony.

Speaker 7: Just asking the working cap question in a different way. If we're using your rule of thumb, the working cap with a percentage of annualized run rate revenues, you know, obviously you mentioned coming in about 31% for the most recent quarter.

Speaker 7: Just wondering, maybe some puts and takes on, it seems kind of at the low end of your typical range, maybe expectations of an appropriate run rate going through the year, if there's any structural improvements or things you guys are doing that would keep it down to the low end there.

Speaker 4: Yes, so look, we talked about that 30 to 35% range and that's simply because we went back historically for seven years to try to understand it very, very well. And that's the range and you could do the same math that we did.

Speaker 4: We're on the lower end of that range right now and we always strive to improve it. But I will say, and I think I said it during the Q3 call as well, is that we were all going full speed ahead on growing the business with attractive margins and contributions, cash contribution levels.

Speaker 4: And we justifiably took our eye off of the working capital ball a little bit. And what we're experiencing from my perspective, from the financial perspective is the divisions being able to turn their heads even more to focusing on...

Speaker 4: cash flow, understanding the puts and takes as you put it. And just like we improved margins over the last year, once that becomes front and center, the guys start putting up better and better performance. And now that revenue is stabilizing, there's a little bit of breathing room to focus on it more. So.

Speaker 4: I'd like to say that we're going to live in the lower end of that 30 to 35 percent range going forward. And in terms of how we're going to do that, well, we're taking a very methodical, granular approach to understanding the puts and takes. And we've developed pretty sophisticated dashboards over the last year.

Speaker 4: to be able to point out trends and find opportunities, and they're different in every division. We talked in the Q3 call about how the cash conversion cycle is inherently different in the drilling fluids business versus production chemicals business, and there are different things to focus on.

Speaker 4: Some is DSO, some is DSI. But I guess to summarize it all, we are better than we ever were before on understanding those working capital drivers. And I hope you see continued trends allowing us to stay in the lower end of that 30 to 35 or maybe...

Speaker 8: Morning all. Tony, you touched on it a little bit, but how do you think about the dividend from here? I mean, it seems to me you've hit the inflection and you're working capital requirements and CapEx is relatively low. So I mean, even at current levels, it's a pretty small piece of your forward free cash flow. I mean, I think it's a pretty small piece of your forward cash flow.

Speaker 4: you know, simply put, I mean it seems like you could double the dividend and it would still be sustainable. So how do you think about that going forward? Yeah, so the answer is mathematically, yes. Like we're lucky we have a business model as Ken mentioned that at these levels generate massive free cash flows and just to remind everybody because of that same business model and the working capital and harvesting of working capital we technically.

Speaker 4: didn't even have to turn our dividend off back in 2020, but we did it because of the uncertainty. So to answer your question specifically, we talk about exactly what you just described. We were talking about it during our board meeting yesterday, but we want to be very responsible. We've definitely got the

Speaker 4: company up to this higher cruising altitude with this record level of revenue at $2.25 billion annualized and this very high level of VBIDOT. But it's been a quarter and a half, right? And I'm not saying we don't expect it to continue, but I think the prudent approach would be

Speaker 4: Let's get another solid quarter, understand it, understand how those dashboard metrics are looking. And then we absolutely will revisit the dividend and we will revisit the NCIB as well based on where our share price is and our implied valuation is at the time.

Speaker 4: but it's a little bit premature to make any grand changes at this time.

Speaker 8: No, that's totally fair. And Ken, you talked about the drilling fluids market share a little bit. I mean, how do you kind of think about the strategy in a flat rig count environment? I mean, you mentioned some of your competitors being a little price competitive, but do you just kind of sit back and let your new infrastructure do a lot of the work?

Speaker 3: Yeah, I wish it was that easy. No, it takes doubling down on service to customers and visits to customers and coming up with new technologies and ideas and making sure we don't have any problems on the work that we have. And that's the kind of thing that...

Speaker 3: rumors spread about and get you opportunities with new customers as if they end up having problems with their current providers. So our strategy is always to grow the drilling fluids business and that will continue going forward. We think we have the best groups in North America on both sides of the border and that we can continue to chip away the way we have chipped away.

Speaker 8: Got it. That's all for me, thanks. I'll turn it back. Thank you.

Speaker 5: The next question comes from Keith Mackey with RBC Capital Market. Please go ahead. Hi good morning thanks for taking my questions. Ken if we continue to see this trend in the US of private companies generally dropping rigs and public companies generally picking...

Speaker 5: ultimately revenue trajectory as well.

Speaker 3: I think it'll totally depend who it is. We do work with some of them and we've got some doors open at a couple of others. So opportunities persist at the super majors as much as the smaller guys. I mean there's challenges with smaller companies too and that a lot of them have relationships or investors that work at private companies.

Speaker 3: We face that as well and over the last sort of seven, eight years we've looked to blue chip our our customer base and we've done a great job with that on both sides of the border. You know we work with a couple of the super majors here in Canada and like I say we're we've got because of that we've got some inroads in the US so overall I you know I continue to view

Speaker 3: the North American drilling fluids market as being very strong for us and as a market. We think these kind of flat run rates are actually good for us and as I've said we want to continue to chip away at market share. I think we still have room to grow on both sides. And the other thing, we've talked about this in the past and we updated quarterly in our investment.

Speaker 4: majority of that revenue comes from public company.

Speaker 4: Two-thirds of the revenue that we derive from those public company customers, because we can get this information from them, two-thirds of that revenue comes from companies with market caps of $10 billion to $700 billion.

Speaker 4: The majority of our revenue comes from those bigger guys that are doing exactly what you said growing versus some of the smaller private guys maybe dropping rigs.

Speaker 3: So I'll add to that again thinking about it. You know, seven, eight years ago we used to compete with the three big major super international companies on the service side on drilling fluids in North America on both sides of the border. And today, you know, we compete with one of them on the US side and none of them in Canada.

Speaker 3: So when the big companies are looking for who to use and who's got a big sophisticated accounting and safety programs and can provide solutions, really, you know, we have one major competitor in the US and one moderate competitor in Canada that are of scale that kind of fits that profile. So it gives us a better chance to get into those places.

Speaker 5: Yeah, got it. That's helpful context. And just if we go back to your revenue and margin targets or guidance for the year, what sort of macro assumptions as in

Speaker 7: Canada rig count, US rig count levels, would you say are embedded within that guidance range?

Speaker 4: I can start with that and again we don't provide guidance, financial guidance but we do share what we think our ballpark assumptions are for rig counts in the industry and that's based on public information and then we'd leave it to you and the research community to provide estimates on where you're at.

we are that could change, that might come down, but that's where the public estimates were when we were putting this information together. And similarly in Canada based on public information, that average for the year was in that 190 range. Got it. Very helpful. Thanks very much. Once again, thank you for joining us.

I'm guessing that's kind of trended in the same direction here in Q4, but I'd like to focus on your production chemicals business. You know, treatment points haven't really moved substantially this year, so I'm guessing that isn't a great proxy for revenue growth. Can you maybe talk about how the average job size has trended over the past year with the migration towards pad drilling work both in Canada and the US? Yeah, like it's... You're right, that treatment point metric used to be really good before...

the significant onset and acceleration of pad, multi-well pads over the last five years or so. And we do try to explain that above those two graphs in the mDNA and basically explain that although the treatment point levels seem to be stable, what's actually happened is confidencescales.com on paced Planning.

the volume of product delivered to those sites has increased significantly over time. So the number of times you actually have to go and visit those well sites has declined, but you're providing even more volumes. And the proof is in the pudding because that has to be true.

bigger and longer and more prolific. What we typically experience on the production chemical side is that the bigger, more intensive levels of treatment are incurred during the initial production levels or periods during that first year.

where there are even higher volumes of good product, good margin product that need to be used to treat that initial production. The other thing that we're continuing to see that people aren't talking too much about, but everybody should remember, is how steep the decline curves are, especially in places like the Permian.

And lastly, what you're starting to hear more of in the US and even in Canada, but in the US in particular, is people scratching their heads on the availability of the higher quality inventory to be able to maintain the production levels that they need to deliver on their return plans to their shareholders, etc. And Ken touched on this and it all goes back to the service and...

experienced.

Great, appreciate the call and I'll turn it back.

The next question comes from Tim Monticello with ATB Capital Markets. Please go ahead. Good morning, everyone.

Hey, good morning everyone. I appreciate all the detail that you've given on the capital program for this year, the Inverter facility coming in line, the Barrier facility, and then last year you did the Procloa acquisition. I'm just curious if there's anywhere in your portfolio, one where you could see some more debottled people in lot of spaces.

release some activity growth like you're seeing at the inverter facility. And then also, you know, in I guess price competitive markets where supply isn't constrained, oftentimes, you know, companies just look for ways to cut costs. So is there anywhere in your manufacturing process where you think you could become more vertically integrated? Understanding that you're based in a lot of your chemistries already.

But is there areas that you can drive cost down that might, you know, yield more margin over time? Yeah, like, it's like you're reading our mind, Tim. That's something we've been focused on. We've got a lot of pressure on a few major product lines that are getting harder and harder to get, and the price keeps escalating on, not because the core cost of producing the products is going up, but because the core costs are going up.

supply and demand. So there's two or three things we're looking at right now to get more involved on the manufacturing side of these products that we use a ton of in order to help guarantee our supply as well as cut the cost to get them or acquire them. Are those things that are going to be done in 23 or those longer term?

I'd say we're a couple of them were down the path on and one of them is a little further down. Like one a couple of them one of them that we think we can implement pretty short term here in the next quarter or two without a bunch of without CapEx. And then the other two are probably.

you know, second half of the year, hopefully. And they may require some capital, so they're getting vetted a little more firmly.

Okay, so if we go into 2024 and the rig count is only out moderately in North America, should we expect growth capex to be lower or are there other things that are on the list that need to be done? Governor De Sessions speaks, wing of the governor.

I think it all depends what we can identify. We've always had this 2.5% of revenue.

as a target and then through the year we identify opportunities that pop up. We don't have the entire capex for this year on the gross side earmarked. It's a placeholder and if the opportunities we're looking at come through, we'll spend it. If they don't, we may not spend it. So it's more of an earmarking than it is an actual.

Okay got it. And then could you give an update just on how the offshore stuff is going?

Yeah, it's going. I mean, we have the same... We had a little bit of business there, and ProFlow had a bit of business there. We put the two parts together. We're now manufacturing all the products that are possible for those platforms.

and we're servicing it all through the pro-flow management. And like I said, we've gotten a couple of opportunities of late here. We had an RFP that we're participating in, and then as well, we had a couple of opportunities to try a new technology or a new method on a couple of platforms with a new customer. And if those trials go well, we would anticipate picking up that work. But from a…

from a cash flow and performance perspective, ProFlow's worked out exactly as we thought it would. Financial performance has been good and we're, you know, starting to open some doors. Okay, great. I appreciate it. I'll turn it back.

Thanks Tim. The next question comes from Sam Douglas with Marrow River Capital Management LLC. Please go ahead.

Hi, thank you for taking my question. On your margin range for the 13 to 15 percent, you mentioned material costs continuing to increase. Is it fair to assume that the variance between that 13 to 15 is largely...

driven by that material cost increase and ability to timely pass that through? And then, I guess also how are you seeing labor costs moving? Are you continuing to see pressure and inflation? And I guess how much could that be factored into your margin guide? From the labor cost, it's been pretty static. You know, it was.

The rest of the time it's been pretty much low 13's ever since 2016. So we don't view it being possible to go below that, just simply because we can't afford to work at that level. So we're pretty stringent on what the minimum sale prices are to all of our salespeople. We believe it's fair in the market, it's where we've always lived, and we don't believe we'll be pressured to go under that.

Q1 when we got way behind on margin as we tried to pass through increases, it was tough to talk to oil companies because it was the first time in recent memory that that much stuff had gone up in that significant a way. So we had it basically everything went up in a significant manner. That was a challenging conversation.

Well this year, the conversations are challenging as well because at least last year oil was moving to $100-$110. This year we're having the same conversations about a much smaller number of products. You know, it's kind of two, three, four, five things that are moving at any one time, but they're moving in a meaningful way. And they're doing it at a time when oil is hovering at $75 and seemingly unable to move above that.

Because of that, you know, nobody wants to see price increases when they're at that level. So, it's, they're challenging conversations, but it's not as wholesale as it was last year. It's not every product and it's not huge increases on every product. Okay, thank you very much. This concludes today's question and answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks. With that, I'm going to wrap up the call by saying thank you to all of our customers and our employees. We look forward to seeing you in the next session.

I.