Q2 2023 Trican Well Service Ltd Earnings Call
Good morning, ladies and gentlemen, welcome to the Tri County about service second quarter 2022 earnings results conference call and webcast. As a reminder, this conference call is being recorded I would now like to turn the meeting over to Mr. Brad Fedora, President and Chief Executive Officer of Tricare.
Well services limited.
Please go ahead Mr Fedora.
Good morning, everyone and thank you for attending to try can.
Second quarter results conference call to start the call Glenn Mattson, our Chief Financial Officer.
Overview of the quarterly results I will then provide some comments which quarter the operating conditions.
Nir.
I will try to get through my comments as fast as possible I know there's lots of them.
Also we're hoping to wrap this up within 20 minutes or so and then we will then open the call for questions.
Several members of our executive team are here today on the call and are available for questions and I'd now like to turn the call over to Scott to start things off spread so before we begin I'd like to remind everyone that this conference call may contain forward looking statements and other information based on current expectations or results for the company.
Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward looking information section of our MD&A for Q2 of 2023.
A number of business risks and uncertainties could cause actual results to differ materially from these forward looking statements and our financial outlook. Please refer to our 2022 annual information form and the business risks section of our Q2 2023, MD&A and our MD&A for the year ended December 31, 2022 for a more complete disc.
Friction of the business risks and uncertainties facing <unk>. These documents are available both on our website and on SEDAR.
During this call we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q2 2023 MD&A and.
Our quarterly results were released after close of market last night and are available both on SEDAR and on our website.
So with that let's move on to the results for the quarter.
<unk> results were significantly improved with continued solid industry activity levels, and a more moderate inflationary environment, which led to a more sustainable margin profile and improvements across virtually all the major financial categories.
Revenue for the quarter was $168 2 million about a 10% increase compared to the same period in last year. This was mostly attributable to a more constructive pricing environment, which allowed us to offset some of the inflationary pressures. We are facing at this time last year adjusted.
Adjusted EBITDA came in at $31 9 million a significant improvement over the $19 2 million, we generated in Q2 of 2022.
And I would note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $1 million in the quarter and were expensed in the period.
And adjusted Ebitdas for the quarter came in at $32 9 million or 20% of revenues, which is stronger when compared to the $23 6 million and 15% of revenues, we printed last year.
To arrive at EBITDA, we add back the effects of cash settled share based compensation costs recognized in the quarter to more clearly outline the results of our actual operations and remove some of the financial noise associated with the changes in our share price as we mark to market. These items, we recognized approximately $1 million in expense related to those items in the quarter.
On a consolidated basis, we generated positive earnings of $9 8 million in the quarter, which translates to about five cents a share basic and <unk> <unk> per share on a fully diluted basis.
We generated free cash flow of $22 7 million during the quarter as compared to the $14 6 million, we printed last year.
And again, our definition of free cash flow was effectively ebitdas less less non discretionary cash expenditures.
Since capital interest cash taxes paid in cash settled stock based comp.
Capex for the quarter totaled $14 4 million split between our maintenance capital program about $8 $8 million of that was maintenance capital and upgrade capital of $5 6 million.
The upgrade capital was dedicated mainly to our tier four capital refurbishment refurbishment program and the ongoing electrification of some of the ancillary fracking frac support equipment, which Brian will touch on later.
Balance sheet remains in excellent shape, we exited the quarter with positive working capital of approximately $128 million, including cash of about $40 million.
And finally in terms of return of capital we were quite active in our <unk> program during the quarter and repurchased and canceled seven 5 million shares at an average price of about $3 24 per share during the quarter. We remained active in July and repurchased and cancelled an additional $2 7 million shares which successfully concluded our 2020.
Two 2023 program.
As noted in our press release, the board of Directors yesterday declared a dividend of <unk> <unk> per share to be paid on September 30th 2023 to shareholders of record as of close of business on September 15th 2023, and I would note that the dividends are designated as eligible dividends for Canadian tax purposes.
So with that I'll turn things back to Brad for some comments on our current operating conditions and our outlook.
Hey, Thanks, I'll try to get through this as fast as possible overall Q2 pretty much went this forecast we're happy with the quarter, we always budget for bad weather activity interruptions.
So the fires and then.
Believe it or not some of the floods did not have a material impact on our quarter. You know some of the work was delayed until the summer but that's.
We did on the cost side, we did we were still experiencing inflation on certain items, but overall I would say inflation has really slowed down.
And with the improving exchange rate.
And some of the removal of some of the fuel surcharges in some of our items like sand, which went on in price so that.
A refreshing change for consumer base on the pricing side.
Although the pricing has generally been stable for the last year or so we did experience some pricing pressure during bid season late in the quarter, it's always disappointing to see but.
It feels like it's sort of stabilized here now that the bids are over and I wouldn't expect there to be a lot of pricing changes for remainder of this year.
Everybody is sort of.
I would say overall.
For the full.
Pricing.
Pretty much stable here.
23.
On the fracturing side, we're still operating seven frac crews.
Important to note. This means that we're operating about 60% of our equipment, we have sort of a maximum capacity of 11 to 12 crews depending on the size of the crews, but comparison to our competitors.
We're operating basically at capacity try Ken is still at a stage where.
No I wouldn't say our business is operating.
Maximum efficiency.
Okay.
With respect to revenue.
And we can still improve our situation as we can.
Crews to the basin and we will not add those crews to the base of unless there is incremental.
Certainly I would say even quite profitable.
So in our space, we can definitely improve on that as we bring more field on the cementing side I'm really happy with that division.
Meaning our cementing.
Really speaks.
Now how activity as well.
Both the year.
As I've made reference to in prior.
Thank you.
So, we'll get better and better.
As the years go by.
Do you have more of a material slowdown in December just for the Christmas season, like sort of every other business.
I think that's a welcome change.
And certainly something I hope continue.
Along this trend.
Our market share.
<unk> about 30, 35% overall.
But 50% in the Montney in the debate.
We feel we have the most value to add with our technical abilities and our.
Oreo blends in our.
<unk>.
Full service product.
Product offering.
We're looking to add more into plays like the Clearwater and heavy oil we've previously pulled out of it.
The labor shortages. So we're looking to get back to those areas as we think they will be a continued focus on that.
The next five years and our ability to add in those spaces is really only limited by our ability to add staff.
As everybody knows.
<unk>.
Dish and for good quality labor is tough people have lots of choices so well.
High quality labor, so that we can genuine with our best in class service on.
On the coil side we.
We had a fairly slow quarter in coil, but so far Q3 has started with a bang so.
We're not discouraged by it.
Our operating source oil units and although it's not a significant portion of our sales were still working to improve that division I think I've mentioned in the past, it's not operating at a level that we're happy with so we will just continue to spend time on that and we've hired people that are dedicated full time.
We're getting that vision operating at a level that we're happy in.
It's keeping up with.
Internally with fracturing it.
Burns perspective, so we'll just continue to grind away on that too to make improvements.
Outlook for the second half of this year.
I think it's pretty similar to last year, the rig count although it was much higher in Q1, it seems to be basically tracking so far in Q3, it's similar to last year's levels and so I think the second half of this year looks a lot like last year, maybe Q3 is slightly higher than maybe Q3 Q4 is even maybe slightly low.
But overall I would say should be kind of a repeat of last year due to a large X.
Even though our revenue was up 25% year to date.
The second half as the rates like you said.
Last year.
I would say the pressure.
No I don't think we're under supplied and I don't think we're oversupplied you know when it seems like it's sort of steady as she goes to our customers.
Fair.
On a budget, they're very thoughtful in the way they're allocating count.
And even just the timing of the completions.
Thank a industry is getting more and more cases so.
They're spending less.
Free cash flow in drilling completions and so.
As commodity prices well always have volatilities.
That sort of percentage of cash right. It's a really good shock absorbed.
And I don't think you'll see big.
<unk> reaction to changes in commodity isn't like marketing in the U S.
They were sort of surprised how stable, Canada being one of our answers was hey, you know last year when when we had the $100 oil in late night.
You know you didnt.
Wants to that and so they sort of activity you know through these ups and downs in the commodity cycle, we've got a hot summer in the U S and Europe , helping to clear out some of the gas storage to more normal levels and so if we get a normal winter I would expect we'll see gas prices go higher.
And maybe we will start activity.
Incrementally.
We're very encouraged with the advancements of the industry's relationship.
Yeah.
We look at the LNG facilities.
It's over seven Bcf.
Two two of which is very near term.
LNG actually LNG drilling activity has started.
<unk> is a very long life, you know 50 plus years.
The first nations are very happy to be involved with it very much.
Lines with their pro.
Profile and in wine.
So with various facilities, whether it's you know in Squamish B C, yet wood fiber or LNG, Canada and Kitimat, we expect this to be to build over time.
Really underpins long term stability in this basin of course.
The Montney deep basin.
Primarily gas focused.
Which means theyre very fax intensive so we think this is again.
So Canada is a great place.
Two two to invest in and do business with over the long term.
And we think our product offering in particular is really well suited to this incremental LNG demand.
High pressure wells because customers want low emissions.
Both the customer and the first nations once small footprints they want less water consumption clean air you know all of that all of the technology that we've been investing in.
On the supply chain, we are seeing just as the amount of tons that tons of sand per well.
Is growing and we have some you know some big numbers in the Montney in particular, we are seeing what we will believe our current and future constraints within the logistics of sand.
We think the whole trans loading system rail system trucking.
Trucking industry is basically running at capacity and we've already seen instances, where theres, a chance and shortage in certain areas of our of our Western Canada. We don't think this will get anything but worse frankly.
Third party trucks, and just the logistics system and in General is this offer is very tight it is not that well built out as we expanded in northeast B C.
There's less and less class one drivers want to drive in the oilfield today. So you know this of course, we see as an opportunity.
We're looking at lots of different stuff, we wanted to invest in sand logistics.
And making sure that the last mile.
Last mile logistics is as low as possible, which you know has a drastic impact on cost.
Our product offerings.
So again, we're very bullish on Western Canada.
We think we're gonna play them.
Growing role in the in the overall global natural gas picture.
So we want were invested for the long term and make sure that we can deliver our services as efficiently as possible.
We believe plays like the Montney combined with <unk>.
LNG exports.
Long term base of activity.
You know what.
And.
We still have a pristine balance sheet, we exited the quarter with about $40 million of cash lots of positive working capital.
And that just gives us the you know frankly, the luxury of looking at anything and everything.
Two to improve our business, we're going to invest predictable long term returns.
And making sure that you know what.
Good for our shareholders.
We continue on with our differentiation and modernization strategy, you know state of the art equipment, making sure our systems are leading edge really.
Really focusing on the <unk>, yes, ESG side of the business.
Helping out our partnerships with.
D in Alberta.
That'll play.
Role at.
Go forward and this is all under the guiding principle of clean air and clean water.
And we're making sure that our investments align with with all of those all of those prints.
And we've rolled out our first low emissions spread.
Last year, we're really happy with how that technology is performing we get our fifth tier four fleet.
In late Q4 of this year. So five out of seven crews will be state of the art brand new tier four spreads with low emissions low footprint less people.
Able to withstand.
The pumping times.
We have since we started this program.
38 million liters of diesel with natural gas, though.
Something we're really proud of is something that our customers and the communities really want us to do more.
The lines.
Oil and gas.
Activity in development with <unk>.
The public one.
Smaller footprint less carbon emissions drinks.
Drinks tetra.
We expect this technology will continue we expect it will become the standard in the industry and so as a result, we need to continue to look at ways to differentiate ourselves.
Yes, I was mentioning you know starting in Q1, we've electrified the ancillary.
Our equipment fleet.
Which means that it means it.
Our Asian.
<unk> enables us to reduce the number of people that we have in what we call the hot zone, where.
The pressurized pipe yeah as laid out.
And it also combined with tier four technology.
Allows us to have gas substitution rates of over 90%. So again, our goal is to have 100% natural gas on location to pump no no diesel at all and this is just the next step in that and that overall goal, we will continue to invest.
And that electrified equipment as forward as we think it's a win for us and for our customers.
The design of the blip there in particular I think we've said reliability are still working out some game.
In the design, but we think overall it will be a much improved piece of equipment.
And it's important to note since we've we've upgraded so much of our fleet that we now actually have sort of a 11 of 12 fleets that are field ready.
But generally been upgrading parked equipment and as we've been upgrading that equipment for we've been sort of displacing a traditional diesel spread but now you know 11, we have 11 fleets field ready and so when you think about the spare capacity in Canada, we pretty much have the bulk of it and it is ready to.
No.
Any more capital investment for us.
When you look at the parked equipment at our competitors it just like.
Altogether.
You know not only do we have the most technically advanced new fleet.
But our entire fleet is basically been reworked so youll back faster.
This industry and where we were at even just a short few years ago. We've gone from an aging fleet that required a lot of cap to basically half of our fleet is brand new in the office is ready to go with.
So we feel like we're in a great position to take advantage of increasing activity.
And even just increasing focus and in northeast BC and northwest Alberta.
I'm really happy where we where we're position sure.
On the return of capital side, you know our priorities have not changed we want to build a resilient sustainable and differentiated company invest in growth opportunities that provide returns for our shareholders and our customers long term.
And of course provide a consistent return of capital for our shareholders through dividends and buybacks. So we finished we focused heavily on the NCI would be this year and we finished it early like Scott was saying we bought.
$23 1 million shares since last October at an average price of $3 37, a share when you roll back when you roll This program back to 2017.
Overall, we bought 143.
Over 143 million shares at an average price of two.
Care, which represents just over 41.
Very successful program, regardless of how the market is valuing us in our space.
When we look at we look at this at these multiples and think it's a screaming buy you cant Hong So we expect to renew our NCI D. In October and remain committed to this program for what may be the long term.
We now pay a quarterly did well just to provide.
Some certainty and stability in our retreat a little strategy, but.
Look for us to be active again in the fall.
Tariffs back.
Well I think I'll stop there and I'll turn the call over to the operator for questions.
We will now begin the question and answer.
Session.
During the question queue you May Press Star then one on your telephone keypad, you'll hear tone acknowledging your request.
If youre using a speakerphone please pick up your handset before pressing any Keith.
David draw. Your question. Please press Star then two.
The first question comes from Aaron Macneil with TD Cowen. Please go ahead.
Hey, good morning, Thanks for taking my questions.
As it relates to the quarter I was a bit surprised to see proppant pumped down 15% on a year over year basis, but revenues up 10% I know you referenced both stronger pricing and a change in customer well designs in the disclosures, but I'm, hoping you can sort of parse that out a bit more for us like what was pricing.
Well it was well design and what specifically changed in well design on a year over year basis.
I don't we don't have all of that information with us here, but I wouldn't get too fussed by those stats you know like just depending on the customer base and what their develop what they are completing.
You know that can change quite drastically from quarter to quarter frankly.
But I don't have any more detail handy here Aaron to give you much more than that it's not something that we track that closely frankly.
Fair enough.
You sort of touched on this at various points of your prepared remarks, but.
You know you've seen arc sanction attaching stress Kona just went public or is it tends to go public via Pipestone and are guiding to growth in the sort of high single digits Logan again, small, but also committing to more of it.
Traditional growth model you highlighted the parked equipment in your prepared remarks.
I'm just trying to understand what do you think the likelihood is in your view that some of this equipment that goes back to work in 2024 are another time frame that you think is reasonable.
I think for sure we'll be bringing you know.
One maybe two spreads into this space and in the next 12 to 15.
Yes, just the momentum it feels like there's always you know slowdowns and then you know theres always little pauses, along the way, but it's in this business for the long term.
And when you think about you know LNG in the transactions that you just mentioned.
Transactions. They result in increased activity right they don't.
You, you've taken sort of asked us, but maybe under capital.
Into much stronger.
Financially stronger hands, so that just means an increase in activity.
And when you've got you know LNG is real T. M X is real.
The World wants more Canadian natural gas in particular more Canadian oil as we know it's the cleanest.
Cleanest hybrid hard.
World.
I look at this.
I never felt I've said this before I think a few times, but never felt good just as good about the business when I look out 510 years.
And I don't think it's going to go Crazy and I don't think we're going to see these huge swings in an activity activity level from year to year that we all thought was normal when you go back you know pre pre 2014.
So no I think it's.
I think I think all of that parked equipment that we have or.
Those five spreads that are go.
Some of it comes off here in the next year.
That's great. Thanks, Brad I'll turn it over.
The next question comes from Colby <unk> with Stifel. Please go ahead.
Good morning, Al I'm, just thinking about capital allocation in 2024.
I mean with your five tier fours do you feel there's adequate demand and upside for more of those upgrades are you kind of fine with your footprint in that regard and you know how do you kind of think about you talked about share buybacks, but maybe further dividend increases potentially M&A et cetera.
Yeah I mean.
We are always pausing.
And reviewing.
Different technologies, so we've got five.
We're currently waiting on the results from what.
Was 100% natural gas engine.
We're still waiting to see how that will go out.
And so we might pick up.
Just ignore our never ending pursuit of having that natural gas.
But we don't feel we don't feel we feel like we're very much ahead of the game.
And that gives us the luxury of being able to pause and look around and say Hey, you know.
Let's not get too must not have the blinders on with our technology.
So.
You know, we'll we'll figure out what's happening and you know I.
I still think you know more of our fleet will be converted.
I think the industry is going.
Just everything I've already said it.
So.
We have a placeholder for capital it's very similar to this year, you know our NCI, but he will be.
This is a board decision not my decision, but I would expect sort of once a year, we'll recalibrate our dividend.
So that's the overall aggregate dividend payout doesn't change from year to year, but just as our share count shrinks you would expect a dividend per share to go up.
That seems like a logical.
<unk> approach.
And as far as M&A goes nothing.
Nothing's changed I mean, they were all trading at Crazy low multiples.
Hey, maybe makes it hard but as with oil you know looking back 20.
Here as you know the market for M&A in oilfield as always.
It's it's maybe.
You know small spits a consolidated space already.
We continue to look at that and look at other operating division.
Company.
So we're.
Clean balance sheet excess cash on the books in the bank.
We have a relatively well priced.
Talk within us.
So we think we're in a we're in a great.
Okay got it thanks, and just quickly Scott can you talk about how we should be thinking about working capital changing into Q3 and can you refresh.
The timeline when do you think try can goes cash taxable. Thanks.
Yes, I think we will see a similar cadence in terms of working capital that we saw through 2022 like we saw a pretty big release coming out of Q1 into Q2 that will start to build a little bit as we come through three and four as you would expect as activity increases from there.
You'll note in one of the things we did make note of is that we are now moving into a cash taxable positions that we expect to do.
Do you actually fund some of the current tax liability that we've got and crew on the books early next year.
When that goes out.
So you'll see that number build through the year and then we'll make our first payment likely in Q1 next year and then we'll install as normal from there.
Okay got it. Thanks, that's all for me I'll turn it back.
You bet.
The next question comes from Keith Mackey with RBC capital markets. Please go ahead.
Hi, Good morning, just wanted to start out on your.
Differentiation strategy, which is very clear on the last one.
On a year to to Brad and so forth.
Default DGB fleets are starting to the electrification of the ancillary items.
But I imagine as you think about your competitor potentially catching up on some of those points of differentiation strategy has to be a continuum.
So what is that.
In your view on where you need to differentiate in order to.
Maintain the position you've got and put yourself in potentially the best position to capture some of the emerging work, whether it's LNG or or other types of work.
Oh Wow.
We're not going to get.
Maybe I'll just say this.
I absolutely agree with you that you know differentiation in our space is temporary because in general you can replicate.
Almost any technology and so it's very very hard to continue to say that you were going to be a leader in technology, but.
So far it's been working and were but that's why you know things like okay.
That's nice but what.
Ancillary.
Right in that.
Probably will remain will remain that way for some time.
The dividend so the differentiation gets maybe more difficult if technology isn't rapidly changing and you've got to obviously make sure you get a return.
In the near term. So you know I would say what's next for US is more on the logistics side of the business and I'm not going to give you any more color than that but it's you know there are a lot of product moving around.
And when you've got Montney wells with 10, and I'm talking metric tons here doesn't much matter, but you know you've got 10000 plus tons in a well that's an awful lot of product to get from a to b in a very.
Knowing full well that you just can't store it and every time you take it from truck to rail or rail to truck it.
At 10 Bucks a ton to the equation very quickly so.
We're starting to look at.
It's almost turning the clock back and starting to look at the basics again.
Because the logistics can really have an impact on.
Not just the quality of your service offering but on the profitability of it in <unk>.
Looking for a little places to squeak out little things and inefficiencies.
You know when Youre looking at this as many tons per year of sand pumped.
Man you scrape a few nickles off the edge as they add up quickly.
Yeah, Yeah got it.
And just to follow up on that so.
The potential to get into more and more logistics type of offerings or whatever it ends up being in general would you see a necessity for capital intensity to change like can you continue to do those types of investments.
Meaningfully without spending materially different from how you or the amount of capital you're spending.
At that kind of 100 hundred $15 million or how should we think about that.
Yeah, I mean, it probably depends on the year, but I think it's a pretty good placeholder.
You know when you look out a few years.
I don't know the answer and it can change every day, but.
Feels to me I mean, you know how it goes in this business you can only spend so much money intelligently without overbuilding or causing a bunch of them.
Product inflation.
Uh huh.
The supply chain of stuff, whether it's an engine or a.
Railcar.
You just can't get everything you want in the time, you want it and so.
When you think about CAGR.
Aggregate capital spend on a per year basis, it feels like.
What we've been doing.
Probably should be relatively consistent.
You know, maybe you know and there's going to be years, where it's less and there's going to be.
More but I think that's pretty good placeholder from us building a cash flow model say.
Okay. Thanks, Brad I appreciate the comments.
Yes.
Once again, if you have a question. Please press Star then one.
Next question comes from Waqar Syed with <unk> capital markets. Please go ahead.
Thanks for taking my question.
Brad as you think about building the logistics business.
You're thinking this royalty can fly into its frac sand logistics are.
You'd also thinking of maybe people who says.
Ken.
Yes that is number one and number two the logistics business.
You're thinking about Q.
Cater to your old fleets.
Also to be providing services to third parties as well.
I don't want to answer any of those.
Okay.
And everything that you know you've that's.
You've pointed out a good.
You founded the good point like it's not just sand right. Our business is not just it's not just sand that's moving around when.
When you have these natural gas fleets, there's an awful lot of natural gas that needs to be deferred on location in a short period of time and.
And not everybody has the luxury of a you know.
10 wells that were drilled last year to tap into for gas supply right. So.
It could be.
B fuel, whether it's diesel engines and natural gas or the.
The other big items, obviously, your sand and then theres, some chemicals, but thats, probably tiny Harrison so and as far as you know we're going to do it for our own benefit or are these like sort of independently operating businesses in the answers we're looking at everything.
And Theres no press release coming Tomorrow.
Now we're looking at it we're being very thoughtful very analytical.
You know, we're looking at the whole the whole sort.
Value chain I guess.
Right from the beginning.
We love <unk>.
Indian market.
So we'd much rather grow our presence here then sort of take hail marys.
In other country.
So we're looking at that means we look at everything.
That.
It makes sense then.
In terms of the supply chain for tier four days D&B.
How is that.
Improved.
Okay.
So what's kind of the earliest.
Delivery, if you were to Orbis.
Today.
Yeah, I'll hand that over to Todd <unk>.
Yeah, the supply chain has.
Improved slightly but its still quite a long lead time, probably in the neighborhood of 12 to 18 months.
Two.
For delivery and the retrofit of our.
Equipment.
Okay.
And any changes on the pricing side, Florida.
That equipment.
Yeah.
Yeah.
Okay.
Thank you Sir.
Yeah.
Thanks.
Okay. Thanks, everyone. I guess this concludes our call there's no more questions in the queue.
So thanks for joining thanks for taking the time the executive team is available for the remainder of the day for questions. Please.
Please call us directly if theres any other questions you would.
Thanks, We'll talk to you again next quarter.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Hum.
[music].
Yeah.