Secure Energy Services Inc. Q1 2023 Earnings Call
During this call you need assistance, Please press star zero for the operator.
This call is being recorded on Thursday April 27, 2023, I would now like to turn the conference over to Alison <unk>. Please go ahead.
Thank you welcome to Securities Conference call for the first quarter of 2023, joining me on the call today are Bernie MRO, our Chief Executive Officer, Alan Graf, our President and Chuck Magro, our Chief Financial Officer.
During the call today, we will make forward looking statements related to future performance and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial metrics or ratios disclosed by other companies.
Forward looking statements reflect the current views of secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by secure and forward looking information address future.
Future events and conditions by their very nature, they involve inherent assumptions risks and uncertainties and actual results could differ materially from those anticipated due to numerous factors.
Please refer to our continuous disclosure documents available on SEDAR and they identify risk factors applicable for secure factors, which may cause actual results to differ materially from any forward looking statements and identify as non-GAAP measures today.
Today, We will review our financial and operational results for the first quarter of 2023, followed by our outlook for the remainder of the year I will now turn the call over to Ravi for his opening remarks.
Thank you Alison and good afternoon, everyone.
Momentum that supported our business throughout 2020 to carry on through the first quarter of 2023 result.
<unk> get higher volumes at our waste processing facilities and increased demand for all business units due to strong industry fundamentals.
As a result, we recorded adjusted EBITDA of 151 million, a 20% increase over the first quarter of last year, we continued to maintain our strong adjusted EBITDA margin up 36%.
Positive impact from cost savings synergies related to the <unk> merger and higher revenue leading to improved fixed cost absorption more than offset the impact of inflation.
In the fourth quarter of 2022, we presented our updated capital allocation priorities, which reflect the increased breadth and size of the corporation, our commitment to maintaining a strong balance sheet.
Blocking additional shareholder value through increasing returns to shareholders and growing our business through our capital investment program in the first quarter of 2023.
Pleased to deliver on these priorities with the return of $100 million of capital to shareholders through our quarterly dividend and share repurchases under our normal course issuer bid since the inception of the CIB, we have repurchased one 5%.
Outstanding common shares.
We announced today, an increase to our capital growth plan for 2023 to approximately $100 million up from premium previous guidance of $50 million as we entered into a new 12 year take or pay agreement with a senior E&P producer for water disposal and the Montney region of Alberta, we are excited to work in.
Partnership with our customer.
Emission new infrastructure associated with this contract this year, providing secure with long term take or pay volumes and providing our customers with cost effective reliable solutions, we are growing volumes alloys.
Alan will speak more on this development along with the construction progress of our crude oil gathering pipeline and terminal infrastructure into Clearwater region during the operational update.
And our first quarter financial reporting we revised our segment reporting to reflect changes following the completion of the <unk> post merger post merger integration.
Biding stakeholders with improved visibility and transparency for valuing the business operating segments with similar operating characteristics economic prospects have been aggregated to three segments.
Environmental waste management infrastructure segment is comprised of waste processing recovery recycling and disposal operations offered through our network of waste processing facilities water pipelines industrial landfills waste transfer and metal recycling facilities. The energy infrastructure segment is comprised.
The crude oil gathering optimization, terminalling and storage solutions offered through our network of crude oil gathering pipelines terminals and storage facilities and the oilfield services segment is comprised of drilling fluids equipment rentals and onsite project management.
The new reporting structure provides a more direct connection between the corporation's operations. The services, we provide to customers the ongoing strategic direction of secure recast financial information for 2021 and 2022 by quarter has been included in the MD&A to reflect these new segments.
We are very excited to share our fourth annual comprehensive report on sustainability with you next week.
Our ESG priorities in 2022, we're focused on emission reduction water conservation and building an inclusive and welcoming culture. We're proud of the progress. We've made in these three areas highlighted by an 8% reduction in scope, one and two emission intensity, an 8% reduction in freshwater consumption and the introduction of companywide.
Diversity equity and inclusion training.
Sustainability report provides an update on these and other ESG achievements.
So new goals and initiatives, we have undertaken to further improve.
<unk> performance I'd like to thank our remarkable employees, who lead our ESG journey have enabled the transformation of elements of our ESG strategy from plan to reality in our business.
In March we were pleased to appoint Wendy Hanrahan to the board of directors Wendy is a former TC energy executive VP and brings to our board a deep knowledge of the North American energy infrastructure sector and expertise in strategy information technology finance human resources and other.
Corporate services Wendy will be a key addition to secure as it enters its next phase of growth and development as a leader in environmental and related energy infrastructure.
We were disappointed with the decision received from the competition Tribunal on March 3rd with respect to the commissioner of competitions challenge of secures merger with Davita.
While the tribunal agreed with secure that not all of the 41 facilities. The commissioner with Zika, perhaps secured dispose it should be sold it issued an order requiring secure to divest 29 of the 103 facilities acquired in connection with the merger we have filed a notice of appeal to the federal Court of appeal and believe we have strong brands in doing so the next step in the appeal process.
This is the filing of our factor expected to occur next week, which will contain our detailed arguments.
Peel hearing has been tentatively scheduled for the week of June 19, and we believe a decision could be received by the fourth quarter of 2023.
While the appeal of the competition Tribunal decision does not anticipated for some time the partial stay received with respect to the Divesture order allows us to operate status quo. If the tribunal decision is final after any and all appeals are exhausted, we will be prepared to conduct a process to maximize sale proceeds from a required there.
Divestitures, which we can then use to strengthen the business through the repayment of debt growth and additional shareholder returns Chad will now go through the financial highlights from the first quarter of 2023. Thanks.
Thanks, Rodney and good afternoon to everyone on the call during the quarter, we generated revenue of $416 million, an increase of 16% from Q1 2022.
Resulting from higher volumes at our waste processing facilities pricing.
Pricing increases established last year to keep pace with inflation and increased demand for services due to robust industry fundamentals.
We recorded net income of $55 million or <unk> 18 per share an increase of 50, 50% on a per share basis from the first quarter of 2022 and.
In addition to the factors impacting revenue the first quarter of 2023, so the full run rate of over $75 million target synergies realized in relation to that to read a merger.
Our adjusted EBITDA margin remained very strong at 36% inflation continues to have some impact on our costs.
Have been mostly able to offset this through operational efficiencies managing cost increases.
We generated impressive discretionary free cash flow of $122 million in the quarter, which reallocate the growth and shareholder returns.
Our total debt to EBITDA ratio remains at one nine times.
With the recurring nature of our cash flows we are very comfortable with our principal debt balance $971 million at March 31.
We are continuing to target a principal debt balance of between $850 million and $950 million to exit 2023.
Our capital structure. Currently consists no near term maturities with the first fixed note maturing in 2025.
We retain a considerable liquidity position with $363 million of availability on our credit facilities also maturing in 2025.
In January we paid our first increased quarterly dividend of <unk> 10 per common share.
<unk> that dividend payout ratio on a trailing 12 month basis a 34%.
At our closing share price yesterday annual dividend provides an attractive yield of six 1% on our common shares.
We were also very active on a normal course issuer bid during the quarter over the three months period, we repurchased and canceled $9 6 million common shares at a weighted average price per share of $7 24.
For a total of $69 million.
Quarter end, we have repurchased an additional 4 million common shares representing a total of four 4% of outstanding common shares repurchased so far this year.
Our healthy balance sheet, along with our significant reliable cash flow have provided the platform that allowed us to begin executing on our commitment to deliver increased shareholder returns.
Both through our increased dividend and share repurchases, while also maintaining a strong financial position.
I'll now pass the call over to Alan to provide our operational highlights.
Thanks, Jeff Good afternoon, everyone.
Strong industry fundamentals continue to drive increased volumes across our infrastructure network.
With our environmental waste management infrastructure segment waste volumes received and processed increased by 3% over Q1 of 2022 to over 67000 barrels per day to increase overall production levels. We recovered 383000 barrels of oil from waste through this process.
<unk> 7674 tons of Cotwo emissions as a result, our waste processing facilities also process and disposed on average nearly 142000 barrels of produced water each day, an increase of 9% over the prior year quarter consistent with expectations as same store.
<unk> sale produced water volumes trend higher over time.
During the quarter secure safely contained $1 2 million tons of contaminated soil on behalf of our customers across 17 industrial landfills, we expect to see increased remediation work during the year as the liability management programs in British Columbia, Alberta, and Saskatchewan seek to speed up the rate at which <unk>.
Active wells and facilities are abandoned.
Great.
These programs are expected to result in incremental volumes at our industrial <unk> waste facilities metal recycling facilities and higher demand for environmental remediation.
At our metal recycling facilities ferrous volumes were up 7% as demand increased for scrap steel at our mills at mill, we made process improvements at several several of our scrap yards to optimize workflow successfully reducing the amount of handling required and improving inventory turnover new equipment.
Including the purchase of new railcars in the second quarter will increase our handling capacity and drive further optimization at these facilities.
Our energy infrastructure segment also had a strong quarter operationally, our oil terminal and pipeline volumes averaged 93000 barrels a day at increase of 8% from the first quarter of 2022, driven by commercial agreements and recurring crude oil volumes from our oil gathering pipeline.
Stable commodity pricing, along with changing oil quality differentials increased opportunities for blend and price optimization at our 22 crude oil terminals.
Our oilfield services segment had a robust quarter operationally with higher demand for products and services associated with higher drilling and completion activity.
Turning now to our capital program, we continue to focus our capital our growth capital on opportunities that provide reliable volumes and reoccurring cash flows generally through customer partnerships with long term contracts and take or pay or minimum volume commitments as Randy mentioned, we have increased our growth capital plan for <unk>.
<unk> thousand 23 from 50 million to approximately $100 million following the completion of a new commercial agreement.
In March we entered into a 12 year commercial agreement with a senior E&P producer customer for water disposal in the Montney region of Alberta. This agreement provides secure with take or pay commitments on nearly 90% of the facility's capacity and the customer with guaranteed access to cost efficient water disposal.
New water water gathering pipeline disposal, well and facility enhancements are expected to be completed in the fourth quarter of 2023.
We also continue to progress construction on the previously announced Clearwater oil pipeline and terminal infrastructure Backstopped by three commercial agreements the significant growth in the Clearwater area, which has seen oil production growth from zero to over 100000 barrels a day over the last five years.
As required additional infrastructure to support higher production volumes in total we incurred $36 million of growth capital in the first quarter of 2023 related primarily to these two projects.
We also incurred $10 million of sustaining capital related to landfill cell expansions, well facility maintenance asset integrity programs and asset purchases for our metals recycling operations.
We continue to expect to incur approximately $60 million of sustaining capital and $25 million of capital related to landfill expansions in 2023 <unk>.
The additional landfill expansions are in anticipation of increased abandonment spend obligation is driven from government regulations. We also expect to incur approximately $20 million to settle asset retirement obligations.
Finally, we divested non core assets for total proceeds of $22 million as we continue to optimize our portfolio.
Dispositions included our integrated fluid solutions business line previously reported within our oilfield services segment, and our underutilized real asset.
I will now turn it back to Randy to address our outlook for the remainder of 2023.
Thanks Al.
As we look ahead secure is very well positioned to deliver on our strategic priorities and providing best in class customer service and growing the volumes, we handle across the business for the remainder of 2023 of the corporation expects to see continued momentum across all business lines is stronger energy environmental and.
Industrial markets continue to drive higher volumes activity levels, and overall demand for secures infrastructure, our extensive network of environmental and energy infrastructure in place today can handle higher processing recovery in disposal volumes without significant incremental investment. The addition of new customer backed.
Infrastructure results in incremental reoccurring cash flows for secure through take or pay obligations and production area area dedications that also provide a guaranteed rate of return on our investments the.
The energy sector continues to evaluate the supply and demand outlook as it faces macroeconomic factors such as inflationary pressures.
Possibility of a near term recession overall demand globally and the geopolitical risk. However, the current price environment continues to do.
Drive robust producer cash flows and increased energy industry activity in our operating regions, New government regulations will increase environmental cleanups and reclamation in all our business units.
Given this backdrop, we remain confident in executing our previously announced capital allocation priority to return more capital to shareholders.
The 100 million dollar growth capital program, we're excited to see progress with the digital transformation of our business, which results in both great cost savings and improve customer experience to support the safe transportation handling and disposal of waste secure has invested in building a digital E ticketing.
That form for waste transportation and disposal documents in Alberta built along industry partners. This will help Alberta energy industry comply with regulations keep people safe help preserve the environment optimized cost and reduce emissions. The platform has been launched internally and we are anticipating an external launch later in <unk>.
23.
So, creating a tool which utilizes artificial intelligence to calculate facility wait times and providing customers with recommendations on secures disposal locations.
Future releases of the E ticketing solution solution, our customers will have access to these valuable tools to reduce idle time distance driven and emissions. These digital initiatives will make working with secure easier for our customers and support responsible waste management activities, which will help our industry move forward together.
With Tomorrows annual general meeting of shareholders two of the corporations long standing directors, Kevin Nugent, <unk> will not be standing for reelection making the end of their term on the board of directors Mr. Mr. Nugent, joining secures board in 2007 and has been instrumental in establishing best in class governance.
Practices and providing sound counsel over the last 15 years. Mr. Thornton was appointed the secured board in connection with the Davita merger on July <unk> 2021, and provided strategic leadership through the merger and integration has continued to provide valuable counsel to the board and management prior to his appointment to secured.
Board, Mr. Darden had been a director of <unk> since 2016 bolt.
Both individuals are accomplished business leaders, who have brought no measurable wealth of industry experience and insight to secures board I want to thank Kevin and Jay for their valuable contributions as directors and wish them. Both the best in their retirement I also want to thank all <unk> employees for their hard work dedication and drive.
That makes this company what it is and lastly, thank you to our customers and stakeholders for their continued support and partnership.
That concludes our prepared remarks, we would now be happy to take your questions.
Thank you ladies.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone. If you are using speaker phone. Please let the handset before pressing any piece.
First question comes from Patrick Kenny at National Bank Financial. Please go ahead.
Thank you Hey, guys.
Just on the new disclosure I appreciate the.
The operational data, but just wondering if you could help us.
Extracts the direct commodity exposure as well within each of the new segments. So.
For example, <unk>.
5% of EBITDA being environmental waste management, how much of that is.
Metal recycling.
Or within the.
25% energy infrastructure segment, how much has crude oil marketing.
Yes, so I mean, what we're going to be able to do I think gulfport basis has tried to give you different.
Metrics.
Volumes in.
I'm not sure we're going to be able to disclose how much.
We would get for a barrel of recovered oil versus.
Some of the other metrics, but what we will do is try to give you some meaningful.
Metrics that we could share.
To our investors and just show the various trend lines as to.
What's happening in terms of.
The volumes.
Yes.
Repeatable.
Yes.
Volumes that we see coming in day to day. So we can give you at least a trend line on the volume aspect of it.
I'm not sure what else, we're going to be able to.
Disclose.
<unk>.
Because there's so many factors that go into some of those some of those different categories, but where I'm trying to at least give you something that you can trend line.
On a go forward basis.
I think here Patrick we we wanted to align our opry operations relate to the activities that we're performing and I think if you look at that environmental waste management infrastructure segment at 70% of our operations and what do we do there we're processing waste we're recovering.
<unk>, a barrel of oil or recycling metals or we're disposing of contaminated landfill.
Soil and so we wanted to make sure that these business operations, where all contained in one operating segment and specifically.
That same thought process was around our energy infrastructure and in terms of what do we have in terms of volume on an oil pipeline how much do we put through in our terminals to our storage and really what we do from an optimization standpoint with all the volumes that we received.
Our facilities, but.
And then we broke out our oilfield.
Services segment. So you can clearly see what is truly impacted by a highly cyclical.
Nature of the business its drilling activity and really what we're trying to achieve here is taking a look at secured valuing it as the sum apart so taking a look at our energy.
Energy sector and comparing it to the proper peer group, taking a look at environmental wastebasket and comparing that to the proper peer group at same with with that oilfield services, clearly I think the market needs to understand that fundamental.
Because the stock last week as we feel right now it is undervalued because theyre just they don't seem to understand how these businesses perform because you've got that reoccurring stability in the cash flows.
<unk>.
This was our way of showcasing that at work in a more structured way.
Yes, I appreciate that color and.
And I guess your comment around the stock being undervalued is a good segue into my next question here just.
Trading at a free cash flow yield well above 20%.
Hence your buyback activity appears to be a no brainer.
But perhaps you could comment on the returns you expect to generate from this incremental $50 million of growth capital that was just announced.
Maybe your thoughts on how you think about balancing.
Returns from growth projects versus.
Simply bolting on higher quality cash flows.
Under long term take or pay even if it means having to accept.
Slightly lower return.
Yeah. Good question I think.
Maybe talk about capital allocation first.
We announced.
We were going to come out with a dividend. It's currently a 6% yield which we feel is sustainable for the foreseeable future.
Inception.
Purchased.
Four 5% of our stock back we think Thats a great investment as I said, we think the stock's undervalued.
We believe our current debt position is that the right.
And the rate level, and you balance that out with growth capital opportunities.
I've said over the past few months.
We work on projects that are <unk>.
Thought with.
With take or pay long term contracts and.
The contracts take time to get signed and developed and once you do have them signed we said we would announce that we've got a signed contract that's back.
So the first of that was the Nipper C. Clearwater pipeline, which is an area that that needs more infrastructure.
Not specific to that energy infrastructure segment.
When we look at these opportunities that are fully backstopped for 10 plus years.
That four five times payback on that asset.
For it for a 10 year period.
Currently just as an update on beer water. That's on budget. That's on time that will come on stream here in Q3.
And then we announced the Montney water pipeline disposal.
Similar kind of payback metrics that that 12 year, 90% take or pay agreement with an existing customer that we're partners with their senior high quality E&P and these opportunities.
It just improves the asset values that we have in our network.
So I would say to your question.
When you think about capital allocation, we are balancing that obviously, we've got a lot of free cash flow in this business and we've been aggressive on the buyback, but these contracts we've been working on for a long period of time.
And they're good quality.
<unk> Richard projects that we got to go out and execute so that that Montney project that will come online and kind of back half like call. It Q4 opex.
This year.
Okay, that's great it four and a half year payback does some quite attractive so I guess from a BD perspective.
It sounds like a rosy outlook for both the Montney in Clearwater.
Maybe you could just provide a little bit more color on what your unsecured backlog might look like in terms of.
Customer customer demand for.
More water disposal services or incremental gathering and pipeline connectivity.
Yeah, I would say the.
<unk> already of our hopper is tying into existing infrastructure call. It brownfield expansion, we have a few of those opportunities. We're working on right now again that would be tied to tied to long term contracts.
And we've always talked about our capital program being in that $50 million to $100 million annually and so we've kind of hit that Mark here for 2023 timing of contract signed maybe you get a little bit more.
These projects developing late in the year for more of a 2024 capital program. So there are some in the hopper.
That would kind of be very consistent with what youre seeing in 2023.
Okay, perfect I'll leave it there guys.
Thank you thanks Patrick.
Thank you. The next question comes from Qualcomm at Stifel. Please go ahead.
Morning, All just a follow up on Pat's question on the segments. So if you had a scenario where you had a crude oil waste processing facility.
So obviously the processing revenue and skim barrels would be reported in AWS, but what just to clarify any blending or marketing would be reported in infrastructure is that accurate.
Yes, just think of it in terms of the.
There's a lot of clean barrels that come into.
Pure terminals.
And some of those combined facilities. So really everything we've tried to put in that energy infrastructure Division is not really getting processed it's basically.
Clean oil that needs to get to market and optimized.
And sometimes it gets start so that's all in that energy infrastructure segment.
Okay, perfect and then thinking about the infrastructure segment as well so I mean, if we think about.
Your pipelines.
And storage units I mean, that's kind of call it $150 million of Capex.
Total spend and the segment kind of did a $150 million of EBITDA. So I mean safe to say then the majority of that segment would be kind of that marketing blending et cetera type of EBITDA is that fair.
You kind of lost me on the $150 billion like he's saying net net.
Net book value or like what are your assets or sorry that just are talking about the total spend for two pipelines.