Q1 2024 Trican Well Service Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to backend load Services' first quarter 2024 earnings results conference call and webcast.
Speaker Change: 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 Kuykendall Services limited.
Speaker Change: Please go ahead.
Bradley P. D. Fedora: Good morning, Thanks for joining us everyone.
Scott E. Matson: First Scott matching our CFO will give an overview of our quarterly results I will then provide some comments with respect to the corner in the current operating conditions and our views for the outlook.
Speaker Change: The future and then we will open the call for questions. Several members of our executive team are here today in the room and are available to answer any questions that everybody May House I'll now turn the call over to Scott. Thanks, Brad before we begin I'd like to remind everyone that this conference call may contain forward looking statements and other information based on current.
Scott: Patients or results for the company.
Scott: 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 Q1 of 2020 for a number of business risks and uncertainties could cause actual results to differ materially from these forward looking statements and our financial outlook.
Scott: Please refer to our 2023 annual information form for the year ended December 31, 2023 for a more complete description of the business risks and uncertainties facing try Ken the.
Scott: This document is available on our website and on SEDAR.
Scott: During this call we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q1 2024 MD&A.
Scott: Our quarterly results were released after close of market last night and are available both on SEDAR and our website.
Scott: So with that let's move on to our results for the quarter. Most of my comments will draw comparisons to the first quarter of last year, but I'll also provide some commentary about our quarterly activity and our expectations going forward.
Scott: <unk> results for the quarter compared to last year's Q1 were solid but not quite as strong based on moderately reduced activity year over year.
Scott: Of course started a bit slower than we anticipated with a snap of extremely cold weather delaying some of our customers' operations as we started back in earnest in January.
Speaker Change: And with that revenue for the quarter was $271 9 million with adjusted EBITDA of $72 8 million or 27% of revenues and not quite as strong as the $81 6 million of revenues, we generated last year, but still very solid.
Speaker Change: This was mainly a result of activity levels on the Frac side of the business being a little slower due to the start of the year combined with the job mix in a specific customer well designs and programs that we executed during the quarter.
Speaker Change: Adjusted Ebitdas came in at $74 4 million or 27% of revenues to arrive at EBITDA, we add back the effects of cash settled share based compensation recognized in the quarter to more clearly show the results of our operations and remove some of the financial noise associated with changes in our share price as we mark to market. These items.
Speaker Change: On a consolidated basis, we continue to generate positive earnings generating $41 2 million in the quarter, which translates to <unk> <unk> per share basic and <unk> 19 per share on a fully diluted basis.
Speaker Change: <unk> generated free cash flow of $49 9 million during the quarter. Our definition of free cash flow is essentially EBITDA less non discretionary cash expenditures, which include maintenance capital interest current income tax and cash settled stock based comp.
Speaker Change: You can see more details on this in our non-GAAP measures section of the MD&A.
Speaker Change: Capital expenditures for the quarter totaled $15 3 million split between our maintenance capital of $11 5 million and upgrade capital of $3 8 million or upgrade capital was dedicated mainly to the electrification of ancillary frac equipment and ongoing investments to maintain the productive capacity of trike and active equipment.
Speaker Change: During Q1 2024, we deployed our fifth tier four fleet in the second group of electric ancillary equipment into the field and we're extremely happy with the operational and financial performance of this equipment.
Speaker Change: Balance sheet remains in excellent shape, we exited the quarter with positive working capital of approximately 175 million, including cash of $9 3 million.
Speaker Change: As we anticipated our cash position decreased compared to year end. The major factors that contributed were as follows.
Speaker Change: Working capital increased by $74 million due to the uptick in Q1 activity and we would expect the majority of this to unwind as we move through the summer.
Speaker Change: Tax payments were a combined $39 7 million with $36 4 million related to our 2023 tax Bill, which we telegraphed throughout 2023, the remainder related to our ongoing installments for 2020 for.
CIB representative: And CIB funding was $16 7 million in the quarter with our share repurchase program is still an active flight and our dividend payment was $9 3 million.
Speaker Change: With respect to our return of capital strategy, we repurchased and canceled 4.0 million shares under the <unk> program in Q1 of 2024 and subsequent to the quarter, we purchased and canceled an additional one 6 million shares and continue to be active with our buyback program.
Bradley P. D. Fedora: And Brad will provide a bit more color on our CIB strategy a bit later.
Brad: As noted in our press release, the board of directors approved a dividend of four and a half cents per share, reflecting approximately $9 1 million in aggregate spend shareholders.
Speaker Change: The distribution is scheduled to be made on June 28, 2024 to shareholders of record as of the close of business on June 14th 2024, and I would note that the dividends are designated as eligible dividends for Canadian income tax purposes.
Brad: So with that I'll turn things back over to Brad.
Brad: Okay. My comments willing to Q1 and current and forward looking observations and I'll try to keep my comments brief. So we can get to questions. Overall, I think Q1 west went quite well in the context of commodity prices. We have some weather delays in January and had some work delayed into Q2, but that is always the case, there's always weather delays.
Speaker Change: Things are always moving around so I would say overall the quarter went pretty much as expected and we were happy with the outcome. There was we were disappointed that there is pricing pressure in the business today and it never seems to to end with competitors' positioning themselves.
Speaker Change: Trying to fill their boards for the winter et cetera, and typically when the when the pricing game starts.
Speaker Change: We don't participate the equipment has a finite amount of hours and we expect to make a reasonable return on each hour that our equipment is operating and so we will just hunker down and working areas and with customers that we can make a reasonable return and where they value the service that we provide.
Speaker Change: In general I would say cost inflation has basically stopped or is quite muted and in fact, we've actually experienced some cost reductions in certain areas, which has helped mitigate some of the pricing pressure that we're experiencing.
Speaker Change: On the fracturing side were still operating with seven fracturing crews, we have five parked fleet.
Speaker Change: In the first quarter, we commissioned our fifth tier four fleet, which is designed as a high pressure fleets operate primarily primarily in the duvernay and the high pressure areas of the Montney.
Speaker Change: We're still operating about 60% of our total horsepower in comparison to our competitors that are basically operating at capacity and what that means is as the base grows.
Speaker Change: Our uniquely positioned to take advantage of increased activity.
Speaker Change: The equipment that we have parked is ready to go into the field just needs to be crude.
Speaker Change: And as per usual in fracturing operations are focused almost exclusively in the Montney Duvernay and deep basin.
Speaker Change: All of this in our cementing division.
Speaker Change: The spending division continues to operate at essentially 100% utilization of crude equipment and generated great results in the quarter, an indication of our expertise and leading market position in this service line, we generated 10% higher revenue and EBITDAR than we did in Q1 last year and most of that was attributed to our market share in the montney.
Speaker Change: The increases in overall well length that our customers are drilling we completed over 1100 cement jobs in Q1.
Speaker Change: So with 69 different clients and we completed.
Speaker Change: The deepest well in Canada, just over 9000 meters. So we're very proud of our crews and their accomplishments in Q1 and with what is often a difficult quarter to operate with the weather.
Speaker Change: We still have almost 35% market share in their overall basin is about a 50% market share in the Montney and deep basin. So we're looking to build on that certainly and we gravitate towards areas, where we think we can provide the best service and value for our customers and ultimately make the best return for our shareholders.
Speaker Change: Very happy with the performance of.
Speaker Change: This division and we view ourselves as a technical leader with a great customer list and we continue to focus on on this division and we will grow accordingly.
Speaker Change: On the technology side.
Speaker Change: We have made investments in technology, and cementing and art.
Speaker Change: And in our equipment and this is just based on providing better cement blends and more efficient operations.
Speaker Change: To try to reduce things like rig in time.
unknown: And our coil division, we're making good progress in this division we've been focusing on growing our market share as we feel we're not operating at an optimal at an optimal level. We continue to operate only seven coil CRU. So lots of room for growth and we grew our revenue I think 12% year over year in Q1, we've.
Speaker Change: We've recently entered into a strategic partnership with a specialized tool company to grow our market share in the oily areas of the basin that have multilateral well designs and this is a market that we're not currently active in at all so very excited to see how this unfolds over the summer.
Speaker Change: We have great margins in this division, but our overall our scale is still still too small. So we will continue to focus on growing this and provide better returns as this division gets better.
Speaker Change: Just overall outlook.
Speaker Change: We're looking forward to a second quarter that we will believe will be better than previously expected our customers are getting better every year at level loading their drilling and completions activities throughout the year. Some of the Q1 work always bumps into Q2 and in fact, we're now working with our customers to move some of their Q3 work.
Speaker Change: Forward into Q2 to avoid potential water restriction issues caused by drought conditions in certain areas of Western Canada. So we're looking forward to a very very good Q2, and we expect the first half of 2024 will be at least as good as the first half of 2023.
Speaker Change: Closely monitored the water availability issues, which is a key component to our to our to our fracturing operation.
Speaker Change: Areas of the Western Canada have drove conditions and definitely could cause water restrictions issues issues. This summer with potable water.
unknown: Try again.
Speaker Change: Fortunately, we have the largest laboratory and engineering group in Canada, and we've been leveraging this expertise and our proprietary chemical offering to provide our customers with solutions to help alleviate the water issues and the potential restrictions and will continue to work with them and Unfortunately, I think a lot of the customer base having.
Speaker Change: Experienced drought conditions last year and looking forward to maybe more drought conditions. This year have been doing lots of work to plan for water for the summer like building pits.
Speaker Change: Storing water looking at recycle options looking at produced water options. So we don't expect there to be a significant interruption in the summer from water restrictions as I think the industry pretty much as is ahead of the game northeast BC. Fortunately relies heavily on produced water and.
Speaker Change: So that's where a lot of the LNG base truly is happening today overall overall I have to say half of our over half of our customers use non potable water in our operations and.
Speaker Change: And we expect this to increase.
Speaker Change: And Unfortunately, we will also be monitoring forest fire activity throughout BC and Alberta as these could impact access to our field operations and delay work from the summer into the fall and into the winter as you know all of our equipment is on wheels and.
Speaker Change: So there is no there is no risk to the equipment or the people generally but it does it may shutdown roads and restrict access to certain areas of the basin.
Speaker Change: Overall, we expect the second half of 2024 to be good, but not quite as strong as last year and thats, just due to low gas prices and potential water issues.
Speaker Change: And what's looking like maybe some forest fire issues, but still a good that we still expect to have a very good year. Unfortunately natural gas prices have improved significantly over the last month or so and the strip going forward into <unk> into this fall and into 2025 is that very economic levels Montney will continue to be the focal point of activity in the basin.
Duvernay: The Duvernay is building momentum so very fracturing intensive play we participate in the Duvernay now in a fairly significant way and we expect our market share is going to continue to grow.
Speaker Change: Our fleet of our fleet of equipment and certainly our fifth tier four fleet, which is designed almost specifically for the duvernay will allow us to outperform our competitors in this part of the world.
Speaker Change: Our corporate priorities remain the same we want to build a resilient sustainable differentiated company with technology invest in high growth opportunities and upgrade our existing equipment to make sure that we have a value added product offering for our customers and then ultimately provide a consistent return of capital to our shareholders.
Speaker Change: And even though this year you might be a little bit choppy with the water in the forest fires.
Speaker Change: Still expected in the next few years to be very attractive we view Western Canada is a great place to grow our business over the long term.
Speaker Change: We believe Canada will play an increasingly important role in providing natural gas to the world as the as the world starts to electrify its infrastructure of course that electricity has to come from somewhere and basically Canadian natural gas is the cleanest form of energy.
Speaker Change: That we can use to generate electricity.
Speaker Change: We expect LNG Ellen G based drilling to remain very active we're still expecting first cargos of natural gas to leap the west coast. In early 2025. This provides for the first time ever a very stable foundation of activity in the basin that we've never had before so that allows us to look at our business buried.
Speaker Change: Differently, we're starting to make three and five year plans now that in previous cycles, you wouldn't even bother with because of the volatility it seems like the industry now is much more predictable.
Speaker Change: The spending is much more thoughtful.
Speaker Change: So the level loading throughout the quarters has improved significantly and it's a very different business today on the 26 years I've been operating in this business of never felt this good about the next five years, our customers are still spending only about 50% of their free cash flow on drilling and completions and their balance sheets are in great shape.
Speaker Change: And so we think that'll be a foundation of <unk>.
Speaker Change: Very predictable thoughtful activity going forward, we have a very clean balance sheet still we still operating with slight cash balance that allows us to execute on any strategic plan that we develop and take advantage of any volatility that may happen in the marketplace and as we've talked about before the logistics system in Western Canada is basically.
NBC: At capacity in certain areas. So we're still looking at making strategic investments in logistics value chain, particularly NBC to create more efficient operations and a more reliable supply of sand for our customers.
Speaker Change:
Speaker Change: Frac intensity on a per well basis is still growing we're still seeing large sand volumes 50 to 100 railcars of sand per well is the norm a few years ago. We were five 6 million tons of sand per year and this year, we expect to be well over 8 million tonnes. So when you think about.
Speaker Change: How to make profits in this.
Speaker Change: In this sector and certainly you need to get control of the logistics system and your ability to make or lose money.
Speaker Change: Based on how well you you execute your logistics is fairly significant so for US we looked at this as a great opportunity to two.
Us: To expand our margins by getting getting a better control of our logistics system and we still have we still have the most efficient fracturing fleet in Canada.
Speaker Change: We spent the last few years developing our tier four pumps, but we're onto the next.
Speaker Change: Next thing, we continue to differentiate our offering and what we've been focused on in the last year as the electric ancillary equipment that goes along with those tier four pumps or the only pumping company in Canada with those electric what we call back sites.
Speaker Change: <unk> been very well received by customers.
Speaker Change: Demand for this equipment well exceed that supply and we're very we're very happy with the performance of the equipment, so far particularly in the winter. When you can have a lot of issues with hydraulic hoses.
Speaker Change: Things like that so the electric equipment operates very well and in various weather conditions.
Speaker Change: We are operating two sets of this equipment today and we're in the process of building our third for activation. This fall when you combine the electric equipment with tier four pumps, we're getting up to 90% natural gas substitution on location. So obviously our customers are excited because of the significant reduction in fuel costs and emissions.
Speaker Change: The equipment's very reliable.
Speaker Change: Typically the conventional blenders the biggest source of fracturing delays, our nonproductive time on location in our electric Blender has been performing.
Speaker Change: Tastic in Tibet to better.
Speaker Change: Defend off from shutdowns, we've developed battery technology that even if we got natural gas interruptions into the electricity generation. We can operate that equipment off batteries. So very very significant reduction in downtime, we expect electric equipment will eventually be the standardized <unk>.
Speaker Change: Technology in Canada, there's certain logistical issues with the remoteness of a lot of our operations efforts trying to work through.
Speaker Change: Easier to do in the U S.
Speaker Change: But we're we're taking advantage of our experience with this electric gear to get better informed understand how it performs and so that we can stay ahead of our competitors from a technology perspective.
Speaker Change: Lastly, I will just touch on our return of capital strategy, we generate significant free cash flow and maintain a clean balance sheet, we subscribe to a diversified return of capital through a combination of base level of dividend in the CIB. When it represents a good investment for our shareholders in the context of all of our other investment.
CIB representative: Opportunities and so we've been very active in the CIB for the last few years, we view that as a great investments, we have no intentions of changing that anytime soon but.
CIB representative: As an oilfield services company, we experienced fairly significant swings in our working capital and cash balance just due to the timing of when you receive your accounts receivables.
CIB representative: So.
Speaker Change: Between Capex dividends and the CIB, we expect to spend more than 100% of our free cash flow in 2024 and have no intentions of building any cash and actually expect to exit this year with basically zero cash to maybe maybe a little bit of that a little bit of cash, but basically cash debt neutral. So we're going to be very.
CIB speaker: Active <unk> in CIB over the summer, we've repurchased and canceled below 40% of the program and we fully intend to fully execute on this program by by the end of September early October.
Speaker Change: And as a reminder, we.
Speaker Change: Last year, we repurchased just under 23 million shares between the <unk> and the dividend, we returned about $113 million to shareholders. So.
Speaker Change: We value that returning capital to shareholders we understand.
Speaker Change: Come and important ingredients for any successful company operating in this sector and we certainly think we will maintain our leading position of having significant returns to shareholders. Both in the form of in CIB and and the dividend.
Speaker Change: And lastly, I'll just reminder, we did declare our Q2 dividend it'll be payable at the end of June I think with a record date of mid June I think June 14th to be exact and as we discussed on our last call. We increased our dividend from four cents a share four five cents a share to account for the reduction in shares.
Speaker Change: Resulting from the NCI, but last year, we expect to keep our annual dividend payout of approximately $35 million consistent from year to year, and we will likely raise the dividend per share in accordance with the reduction of shares pursuant to any and CIB activity. So we're very very fortunate to be in the position that we're in with <unk>.
Speaker Change: At Canada for the next three to five years and see nothing but.
Speaker Change: Positive signs and we'll continue to execute and provide returns to our shareholders.
Operator: So I'll stop there operator, and we can take questions.
Operator: Thank you.
Operator: So join the question queue you May Press Star then one on your telephone keypad.
Operator: Now as you may recall.
Operator: Thanks, Peter Kwon, please pickup your handset before.
Peter Kwon: Any keane.
Peter Kwon: So the Jai a question. Please press Star then.
Operator: Two.
Operator: First question comes from Aaron Macneil of TD Cowen. Please go ahead.
Operator: Good morning, Thanks for taking my questions Brad.
Operator: Brad you mentioned the first half.
Brad: I would look at least as good as the first half of 'twenty three I'm. Just wondering if you could give us a sense of the order of magnitude.
Brad: In terms of how much revenue was deferred from Q1 into Q2 and then how much revenue do you think will be pulled from Q3 into Q2.
Speaker Change: Thank you doesn't have to be exact and just sort of looking for.
Speaker Change: Paul Park.
Speaker Change: Okay.
Brad: And I don't actually know those numbers off.
Brad: Off hand, but it's.
Paul Park: Be like $10 million to $20 million is sort of moving around from quarter to quarter.
Brad: Gotcha.
Brad: That ballpark the same thing from Q3 into Q2.
Brad: So nothing major but in a quarter that historically has been.
Brad: Sort of a thorn in the industry side.
Speaker Change: It's nice to now have a quarter that doesn't only generate EBITDA and free cash flow, but actually earnings.
Speaker Change: So when we look at the first half of this year compared to last year, it looks looks to be as good.
Speaker Change: Makes sense and then sort of a bigger picture question you know just given your comments on the long term visibility of the business.
Speaker Change: Is there a case to be made to either look at selling frac assets to buyers outside of Canada or cannibalizing assets over time to reduce your capacity or do you see a scenario, where your idle assets or eventually utilized.
Speaker Change: We are doing both.
Speaker Change:
Speaker Change: And we focus on older technology that we don't take off rate sufficiently.
Speaker Change: And we only sell outside of the basin, obviously that we don't want to compete against our own assets six months from now.
Speaker Change: You bet.
Speaker Change: As with any industry that technology changes and so.
Brad: 'twenty to.
Speaker Change: $22 50 horsepower pumps or even 2500 horsepower pumps that don't have sort of a more durable power and they are really not appropriate for the basin anymore and so I think we've.
This company: This company over the last sort of five to seven years has done a great job of of getting rid of obsolete assets into areas, where they can.
This company: They can still operate so.
This company: We talk about fleets.
Speaker Change: That's as we all know Thats, a general term, but yes, we've I think we've done a very good job of making sure that the fleet that we do keep us current and up to date and is appropriate for the kind of work that we're doing.
Speaker Change: That's fair to assume there is a bit more wood to chop, there or how should we think about that.
Speaker Change: There is always there is always refinements and equipment, but I think we're not going to release these kind of details but.
Speaker Change: I think you'd be surprised at how much how much.
Speaker Change: How much obsolete equipment. This company has sold over the last five to seven years.
Brad: Makes sense, thanks, Brad I'll turn it over.
Brad: Once again, if you have a question please press star.
Brad: Everyone.
Brad: Next question comes from Steve.
Steve: Stifel. Please go ahead.
Steve: Hi, good morning, all so thinking about the year over year changes it sounds like the first half should be pretty flat.
Steve: I'm under the assumption you know the second half of the year is may be 5% lower.
Steve: From an EBITDA standpoint that kind of translates into you know a net year over year decline in EBITDA, you know in that 2% to 3% range is that kind of how we should be thinking about it.
Brad: Thus.
Brad: <unk>.
Speaker Change: So it's a tough question.
Speaker Change: Just because of the potential impacts of water and fires.
Speaker Change: If we weren't dealing with those issues I would say absolutely.
Speaker Change: That's probably a pretty safe assumption for you to make.
Speaker Change: But given <unk>.
Speaker Change: Given sort of the unknowns around.
Speaker Change: Restricted access to certain areas.
Speaker Change: With firefighting just to stay out of the way of firefighters.
Speaker Change: Not sure how the summer is going to unfold, so I'm, giving you a long answer call but.
Speaker Change: I'm not.
Speaker Change: I think you can make your own estimates I don't think I want to we want to guide you on those quite yet.
Brad: Yeah fair enough that makes total sense.
Brad: Just wanted to come back to your earlier comments on pricing just to clarify so market pricing has decreased modestly, but you haven't seen a reduction.
Brad: And your own equipment is that fair.
Speaker Change: No no no. We've we've experienced pricing pressure I would say much less significantly than our peers.
Speaker Change:
Speaker Change #100: But there is we've had savings from our suppliers.
Speaker Change #102: We get better at our at our jobs every day as well so.
Speaker Change: We've seen we've seen those that pricing pressure, we've been able to maintain margins.
Speaker Change: But.
Speaker Change: I think for the most part pricing has stabilized.
Brad: Got it.
Speaker Change: And then I think were all you know expecting a lot of activity tailwind into 2025 that probably requires more frac spreads but you've.
Speaker Change: You've had some competitors add incremental spreads at a lower price point.
Brad: Do you think about.
Speaker Change: Mitigating that going forward in a potential scenario, where just given your price discipline.
Speaker Change: Other key others keep jumping you are in line in terms of fleet additions.
Speaker Change: Yes, I mean, that's definitely a concern I mean as you know it's a closed system.
Speaker Change: Or a zero sum game.
Speaker Change: There's only so much work to go round.
Speaker Change: <unk>.
Speaker Change: We're just very thoughtful about where we put our efforts and the type of customers we want to work with.
Speaker Change: And not not surprisingly those customers are typically.
Speaker Change: Looking for efficiency and value and don't see the.
Speaker Change #101: The the bid price is the most important component to their operation.
Speaker Change #105: So you can run around chasing bids and cutting prices and you have that customer for a while.
Speaker Change #101: We typically like to.
Speaker Change #106: Have long term.
Speaker Change: Symbiotic relationships with our customer base.
Speaker Change: That's proven by.
Speaker Change: Our top 10 customers, which are basically been with us for.
Speaker Change #107: 10, plus years, so we pick our spots where we are at the end of the day, we don't care about market share we care about returns.
Speaker Change: And.
Speaker Change: We will govern ourselves accordingly.
Speaker Change: Two making sure that we're in.
Speaker Change #108: Providing good service to our customers, but also in return.
Speaker Change #103: We want we want customers that want us to make a return for our shareholders as well so.
Speaker Change: We pick our spots there is lots of customers.
Speaker Change #104: We're happy to compete from a operations performance basis with any competitor and typically have done quite well.
Speaker Change #104: That's the criteria.
Speaker Change: So we'll figure it out.
Speaker Change: Got it that's all for me, Thanks, I'll turn it back.
Speaker Change: This concludes our question and answer your question I would now like to turn the conference back over to Stefano Rossi for any closing remarks. Please go ahead.
Stefano Rossi: Okay. Thanks, everyone. We appreciate your time the management team will be generally available throughout today and tomorrow. If you have any follow up questions. Thanks for calling in.
Stefano Rossi: This concludes today's conference call you may disconnect your lines. Thank.
Stefano Rossi: Thank you for participating have a pleasant day.
Stefano Rossi: Okay.
Stefano Rossi: Okay.
Stefano Rossi: Uh huh.
Stefano Rossi: [music].
Stefano Rossi: Okay.
Stefano Rossi: Yes.
Stefano Rossi: [music].
Stefano Rossi: Okay.
Stefano Rossi: [music].