Q2 2023 CES Energy Solutions Corp Earnings Call

Thank you for standing by.

Chris Operator, welcome to total energy second quarter, 2023 conference call and webcast.

A reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions.

She joined the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.

I would now like to turn the conference over to Daniel Halleck.

President and CEO of total energy service.

Please go ahead.

Thank you and good morning, and welcome to total energy services second quarter 2023 conference call present with me as Julia Garbage total <unk> VP finance and CFO will review with you total financial and operating highlights for the three months ended June 32023.

And provide an outlook for our business and open up the phone lines for questions Yulia. Please go ahead.

Sure Dan during the conference.

During the course of this conference call information, maybe provided containing forward looking information concerning totaled projected operating results and anticipated capital expenditure trends and projected activity in the oil and gas industry actual events or results may differ materially from those reflected in the total forward looking statements.

Due to a number of risks uncertainties and other factors.

That in total business and the oil and gas service industry in general these risks uncertainties and other factors described under the heading risk factors and elsewhere in total most recently filed annual information form and other documents filed with Canadian provincial Securities authorities.

That are available to the public of W. W. W Dot com.

Our discussions during this conference call are qualified with the reference you the notes to the financial highlights contained in the news release issued yesterday.

Unless otherwise indicated all financial information in this conference call is presented in Canadian dollars.

Total LNG its financial results for the three months ended June 30, 2023 represents record second quarter financial results.

Underpinning. These results were relatively stable industry conditions in all jurisdictions, and then deployment all equipment upgraded pursuant to our 2022 capital expenditure program.

Second quarter consolidated revenue increased 17% on a year over year basis, while EBITDA increased by 5% included in Q2, 2022 EBITDA was $74 million of contract cancellation revenue in our Cps segment, excluding such contract cancellation revenue Q.

<unk> EBITDA increased 41% on a year over year basis with Cps segment EBITDA adjusted for contract cancellation revenue is calling in for 55% of this increase and the Rts segment, 40% geographically, 47% of second quarter revenue was.

<unk> generated.

In the United States, 40% in Canada, and 13% in Australia as compared to second quarter of 'twenty 'twenty. Two we're 26% of consolidated revenue was generated in the United States, 54% in Canada and 21% in Australia.

By business segment compression in process servicing generated 54% of second quarter consolidated revenue followed by contract drilling services at 26% and mutual well servicing and rentals and transportation services contributing 10%.

In comparison for the second quarter of 2022 Cps segment contributed 52% of consolidated revenue contract drilling that's everything between the 8% well servicing 13% and the Rts segment contributed 7%.

Consolidated second quarter gross margin of 19% with two percentage points lower than Q2, 2022.

Excluding the $7 $4 million of C. B S. Corn trip cancellations revenue received in Q2, 2022 second quarter gross margin improved by two percentage points compared to 2022.

This improvement was driven by improved pricing in all business segments that more than offset cost inflation and the drag on the consolidated gross margin due to the increase year over your relative revenue contribution or the lower margin Cps segment.

Increased drilling activity in Canada was upset with lower activity in Australia, and the United States, resulting in 6% year over year decrease in second quarter consolidated operating days in C. D. S segment.

What city Lora activity was a 17% increase in consolidated segment revenue appropriate Wendy.

This resulted in the 10% year over year increase in second quarter C. D. S segment revenue and 17 and 12% increase in segment EBITDA.

In Canada increased activity.

And the market share gains contributed to an 8% year over year increase in second quarter operating days.

Increases in part due to rig upgrades resulted in a 19% year over year increase in second quarter Canadian drilling revenue pretty which in turn gave rise to a 29% year over year increase in Canadian drilling revenue.

In the United States second quarter revenue decreased by 7%.

As a 13% year over year increase in Germany, or bring D was offset by an 18% decrease in Britain.

Ms arising from modest slowdown in industry activity and the transfer one triple drilling rig to Canada.

Despite the revenue decrease second quarter U S. C. D. S. Operating income increased by 312% as a result of increased pricing and cost efficiencies.

In Australia operating days decreased as one drilling rig was taken out of service for re certifications and upgrade these rigs returned to operation in July are used to operating days were partially offset by a 27% increase in revenue per D result.

In the 2% decrease in revenue.

Lower revenues combined with crew retention and other cost associated with re certification of one.

Drilling rigs contributed to a 70 179 per cent decrease in operating income.

And then R. T S segment.

Improved Canadian industry conditions, and meaningful market share gains in United States contributed to a 7% year over year increase in utilization.

And the 48% increase in revenue per utilized piece of equipment, which in turn resulted in a 47% increase in revenue.

This segments leverage too high activity levels, given its relatively high fixed cost structure was demonstrated by a 102% year over year increase in the segment's EBITDA and a 10 percentage point increase in EBITDA margin, despite significant year over year cost inflation.

Second quarter revenue in total Cps segment increased by 22% as compared to 2022.

This was due to a significant increase in our fabrication sales that more than offset lower sales in Canada.

Also contributing to the year over year increase in the segment's revenue was increased equipment overhaul activity and a 44% increase in utilization of compression rental fleet.

Cps segment EBITDA for the second quarter.

Or 2022 included $74 million of contract cancellation revenue.

Excluding this contract cancellation revenue second quarter, EBITDA, and EBITDA margin increased 64% and 22% respectively for 2023 as compared to 'twenty to 'twenty two.

The fabrication sales backlog increased $285 $6 million compared 281 $7 million backlog at June 32022.

Sequentially the quarter end backlog decreased by 41 $8 million as conversion of Corning activity to sales motivated somewhat during the second quarter with no corresponding decrease in production activity.

Second quarter, well servicing segment service art decreased 13% as Canadian abandonment activity decreased significantly following the conclusion of government incentive programs.

Actually offsetting reduced activity with a 6% increase in revenue per service sarver resulted in the need for some decrease in well servicing revenue.

Lower revenue and operating hours in Canada, and Australia were partially offset by 27% increase in separate silos and a 41% increase in the revenue in the United States and our U S service rig business expanded its customer base during the second quarter over 2000.

23.

Negative only impacting second quarter activity in Australia was there a mobile or a service rig from operations for injury certifications and upgrades.

Lower activity additional maintenance costs following the busy winter season in Canada, and bringing the cost inflation that exceeded price increases contributed to a 23% decrease in second quarter segment, EBITDA and a 19% decrease in EBITDA margin.

From a consolidated perspective.

And then <unk> financial position remains very strong.

During the second quarter of 2023, total reduces bank debt by $10 $5 million or 9%, bringing its net debt position to $2.7 million at June 32023.

During the second quarter, we repurchased 375000 common shares under our normal course issuer bid at a cost of $3 $3 million and we currently have $15 million of credit available under $175 million of existing credit facilities.

<unk> Bank covenants consist on MX, one senior debt to trailing 12 month bank defined EBITDA or three times and a minimum bank defined EBITDA to interest expense of three times.

At June 30, 'twenty to 'twenty, three the company's syndrome being debt to bank.

EBITA ratio was 0.27 and the bank interest coverage ratio was 29.59 times.

Thank you Julia we are pleased with our record second quarter results such results reflect the continued investment in upgrading our equipment fleet as well as a significant increase in the relative contribution of our Rts segment. Following several years of restructuring that segment in response to challenging industry.

Conditions in Canada.

Despite a moderation in U S and Australian activity and the normal seasonal slowdown in Canada that was exacerbated by lower well abandonment activity.

Total generated $43 $9 million of cash flow after changes in noncash working capital items during the second quarter.

That was used to fund $12 $7 million of capital expenditures repaid $10 $5 million of bank debt.

Reduce the number of outstanding common shares by 1% with $3 $3 million of share repurchases and paid $3 $2 million of dividends to our owners.

Canadian activity levels gained momentum as we entered the third quarter and we currently expect continued favorable market conditions in North America, and Australia for the remainder of the year provided commodity prices remained relatively stable.

Contributing to our constructive outlook for the remainder of 2023 is the reactivation of equipment being upgraded and re certified pursuant to our 2023 capital expenditure budget.

Such equipment includes a triple drilling rig relocated to Canada from the U S and in Australia drilling rig that both returned to service in July following recertification upgrades completed during the second quarter.

That said and Australian drilling rigs that came off contract in July is currently undergoing routine inspection.

And is this and is expected to return to service in the fourth quarter of 2023.

In direct response to customer demand, we have modestly increased our 2023 capital budget by 6 million to $72 1 million. This increase will be directed towards continued equipment recertification and upgrades.

With $42 $5 million of our 2023 capital budget funded to June 30th.

The remaining $29 $6 million will be funded with cash on hand and cash flow.

While industry conditions remain stable and positive global economic uncertainty and commodity price volatility give rise to caution.

In such an environment, we will continue to prudently manage our operations and exercise discipline in the deployment of capital.

We continue to be presented with numerous growth opportunities, but necessarily waive such opportunities against the economics of continuing to pay down debt and repurchasing shares.

I would now like to open up the phone lines for any questions.

Thank you we will now begin the question and answer session join the question queue. You May Press Star then one on your telephone keypad, you'll hear it till I'm acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any case.

To withdraw your question Press Star then two.

Our first question is from Tim Monticello with <unk> capital markets. Please go ahead.

Hey, good morning.

Hey, good morning, Tim.

I was just curious.

Saw some margin compression, particularly in the.

Cts segment.

And there was some rigs that were sidelined obviously you've got some.

Impaction, Canada, just given seasonality.

I'm curious how much you think the margin was impacted by you know.

Rig mobilization and other sort of onetime items that might have hit the cost side.

So certainly relative to the first quarter youre going to have some contraction in Canada with the absence of boiler revenue, but overall the margins were fairly stable on a year over year basis.

Definitely we had some costs.

Associated with relocating the triple from the U S to Canada, and obviously no corresponding rep revenue off that rig and then typically spring breakup in all divisions.

Tend to have.

Increased maintenance costs, particularly after Q1, which was a fairly busy quarter. So you definitely have some of that seasonal.

Pickup in maintenance expenses, but.

Year over year margins were relatively stable and.

So we didn't see anything unusual there.

Uli everything yes.

Yes, it's 21% last year 21 spend this year.

In the second quarter soil.

But definitely a little lower than Q1 for sure.

But rates have moved a lot higher over the last year have been up.

So julia up rates and rates and costs yeah certainly.

Activity in Australia, and the U S.

U S was more macro.

Australia was when you pull one out of five rigs out of service that hits your.

Your activity reasonably hard but.

Yes, there wasn't.

Definitely the cost inflation.

But.

Reasonably stable margins so rate increases have been.

Offsetting costs, but that's a constant battle and definitely looking utilization in Q1 of 'twenty three was higher than Q1, 'twenty. Two so that brings a bit relatively more costs for maintenance and breakup season.

Sure.

So yes, no we don't see anything.

Particularly unusual with.

With the margins in Q2 and CBS .

Okay.

I guess on the margin what are you seeing from a pricing perspective.

The North American rig markets.

I think.

Pricing is stabilized there are select areas, where you've got some upward bias, but I would say relative to a year ago, you've definitely got the market more stable and.

And.

I would say more balanced.

Okay.

And then in the Cts segment.

Uh huh.

It was the first quarter in a long time that machine the backlog come down sequentially.

Are you seeing a slowing or a tempering of demand from your customers or is the largest.

A higher consumption level in the second quarter.

And perhaps like an elongation of the.

Superior to actually sign up new orders I think that was mentioned or alluded to in the MD&A.

Yeah. So typically summer time, you tend to get a bit of a breather.

Sanction of.

Summer holidays that sort of thing.

Again, we had a pretty significant ramp up over the past.

Four five quarters.

You can't go up every quarter I think part of it was normal seasonality, where a year ago, we're coming off such a slow period that it was hard not to increase your your backlog you know the other thing as you.

Buildup of backlog you're <unk>.

Delivery time start going out and you lose some bids on delivery as you lose some bids on pricing we certainly.

When you've got a strong backlog youre not going to cut your pricing just to get work.

Bid activity remains strong.

So we see a pretty healthy market there.

So no we haven't noticed any fundamental change in demand.

No.

Okay.

I think that's all for me thanks.

Okay. Thanks, Tim.

Yeah.

Once again, if you have a question. Please press Star then one.

This concludes our question and answer session I'd like to turn the conference back over to Mr. Hallett for any closing remarks.

Thank you.

Everyone for participating in our conference call I Hope you have a great summer and look forward to speaking with you after our third quarter have a nice weekend.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

[music].

Yes.

[music].