Q2 2023 Secure Energy Services Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to U D. Secure energy Q2, 'twenty between three results conference call. At this time all lines are in listen only mode. So long in the presentation. We will conduct a question answer session. If at any John Muir and discolored, you're quite immediate assistance. Please press star zero for the operator this call is being recorded on Thursday.

27 2023.

I would now like to turn the conference over to Alison Pro cut your actual corporate planning. Please go ahead.

Thank you.

The conference call for the second quarter of 2023, joining me on the call today are there any amaral, our chief Executive Officer, Alan <unk>, Our President and Tom Baker, Our Chief Financial Officer.

During the call today, we will make forward looking statements related to future performance.

We will refer to certain financial measures and ratios.

Any standardized.

Please go ahead.

Thank you.

In my financial measure ratios disclosed by other companies.

The forward looking statements reflect the current views of secured.

With respect to future events.

Based on uncertainty expectations and assumptions considered reasonable by project.

This forward looking information about future events and conditions.

The very nature of the involve inherent assumptions risks and uncertainties and actual results could differ materially.

Numerous correct.

Please refer to our continuous disclosure documents available.

The risk factors applicable to procure factors, which may cause actual results to differ materially from any forward looking statements.

Our non-GAAP measure.

Today, We will review our financial and operational results for the second quarter of 2023, followed by our outlook for the remainder of the year I will now turn the call over to Russ for his opening remarks.

Thank you Alison and good morning, everyone. Our results in the second quarter continued to demonstrate the strength.

<unk> of our core business operations, we achieved strong adjusted EBITDA of $119 million or <unk> 40 per basic share. Despite the impact of temporary facility shut ins and lower customer production due to widespread wildfires across western Canada, we would like to extend our heartfelt gratitude to emerging.

Emergency responders stop industry partners for their hard work and protecting our communities during the wildfire situation.

Year to date, our operations delivered adjusted EBITDA of $270 million or <unk> 90 per share a 10% increase compared to the same period last year, while maintaining a strong adjusted EBITDA margin of 35%.

Positive impact from cost savings synergies related to the degree the merger and higher revenue leading to improved fixed cost absorption at more than offset the impact of inflation. We continued to make significant progress in delivering delivering on our capital allocation priorities. During the second quarter, we have returned $175 million of capital.

The shareholders in the first half of the year through our attention quarterly dividend and strategic share repurchases in total we have repurchased five 5% of our outstanding common shares. This year. In addition, we invested $67 million in capital expenditures year to date to advanced previously announced infrastructure projects.

They're backed by strong commercial agreements, providing consisting cash flows throughout all business cycles. All of this was achieved while continuing to maintain a solid debt to EBITDA covenant ratio of one nine ex overall we.

We remain committed to maintaining a strong balance sheet unlocking additional shareholder value through increased return to shareholders and sustainably growing our business through our capital investment program. We also released our 2022 sustainability report and our task force on climate related financial disclosures in may demonstrating our <unk>.

Ongoing commitment to transparent reporting.

Last week, when evaluating ESG and climate related projects designed to support the energy transformation is there is focused on applying good business practices to everything we do which means they are beneficial to secure our customers the environment and provide to healthy financial return on investment.

June 19.

This year, we appealed the competition Tribunal decision, which was heard based on areas of law and there is a fact by the federal Court of appeal, we remain optimistic that the appeal arguments will be successful.

Chad will now go through the financial highlights from the second quarter of 'twenty three.

Ronnie and good morning to everyone on the call.

During the quarter, we generated revenue of $353 million consistent with Q2 of last year as the wildfires in western Canada cause temporary waste processing facility in landfill closures reducing activity from.

<unk> in certain areas and reduced revenues from energy producers that shut in operations in affected areas and actions precautionary measures.

We recorded net income of $34 million or <unk> 11 per share a decrease of $20 million or <unk> per basic share compared to the second quarter 2020.

Driven by an adjustment related to asset retirement obligations in the prior year period, which resulted in lower than typical quarterly depreciation expense.

Our adjusted EBIT margin came in at 34% slightly down from 36% in the second quarter of 2022.

Due to wildfires service mix and higher weather related operating costs, partially offset by the full run rate realized synergies.

Looking at our segment results.

Overall, the strongest contributors for our results in the quarter was our environmental waste management infrastructure segment.

<unk> adjusted EBITDA of $93 million, a 7% increase over the second quarter of 2022.

The increase was driven by strong increased water volumes in areas not impacted by wildfires improved efficiencies and operating capabilities for metal recycling and the full run rate of <unk>.

Cost synergies, resulting from the <unk> merger, which more than offset the impact of temporary shut ins caused by wildfires during the quarter.

The energy infrastructure segment generated adjusted EBITDA of $34 million, a decrease of $6 million from the comparative period.

22, primarily due to higher cost of sales, resulting from increased I'll take tolls during the quarter.

Oilfield services segment contributed $4 million of EBITDA lower in the second quarter.

2023 compared to last year.

As a result of delays in project management services.

Funds flow from operations of $80 million was flat from Q2 2022.

Lower interest paid was partially offset by lower adjusted EBITDA and higher spending on reclamation and remediation activities.

Our total debt to EBITDA ratio remains at one nine times with the recurring nature of our cash flows we remain very comfortable with our principal debt balance of $962 million at June 30.

We expect to maintain a total debt to EBITDA covenant ratio of approximately two times this year.

Our capital structure has no near term maturities with the first note maturing in 2025, we maintain a considerable liquidity position with $334 million of availability on our credit facilities, which also mature in 2025.

We paid our quarterly dividend of <unk> 10 per common share, resulting in a dividend payout ratio on a trailing 12 month basis a 34%.

At our current share price I hope dividend provides an attractive yield of 6% on our common shares.

We remained very active on our normal course issuer bid during the quarter.

For the three months period, we repurchased and canceled seven 3 million common shares at a weighted average price of $6 40 per share for a total of $47 million as Randy mentioned in total we have repurchased five 5% of our outstanding common shares in 2023.

We were extremely pleased to receive an upgraded issuer rating from B plus to double b minus from Fitch ratings to reflect our better than expected financial performance. Following the <unk> merger driving strong free.

Free cash flow and that production capacity.

During the second quarter. We also successfully obtained consent from our majority of senior secured noteholders to amend indenture for 11% notes to align restricted payment capacity of the indenture without the indenture governing.

Our 7% quarter percent unsecured notes facilitating the delivery unsecured capital allocation priorities.

Our solid balance sheet, along with our strong recurring cash flows allows us to continue to provide meaningful shareholder returns both through our quarterly dividend as well as opportunistic share buybacks.

I will now pass the call over to Alan to provide our operational highlights.

Thanks, Chad good morning, everyone.

We are very pleased with the performance across our operations in the second quarter. Despite the challenges presented from the wildfires in Western Canada, our extensive infrastructure footprint and scale underscored the resiliency of our operations. During the month of May our operations were impacted by the wildfires in Western Canada as we took measures to shut in.

<unk> infrastructure and reduced operations at specific waste processing facilities and landfills in June we resumed full operations at the impacted facilities.

As a result within our environmental waste management infrastructure segment waste volumes received and processed at our waste processing facilities decreased by 8% over the second quarter of 2022 to approximately 58000 barrels per day as a result up facility shut in due to the wildfires are industrial landfills.

A similar decline of 6% to 790000 tons of solid safely contained across 17 locations.

Reduced water processing and disposal volumes remained strong in the quarter, averaging nearly a 154000 barrels per day, an increase of 16% over the prior year quarter due to high activity in the Montney region of Alberta, which was not impacted by the wildfires in the quarter and our metal recycling facilities ferrous volumes were up 36.

Percent due to operational efficiencies and increased rail capabilities, improving our recycling operations.

Equipment upgrades, including the purchase of new railcars in the third quarter will increase our handling capacity and drive further optimization at these facilities.

Our energy infrastructure segment had a strong quarter operationally with with throughput increasing by 3% over the second quarter of 2022 to 123000 barrels per day, despite the impact of wildfires on production volumes.

Overall, the contracted nature of the volumes from our oil gathering pipelines along with the location of secures crude oil terminals closer to customer production continues to drive strong and consistent volumes for Terminalling and optimization.

The oilfield services segment experienced lower activity and delays in project management services due to the impact of the wildfires.

Turning now to our capital program, our two major infrastructure growth projects. This year the expansion of the water disposal facility in the Montney region in an oil pipeline and terminal in the Clearwater region are nearing the end of the construction phase and remains on budget. We look forward to commissioning of having these services during the fourth quarter of 2023.

We are extremely pleased with these projects they will provide reliable volumes and reoccurring cash flows through customer partnerships with long term take or pay contracts. The montney water disposal infrastructure is backed by a 12 year commercial agreement with the senior E&P producer.

Or water disposal. The agreement provides secure with the take or pay commitments on nearly 90% of the facility's capacity and the customer with guaranteed access to cost efficient water disposal. The new disposal well has been successfully drilled and completed and the construction of the injection pipeline and facility upgrades are currently underway.

Clearwater oil pipeline and terminal infrastructure. It's also backstopped by three commercial agreements for a 10 year term the significant growth in the Clearwater area, which is seeing production growth zero to approximately 117000 barrels per day over the last five years has required additional infrastructure to support higher production volumes.

In total we incurred $31 million of growth capital in the second quarter of 2023 related primarily to these two projects.

Year to date, we have incurred $67 million of our $100 million total growth capital program anticipated for the year.

We also incurred $37 million of sustaining capital related to landfill cell expansion as well.

And facility maintenance asset integrity programs in asset purchases for our metals recycling operations.

We continue to expect to incur approximately $60 million of sustaining capital and $25 million of investment into landfill expansions in 2023. The additional landfill expansions are in the anticipation of the increased abandonment spend obligations driven by the government regulations as liability management programs in BC, Alberta.

That's as gasoline seek to speed up the rate at which inactive wells and facilities are bad and ultimately declined.

I will now turn it back to Randy to address our outlook for the remainder of 2023.

Alan throughout the remainder of 'twenty three secured continues we expect the current macro environment in both the industrial and energy sectors to remain strong energy industry activity remains robust as producer discipline balance sheet strength cost optimization efforts and operational efficiency strategies facilitate.

The ongoing development our.

Our infrastructure network continues to have significant capacity to help customers with increased volumes requiring processing disposal recycling recovery turbine with minimal incremental fixed cost for additional capital overall secure expects volumes activity levels and demand for security infrastructure to remain strong during the remainder of 'twenty three.

The addition of new customer back infrastructure results in incremental reoccurring cash flows for secure through take or pay obligations and production area dedications that also provide a guaranteed rate of return on our investments.

Given this backdrop, we remain confident in executing our previously announced capital allocation priority to return more capital to shareholders and execute on the 23 $100 billion growth capital program. We believe our shares are considerably undervalued in light of this we plan to continue repurchasing shares to date, we have repurchased 79% of the two.

92 million shares allowed under the <unk> and CIB, which is set to expire in December of 2003, we expect to accomplish this while exiting the year with a total debt to EBITDA covenant ratio of approximately two <unk>.

Projection is based on our strong performance in the first half of 'twenty three combined with their optimistic expectations for the remainder of the year I want to thank all secure employees for their hard work dedication and drive it makes this company what it is and lastly, a 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, Sir ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

<unk> has been absent you would like to withdraw from the queue. Please press star followed by the number two and if youre using a speaker phone. Please keep the handset before pressing any keys.

Please for your first question. Your first question comes from Patrick Kenny with National Bank. Please go ahead.

Thank you good morning.

Just off the 58% utilization rate that you quote on a 12 month trailing basis.

Versus I believe you were at roughly 65% before the wildfires. So I'm just curious if youre back to that level today, and maybe you can comment on.

Further momentum that Youre seeing through Q3 Q4.

Good morning, Patrick Allen here good.

Good question, Yes, when we think about the wildfire impact.

We had 20 facilities throughout Q2 that were shut in for various periods of time, both on the waste processing and on the landfill side. We didn't have we had minimal damage to those facilities.

At firms around them in a lot of gravel so it's a fire barrier.

But when you think about the volumes and utilization.

Had our volumes and our landfills were down 8% and our volumes and our waste processing facilities were down 6%. So you're right that's going to affect our utilization numbers, but as production has come back online here and we've seen that through the month of July that utilization number is trending upwards.

From discussions with our customers. The majority of their production is back online, they're continuing with their capital programs throughout Q3 here in Q4. So we would expect that utilization number to go up as well and I think we pointed it out in the commentary that produced water volumes were up 16%.

<unk> quarter over quarter, and so that's that same reoccurring same store sales that we see that annuity in our revenue streams, because when you look at that environmental waste management infrastructure statement. The majority of the volumes or production and industrial related they are reoccurring and it's like 80% of the revenue comes from that nature.

So we expect that as as volumes continue to come back here and same store same store sales grow we will see that utilization number come back up.

Okay, that's perfect. Thanks.

And then maybe just on the Clearwater.

Thanks for confirming that your pipeline remains on budget there.

Despite the slippage in the in service date, but maybe.

Maybe just based on where crude prices are at these days as well as the compression that we've seen in the dirt.

Differentials I.

I'm wondering if you could just provide a general update on the level of demand youre seeing from Clearwater customers for additional infrastructure as you start to think about.

<unk> 2024.

Yes, no great question I mean, as we pointed out their volumes are 117000 barrels a day in discussion with a lot of that partnerships that we have up there on what we call phase one of our knit to see clear water infrastructure.

We're definitely going to see more demand as we head into 2024, we're going to see that 117000 barrels per day increase so.

Now were on budget.

To have distinct commissioned and operational here during the fourth quarter and I would expect that we're going to have to add a bit of capital as we head into 2024, and we'd anticipated that that there is more volumes coming out of that area that we need to.

Ramp up more capacity and we have the room to do that that's the way we've designed the facility.

And so in discussions with those customers and their plans for 24%, 25%, we do think.

The throughput of that facility will increase and as well as we will have to add a bit more capital there and all of it is through these long term take or pay agreements that they want to make sure that we're here for the long haul partnering up year over a 10 year agreement to make sure that they've got that takeaway capacity because a lot of that volume today has been.

Truck and they obviously want to be more efficient with that volume and put it on a pipeline. So so we're there to help them out and to your question. Yes, I think it's going to continue to grow and it will be there to support it.

Okay. Thanks for that.

And then last one for me guys just.

On your appeal.

<unk> was heard on the 19th.

I'm wondering if there's still maybe.

An opportunity for a settlement here.

Before.

The court of Appeals decision is released.

Maybe later this year and also whether or not youre running a soft process here for the 29 facilities.

Just in case the appeal is unsuccessful.

Or do you wait until the appeal process has been fully exhausted, including.

Potentially be incurred at the Supreme Court level.

Then kick off a sales process at that point.

Yes, no great question.

I am just timed for the commissioner to fly out here anytime he wants to start negotiating and we're always willing to listen to their.

So their thoughts but.

I think.

The way the legal process works today, Patrick it's very much.

More black and white than that maybe.

What.

Common sense will prevail, but.

So we patiently await the appeal process.

We've had I.

I think we've mentioned this in previous.

Previous.

Quarters that.

Right right from the get go when there was a tribunal being set up we had a lot of inbound calls, saying hey, if you ever have to divest. These assets put me on the list. So we have a lot of a lot of.

Various companies throughout North America that would be very interested in these in these great infrastructure assets and reoccurring revenue.

Type assets.

So how how that proceeds in terms of.

Doing.

Our process before after those are still debates discussions.

<unk>.

It will probably be based on these.

These companies wanting to get in front of us. So we'll see how that plays out over the next quarter and hopefully.

The decision come sooner rather than later, but it's.

It's summertime in Ottawa and guess, what a lot of things don't happen summertime, but not alone.

Got it okay I appreciate all the color guys I'll leave it there.

Thanks Pat.

Thank you, ladies and gentlemen, as a reminder, if you have any questions. Please press star one.

There are no further questions at this time, Mr. Amir back over to you.

Thank you for being on the conference call today.

<unk> broadcast of the call will be available on secures website, we look forward to providing you with updates on secures performance at the end of October after the completion of our third quarter. Thank you again have a great summer.

Right now.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.