Total Energy Services Inc. (OTC:TOTZF) Q1 2019 Results Earnings Conference Call May 10, 2019 11:00 AM ET
Daniel Halyk - President and CEO
Yuliya Gorbach - VP, Finance and CFO
Conference Call Participants
John Bereznicki - Canaccord Genuity
Daine Biluk - CIBC World Markets
Thank you for standing by. This is the conference operator. Welcome to the Total Energy Services, Inc. First Quarter 2019 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Daniel Halyk, President and CEO. Please go ahead, sir.
Thank you. Good morning and welcome to Total Energy Services first quarter 2019 conference call. Present with me this morning is Yuliya Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended March 31, 2019, and then provide an outlook for our business, and open up the phone lines for questions.
Yuliya, please proceed.
Thank you, Dan. During the course of this conference call, information may be provided containing forward-looking information concerning Total's projected operating results, anticipated capital expenditure trends, and projected drilling activity in the oil and gas industry. Actual events or results may differ materially from those reflected in Total's forward-looking statements due to a number of risks, uncertainties, and other factors affecting Total's businesses and the oil and gas service industry, in general.
These risks, uncertainties, and other factors are described under the heading Risk Factors and elsewhere in Total's most recently filed Annual Information Form and other documents filed with Canadian Provincial Securities Authorities that are available to the public at www.sedar.com.
Our discussions during this conference call are qualified with reference to 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 Energy's financial results for the three months ended March 31st, 2019 improved thus compared with Q1 2018 and reflects continued growth in Compression and Process Services segment and relatively stable industry conditions in the United States and Australia. Partial offset by significant decline in drilling and completion activity in Canada.
Consolidated revenues for the first quarter of 2019 were $222 million as compared to $205 million in the first quarter of 2018. Geographically, 43% of first quarter revenue was generated in Canada, 34% in United States and 23% in Australia as compared to 51% in Canada, 33% in the United States and 16% in Australia during the first quarter of 2018.
By segment, Compression and Process Services contributed 54% of 2019 first quarter consolidated revenues, Contract Drilling Services 21%, Well Servicing 17%, and Rentals and Transportation Services 8%. First quarter revenue, for the Contract Drilling Services segment was $45.7 million or $23,681 per spud during these offering days.
Revenue per spud during these days in fees 13.6% compared to Q1 2018 due primarily to the mix of equipment operating and increased drilling in the United States. Segment EBITDA was $5.7 million or 12.4% of revenue in the first quarter of 2019 compared to EBITDA of $8.7 million or 14.3% of revenue in the first quarter of 2018.
The CDS segment recorded 1930 operating days or 19% utilization during the first quarter of 2019 as compared to 2924 days or 28% utilization in the first quarter of 2018 which resulted in $2.6 million quarterly operating loss in 2019 as compared $0.5 million of operating income in 2018. The primary reason for weaker CDS segment quarterly results was a 44% year-over-year decrease in Canadian operating days.
Despite the substantial decrease in operating days, Canadian pricing was stable. In the United States, the combination of high rig rates and appreciation of U.S. dollar was somewhat offset by reduced activity levels. During the quarter, this segment continued to consolidate U.S. operations by reallocating one rig from Colorado to West Texas at a cost of $0.9 million.
Utilization in Australia increased due to additional rig operating during Q1 of 2019 as compared to the same period in 2019. Revenue per operating day in Australia was lower in Q1 2019 as compared to Q1 of 2018 due to a combination of lower average rig rates and lower Canadian dollar revenue.
The weakening of Australian dollar relative to Canadian dollar over the past year also impacted revenue from Australian operations. Revenue from our rental and transportation segment for the first quarter of 2019 was $18.4 million as compared to $22.3 million in Q1 of 2018.
Segment EBITDA for the first quarter of 2019 was $3 million or 16.4% of revenue as compared to EBITDA of $4.3 million or 19.5% of revenue in the first quarter of 2018. The rental equipment fees decreased by 3% as compared to Q1 of 2018 as a result of equipment disposal. Utilization for the first quarter of 2019 was 23% as compared to 27% in Q1 of 2018.
Year-over-year decline in the first quarter RTS revenue was due to a 36% decrease in Canadian revenue resulting from the substantial year-over-year decline in the Canadian industry activity. Partial offsetting this decrease was 76% year-over-year increase in U.S. revenues arising from improved pricing and higher utilization over a larger equipment fleet.
Rental equipment utilization in Canada during the first quarter of 2019 was 15% lower as compared with the first quarter of 2018 on the rental fleet that decreased by 470 pieces or 5%. Revenue per utilized piece of equipment in Canada during Q1 2019 decreased 20% as compared to the first quarter of 2018. This is primarily due to equipment mix operating and weaker pricing.
The earlier segment U.S. operations continued to grow in the first quarter of 2019. Compared to the first quarter of 2018 utilization in the United States increased 5% and revenue per utilized piece increased by 38%. Additionally, rental fleet increased by 130 pieces or 22% to 730 pieces at March 31st, 2019 compared to March 31st, 2018 with the reallocation underutilized equipment from Canada and targeted new equipment additions.
Within our Compression and Process Services segment first quarter revenue for 2019 increased 42% compared to the same period in 2018. This increase was due primarily to high sales activity in all markets particularly in the United States and increased throughput following a 30% increase in Canadian fabrication capacity in Q4 of 2018. This segment exited first quarter of 2019 with the fabrication field backlog over $159.8 million as compared to $207 million at March 31st, 2019 and $222 million at December 31st, 2018.
Utilization or compression rental fleet was 68% in Q1 of 2019 as compared to 53% in Q1 of 2019. Segment EBITDA doubled to $15.5 million or 12.8% of revenue for the first quarter of 2019 compared to $7.8 million on 9.1% of revenue in Q1 of 2018.
First quarter revenue for our Well Servicing segment was $36.8 million which was consistent with the same period in 2019. Quarterly EBITDA was $8.2 million or 22.2% of revenue as compared to $9.1 million or 24.8% of revenue for the first quarter of 2019.
Negatively impacting EBITDA in our well servicing segment in Q1 of 2019 relative to the comparable period in 2018 was lower activity in the United States as a result of labor shortages and cold weather conditions, depreciation in Australian dollar and moderately lower pricing and less camp and other ancillary revenue in Australia.
Total service hours for the fourth quarter -- for the first quarter were 42,649 of which 49% were in Canada, 42% in Australia and 9% in the United States. These compares to 41,114 hours during the first quarter of 2018 of which 46% were in Canada, 42% in Australia and 12% in the United States. Consolidated gross margin for the first quarter of 2019 was $42 million or 18.9% of revenue as compared to $39.6 million on 19.3% of revenue in the first quarter of 2018.
Consolidated cashflow before changes in non-cash working capital items was $28.5 million for the first quarter of 2019 as compared to $21.1 million in the first quarter of 2018. This increase was due primarily to increased operating income in Q1 of 2019 as compared to Q1 of 2018 and timing of the income tax payments and recoveries.
Cash provided by operating activities for the first quarter of 2019 with $50.2 million a 120% increase from $22.8 million of cash generated in Q1 of 2018. Consolidated EBITDA for the first quarter of 2019 was $29.4 million a 6% increase from $27.7 million of EBITDA realized in Q1 of 2018.
Total Energy's generated first quarter net income attributable to shareholders of $4.8 million or $0.10 per share on a diluted basis as compared to $3.2 million or $0.07 per share on a diluted basis in the first quarter of 2018.
Total Energy's financial conditions remain strong with $117.9 million or positive working capital including $50.3 million of cash and marketable securities at March 31st, 2019.
During the Q1 of 2019, Total Energy paid $2.8 million of dividends and repurchased $0.8 million dollars of common shares. Total debt was $274.9 million at March 31st, 2019, a $10.9 million reduction from December 31st, 2018.
In addition to regular monthly principal payments of $57.9 million of mortgage debt during the first quarter of 2019 Total Energy repaid $10 million of bank debt assumed with acquisition of Savanna. At March 31st, 2019, $217 million was drawn on $295 million of available revolving bank credit facilities.
Our bank covenants consist of maximum senior debt to trailing 12 months, bank-defined EBITDA of 3 times and minimum bank-defined EBITDA to interest expense of 3 times. At March 31st, 2019, company's senior bank debt to bank EBITDA ratio was 1.61 and the bank interest coverage ratio was 7.34 times.
Thank you, Yuliya. The resiliency of our business model was evident during the first quarter as our operational and geographic diversification allowed us to weather continued challenging industry conditions in Canada. The decline in global oil prices in late 2018 tempered industry sentiment going into 2019 particularly in Canada where the differential between global oil prices and Canadian prices increased substantially due to a lack of pipeline and other export capacity.
In response to the widening differential, a mandatory oil production curtailment was implemented by the Alberta government, while the Canadian price discount has narrowed considerably since the production curtailment came into effect. 2019 first quarter Canadian drilling activity declined by approximately 30% compared to 2018. This lower activity impacted all of our business segments particularly our contract drilling and rental and transportation segments.
Based on customer feedback, we estimate that our first quarter Canadian active drilling rig count declined by at least 15 rigs, as a result of the oil production curtailment. The challenging environment in Canada as evidenced by our revenue mix where for the first time in our 23-year history, a majority of consolidated first quarter revenue specifically 57% was generated outside of Canada. This geographic shift is due in part to our strategy over the past several quarters to relocate underutilized equipment and achieve critical mass in all areas of operation.
While we have spent considerable amounts to execute this strategy including $1.3 million during the first quarter, we believe it has and will continue to pay dividends going forward.
For example, our RTS segment has seen strong demand in the United States for quality equipment and service, and continues to grow its market share by displacing third party equipment with underutilized equipment relocated from Canada and targeted investment in new equipment.
Visibility in our Canadian drilling business is limited. Although, this business continues to operate efficiently and is well positioned to capitalize on any increase in Canadian drilling activity.
Our U.S. drilling business continue to consolidate operations in West Texas during the first quarter with efficiencies of scale and increased pricing as legacy contracts expire. We expect to see improved financial results from this business over the course of 2019 provided industry conditions remain stable.
Our rental and transportation services business continues to migrate south. The relocation of underutilized equipment from Canada to the United States continues as does efforts to further reduce our fixed cost structure in Canada.
Our compression and process equipment segment continue to perform well during the first quarter, while a lower conversion of quotes to orders and increased production throughput during the first quarter contributed to a decline in the quarter end sales backlog.
Quotation activity was consistent. We suspect that the precipitous decline in oil prices in late Q4 2018, put a chill on customers pulling the trigger on compression of process orders and the decline in our backlog appears consistent with industry. As such provided the recovery and stabilization of oil prices that we have seen over the past few months holds, we do expect to see the conversion of bids to orders normalize.
With additional compression production capacity successfully coming online in late 2018 which makes us more competitive on delivery times, we recently increased our sales presence in the United States as we look to continue to grow our share of that market. Our well servicing business continues to perform well particularly in Canada where industry conditions are challenging.
In conclusion, until such time as the prospects for Canada improve, our focus for 2019 will remain similar to 2018 that being capital discipline, international growth and the strategic relocation of underutilized equipment.
I would like to take this opportunity to invite all shareholders and other interested persons to our Annual Shareholders Meeting that will commence at 10 a.m. on Wednesday May 15th at the Calgary Petroleum Club.
I would now like to open up the phone lines for any questions.
Our first question is from John Bereznicki with Canaccord Genuity. Please go ahead, sir.
Yes. Thanks. Morning, everybody.
Good morning, Mr. Bereznicki.
Australia, looks like you may be rolled on to some new contracts in the quarter. Is it kind of indicative of what we're going to see going forward in terms of pricing and margins in that country or is something else at play as well?
I think there's a little bit of the rollover kind of mid last year of some original contracts into spot. What I would say is the spot market over the past few quarters has strengthened and so I think you'll see relative stability to slight upward bias coming out of Australia going forward.
Got it. Alright.
I would say definitely some legacy contracts expired kind of midyear last year that were kind of original new build and rolled off in this spot at the time.
Great. Appreciate the color. Compression rental fleet, looks like the fleet shrunk a bit in the first quarter sequentially. Is there a market trend to read into that or how would you characterize it?
No. I think that is typical in that business. At times, you have customers exercised purchase options which is kind of the normal course of business which is why we include the gain on sale of PP&E as normally EBITDA. That would be a normal exercise of customer purchase options which you know those things are hard to predict but nothing unusual in the quarter.
Got it. Got it. And then, just lastly in well servicing looks like Canada is contributing to the bottom line. Could you talk a bit about what's going on there and how you got there in the quarter?
Well, first of all, they've done a fantastic job of getting their cost structure in line to the realities of Canada. And you know they're executing well on the work they get and definitely you know we're seeing pretty stop strong utilization broad customer base definitely abandonment work is a big part of that. But the bottom line is they're running a good efficient business doing a good job for their customer and growing their market share so we're quite pleased with how they're executing.
Good stuff. Appreciate that. And I'll turn it back to the queue. Thank you.
Our next question is from Daine Biluk with CIBC World Markets. Please go ahead.
Morning, Dan. Morning, Yuliya.
So you guys kind of already touched on it on your opening comments, but I was just curious on some of the more softer conversions from mortar inquiries to firm orders on compression. Was that largely with this in Canada or how much of that was seen in the U.S. and international?
I think the Canadian market definitely we saw bid activity was normal and healthy, but definitely you saw -- I would say the most chilled environment you know fairly I think predictable when you think about the -- the up low out in differentials in late Q4. On the international side outside of the United States that's a pretty lumpy market. And so you know I wouldn't make any generalizations typically when we're competing in that market it's for usually larger orders that come in lumps.
And so I wouldn't read anything into kind of into the conversion to from orders or bids to sales there. Again, it's a fairly lumpy conversion process there at the best of times. I think the U.S. to a lesser extent but similar to Canada was there was a bit of a chill. The flip side is our market share in that huge market is small.
And we see that as our primary market of growth going forward and as I commented post quarter end, we've increased our sales presence in the market in part because now with some capacity additions that we've brought on stream in late '18 we're able to compete better on completion times.
You know one of the reasons we added our -- while we were running at full capacity certainly in Canada and the Canadian operations are definitely increasingly supporting our U.S. sales. And you've got to be competitive on delivery times if you want to compete in that market. And we needed to increase our capacity which we did and now we're going to you know increase our sales presence to try and increase our market share -- here in the United States.
So, it's kind of come together on plan and again with some stabilization in commodity prices one would expect to see your quoting activity to firm orders kind of normalize here but time will tell.
Got you. Okay, that's helpful and makes sense. I guess maybe just as a follow on for the increased sales presence how should we be thinking about that. Is that just more increasing the size or would that be an expansion to different regions or basins in the U.S.?
I think more increasing our marketing capacity within markets that we're currently competing in that we believe we can gain some good market share.
Got you. Okay. Makes sense. I guess then shifting gears. Can you give a bit more color and some of the consolidation -- in the U.S. platform? Was that purely just relocating the one rig from Colorado to Texas or is there any facility closures in that as well?
No. That was the contract came up on a rig and rather than continue to operate in Colorado, we relocated it to Texas where it's gone to work.
Sorry, that was just a function of you seeing better demand pull in Texas or was that going to a dedicated client there at all?
Well, it went to a client. But our thesis is we need to consolidate operations when given the opportunity you know spreading a small number of rigs over a large geographic area is just not efficient operationally and so we're not going to pull rigs from customers that are under contract but as contracts come up and everything else being equal our bias is to concentrate. And then once we've got a good profitable core area, we'll look to grow off of that.
And so, this is part of the -- I would say the restructuring of the U.S. drilling business when we took over Savanna it's been about 18 months. June, it will be two years. You know they had rigs all over. We're very active in '13 '14, had a bunch of rigs go down located all over you know the U.S. and many different states paying for storage costs. And supervision of rigs right from the Marcellus down to Colorado, Texas, Oklahoma, Kansas.
So we've spent the last two years taking inventory and concentrating and so now we're down to really West Texas and we still have one rig actively operating in Colorado, but we've done a lot to basically rebuild and refocus management down there and we've done that while generally maintaining keeping the rigs operating which is challenging when you're changing people and moving things around, you've got to maintain a core operation, so I'm quite pleased with how they stick handle. We've also seen a fairly significant turnover in customer base.
Again, we inherited a bunch of legacy contracts that were signed in when things are tough. We honored those contracts, but the pricing certainly was not sustainable and again we're pretty much getting through that. And you're seeing it in the revenue per operating day continued to trend up and so we're progressing on the strategy of getting that that business profitable pretax which is our ultimate goal and I don't see any reason if the current industry conditions continue that we can't get there.
Got you. Okay. That's very helpful. That's a good color. And then, last one for me. Just thinking on the M&A front. I mean obviously the operating environment in Canada is pretty challenging right now and with that in mind have you seen one, an increase in the number of smaller competitors approach you to take them out; and two, has the valuation they're placing on their businesses come down at all so point where some of those deals might be more attractive.
Certainly, there's a lot of -- there's a lot of chatter. There's a lot of deal flow. If you look at the -- last Ritchie Brother auction in Edmonton. I think it was the largest auction Ritchie Brothers ever had. You're seeing capitulation. What I would say is we're pretty selective on acquisitions asset quality is our primary concern. And then, we get to valuation.
In most cases the quality of the asset base doesn't pass our standard because really our perspective on and on acquisitions and candidates is kind of two things, we can do with that. One, we can sit on it and wait, but we've got a pretty high-quality asset base in Canada. So, we're not all that inclined to unless it's really, really attractive from a valuation perspective, more importantly and probably more of our focus is to if we can acquire quality assets at a reasonable price relocate them to the U.S.
Got you. That is very helpful. Thank you, guys. I'll turn the call back.
There are no further questions registered at this time. I would like to turn the conference back over to Daniel Halyk for any closing remarks.
Thank you. Well, thank you for participating in our conference call and look forward to seeing some of you at our annual shareholders meeting next week. And until then, we'll speak with you at our second quarter conference call. Thanks, and have a good weekend.
This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.