Total Energy Services Inc . (TSX:TOT) (TOTZF) and Precision Drilling (NYSE:PDS) Corporation have released their fourth-quarter results, highlighting a year of financial strength and strategic acquisitions. Total Energy reported record annual EBITDA and cash flow, while Precision Drilling provided updates on its recent acquisition of Saxon Energy Services Australia and its strategy for growth in the Australian market. Both companies emphasized their focus on share buybacks and capital allocation for the upcoming year.
Key Takeaways
- Total Energy Services Inc. announced record annual EBITDA and cash flow.
- Consolidated revenue for Total Energy remained consistent year-over-year in Q4, with a 26% increase in EBITDA.
- Precision Drilling doubled its rig count in Australia following the acquisition of Saxon Energy Services.
- Both companies are focusing on share buybacks and capital allocation for 2024.
- Total Energy reduced bank debt by $10.5 million in Q4 and has zero net debt.
Company Outlook
- Total Energy plans a $46.5 million capital expenditure budget for 2024, targeting operational maintenance and growth opportunities.
- Precision Drilling aims to increase its presence in Australia and expects the Saxon acquisition to be accretive.
Bearish Highlights
- Precision Drilling noted a decrease in Canadian horsepower on rent.
- The Canadian well servicing market remains competitive with no expected significant consolidation in the near term.
Bullish Highlights
- Total Energy's Compression Process Servicing segment was a significant contributor to increased revenue and EBITDA.
- Precision Drilling expects to grow its Australian business by focusing on deeper gas and oil basins.
Misses
- Precision Drilling does not anticipate significant pricing gains from the Saxon acquisition.
- No new units for the rental fleet will be built on speculation.
Q&A Highlights
- Precision Drilling discussed its strategy for the Australian market, focusing on heavier rigs and potential upgrade opportunities.
- The company emphasized the integration of Saxon Energy Services and the realization of synergies.
- Precision Drilling expects some migration of bigger rigs from gas to oil in Canada but provided no specific forecasts.
In summary, Total Energy Services Inc. and Precision Drilling are both poised to maintain their financial strength and explore growth opportunities in the year ahead. Total Energy's strong financial position and Precision Drilling's strategic acquisition in Australia are key factors in their optimistic outlook for 2024.
Full transcript - None (TOTZF) Q4 2023:
Operator: Thank you for standing by. This is the conference operator. Welcome to Total Energy's Fourth Quarter Results Conference Call and Webcast. As a reminder, all participants are in a 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 of Total Energy Services Inc. Please go ahead, sir.
Daniel Halyk: Thank you, and good morning, everyone. Welcome to Total's fourth quarter 2023 conference call. Present with me 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 December 31, 2023. We will then provide an outlook for our business and open up the phone lines for any questions. Yuliya, please proceed.
Yuliya Gorbach: 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 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.sedarplus.ca. 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 December 31, 2023, reflect continued stable industry conditions. For the year, Total Energy generated record annual EBITDA and cash flow. Adjusting for $26.8 million of nonrecurring income tax and related interest and penalties, recorded in the fourth quarter of 2023, following the court ruling upholding reassessments related to the company's 2009 income trust conversion, net income for 2023 also represents a record. Fourth quarter consolidated revenue was consistent with Q4 2022, while EBITDA increased by 26% as a result of modestly improved pricing, in part arising from equipment upgrades and the moderation of cost inflation, as global supply chain challenges continue to ease. Our CDS segment was the largest contributor to the year-over-year increase in the fourth quarter revenue and EBITDA. Geographically, 54% of fourth quarter revenue was generated in Canada, 36% in the United States and 10% in Australia as compared to the fourth quarter of 2022, when 42% of consolidated revenue was generated in Canada, 46% in the United States and 12% in Australia. By business segment, Compression Process Servicing generated 45% of fourth quarter consolidated revenue, followed by Contract Drilling Services at 35%, Well Servicing at 11% and Rentals and Transportation at 9%. In comparison, for the fourth quarter of 2022, the CPS segment contributed 44% of consolidated revenue. Contract Drilling Services, 33%, Well Servicing 14% and the RTS segment contributed to 9%. Fourth quarter consolidated gross margin was 27% as compared to the prior year at 23%. Margin improvement in our CDS, RTS and CPS segments offset weakness in the Well Servicing segment. Relatively stable drilling activity in Canada and Australia, offset a decline in U.S. activity and resulted in consistent operating days in the fourth quarter of 2023 compared to Q4 2022. Price increases and the mix of equipment operating contributed to an 8% increase in revenue per operating day. This resulted in an 8% year-over-year increase in the fourth quarter CDS segment revenue and a 33% increase in segment EBITDA. In Canada, market gains were primary reasons for 19% year-over-year increase in the fourth quarter operating days. Price increases in part due to rig upgrades, resulted in a 10% year-over-year increase in the fourth quarter Canadian drilling revenue per day, which in turn gave rise to a 31% year-over-year increase in Canadian drilling revenue. In the United States, fourth quarter revenue declined by 44%, as lower U.S. drilling activity and the transfer of one triple drilling rig to Canada contributed to a 48% decrease in operating days. The decrease in operating days was partially offset by an 8% increase in revenue per operating day. In Australia, operating days increased as one drilling rig returned to service in October, following its recertification and upgrade. Increased operating days contributed combined with 14% increase in revenue per operating day, arising primarily from rig upgrades resulted in a 20% year-over-year increase in fourth quarter Australian drilling revenue. Partially offsetting the positive impact of higher day rates and operating days was the weakening Australian dollar relative to Canadian and U.S. dollars. Moving to our RTS segment, the deferral of several projects in Canada offset market share gains in the United States and resulted in a 2% year-over-year decrease in fourth quarter segment revenue. Despite lower revenue, fourth quarter EBITDA and EBITDA margin increased 12% and 13%, respectively, as compared to 2022, due primarily to improved pricing and low equipment reactivation cost. Fourth quarter revenue in total CPS segment increased by 2% as compared to 2022, driven by continued strength in U.S. fabrication sales, increased parts and service activity and improved utilization of Canadian rental fleet. Fourth quarter EBITDA and EBITDA margin increased 31% and 36%, respectively, as compared to 2022, due primarily to improved fabrication sales margins. The year-end fabrication sales backlog decreased to $162.8 million compared to the $219.5 million backlog at December 31, 2022. Sequentially, the quarter end backlog increased by $9.9 million during the fourth quarter of 2023 after declining during the previous two quarters. Fourth quarter Well Servicing segment consolidated revenue decreased by 16% compared to 2022, as a modest 1% increase in segment revenue per service hour was outweighed by 17% year-over-year decrease in consolidated service hours. Lower activity in all jurisdictions and slightly lower North American revenue per service hours resulted in the fourth quarter EBITDA and EBITDA margin decreasing by 36% and 23%, respectively, as compared to 2022. From a consolidated perspective, Total Energy's financial position remains very strong. At December 31, 2023, Total Energy had $123.4 million of working capital – positive working capital, including $47.9 million of cash and zero net debt. During the fourth quarter of 2023, Total reduces bank debt by $10.5 million or 10%. As mentioned earlier, following a Tax Court decision issued in February 2024, we fully provided for the certain tax reassessments related to Total's 2009 conversion from income trust structure in Total's 2023 fourth quarter results. We also remitted $19.9 million to pay in full, all reassessed income tax and associated interest and penalties. Total has appealed the Tax Court decision and also applied to Canada Revenue Agency for interest abatement, due to extensive delay in having the case heard by Tax Court. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bank-defined EBITDA of 3x and a minimum bank-defined EBITDA to interest expense of 3x. At December 31, 2023, the company's senior bank debt to bank EBITDA ratio was 0.09, and the bank interest coverage ratio was 10.51x. Excluding $10.5 million of onetime interest expense relating to reassessment of certain of the company's income tax filings related to its conversion from income trust to a corporation in 2009. Interest coverage ratio was 32.27x.
Daniel Halyk: Thank you, Yuliya. 2023 was a solid year for Total. Continued investment in expanding North American LNG export capacity provided tailwinds during the year, particularly for our CPS segment, which has significant exposure to the global natural gas infrastructure build currently underway. Targeted investments in equipment upgrades over the past two years also contributed to our strong financial performance in 2023. Our employees were diligent in conducting operations in a safe and efficient manner over the past year. Notably, our Rental and Transportation Services segment recorded a zero TRIF in Canada for 2023, a significant achievement given the nature of their operations in the harsh environments they often find themselves working in. At a corporate level, Total remain committed to providing our owners with industry-leading shareholder returns. During 2023, $52.7 million of cash flow was directed towards $27 million of debt repayment, $13.6 million of share repurchases and $12.1 million of dividends. Total exited 2023 in a very strong financial position, with bank debt less cash on hand of only $45.1 million. While oil prices remain relatively stable, North American natural gas prices have weakened considerably over the past few months and certain producers have begun to curtail their natural gas capital budgets. In this environment, Total Energy remains focused on operating in a safe and efficient manner and exercising discipline in the investment of our owners' capital. Our previously announced 2024 capital expenditure budget of $46.5 million maintains our current operating levels and provides our business segments with capital to pursue compelling growth opportunities, backstopped by long-term contracts. As announced yesterday, we are pleased to have completed the acquisition of Saxon Energy Services Australia. This acquisition significantly increases our presence in the Australian land drilling market, and is expected to provide a competitive return on invested capital. On behalf of the Board and management, I extend a warm welcome to all Saxon and Schlumberger (NYSE:SLB) employees joining our Australian team, as well as to Mr. Yasir Nisar, who has joined our corporate executive team. We look forward to working with all of you as we continue to grow our global drilling business in a safe and prosperous manner. Finally, we are pleased with our Board's decision to increase Total's dividend. Not only does this decision align with Total's long-standing commitment to providing our owners with industry-leading shareholder returns, but it also demonstrates our confidence in the future prospects of our company. I would now like to open the phone lines up for any questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tim Monachello of ATB Capital Markets. Please go ahead.
Tim Monachello: Congrats on getting the Saxon deal closed. I'm just curious, can you give an operations update on how that's going? It's just closed, I guess, yesterday, but how many rigs are running in Australia today and anything else?
Daniel Halyk: Good morning, Tim. Yesterday, it was a pretty busy day, particularly given the time zone differences. So I'm still in a bit of a fog.
Tim Monachello: Fair enough.
Daniel Halyk: Yes. In terms of active rigs in Australia, today, we would have, I believe, 10. There's a bit of movement. Some rigs are currently in between campaigns, but it effectively doubled our rig count in Australia yesterday, and we're looking forward to continuing to grow our active rig count there. So stay tuned.
Tim Monachello: Now that the deal is closed, are you able to provide any further details on valuation of the deal?
Daniel Halyk: No. We're not – we've never given forecasts. What I would say is we expect the acquisition to be accretive.
Tim Monachello: The 10 – the additional rigs that you're running in Australia, the Saxon that you’ve acquired, are they running at similar economics to your legacy fleet?
Daniel Halyk: I would say we expect the deal to be accretive on a per share basis. So we're pleased with it. Obviously, it competes that acquisition competed for capital with other opportunities and it met our requirements. And I believe it's a win-win for both SLB and Total, in the sense that it was a business SLB has been looking to exit and it's come into strong hands with a company that wants to grow its global drilling operations. And the Saxon employees were very pleased to have him join our team. We're quite pleased to have Mr. Nisar join us at a corporate level. He will bring tremendous technical and global operating experience into our corporate executive ranks. And that will be useful as we continue to try and operate a world-class drilling business as well as grow that. So again, day one of ownership, we'll provide – and we'll be in a better position to provide an update here with Q1. But we're quite happy with the deal and looking forward to expanding our presence in Australia.
Tim Monachello: That's fantastic. Maybe building off that 2024 has started with a couple significant capital outlays, one being Saxon and the other being the momentum of that capital to the CRA with [indiscernible] government. Now that you have those under that sort of behind you and you're digesting that, can you just talk about how you're thinking about capital allocation in 2024, specific to return on shareholders, share repurchases? And then also, how you think about M&A on a go-forward basis?
Daniel Halyk: Sure. So our views have not changed in terms of fundamental principles. On the share buybacks, that remains an extremely compelling opportunity. The reality is we've been prevented from purchasing under a normal course since September, a combination of the blackout for the – extended blackout relating to Saxon, which by the time that was announced, we were then into our year-end restrictions. So we were not able to buy any stock back in the fourth quarter. Going forward, that's right at the top of the list of opportunities, particularly given the addition of Saxon here that obviously, we haven't issued any shares in respect to that acquisition. Again, we continue to – in terms of our current announced capital budget, the growth portion of that are compelling opportunities that are expected to exceed our cost of capital and they're backstopped by long-term contracts. And so a bunch of that is earmarked for Australia, including three service rigs that the first was deployed here in late February. The remaining two will be deployed in Q2 and Q3, respectively. That will rejuvenate our service rig business in Australia significantly. We obviously have the sixth Savanna rig. It's parts have landed already in Australia, and that's expected to – that rig is expected to commence drilling in July under a long-term contract. With that addition, we'll be up to 17 rigs in Australia. We're also examining in the middle of potential reactivation of certain Saxon rigs that if those work out, it will be quite attractive opportunities as well. Domestically, a bunch of our carry-forward capital relates to compression, rentals, long-term contracts bound for the U.S. And our maintenance capital will ensure that we continue to operate at the activity levels we experienced – pardon me, last year. In terms of new capital, we're very nimble. Over the years, we react to opportunities as they are presented. We don't try and force investment. We're also quite interested in continued consolidation, and we'll look to identify and pursue opportunities that make sense for our current shareholders. So we'll continue to work hard, but stay disciplined on that front.
Tim Monachello: Okay. Got it. Looking at the CPS segment, I've just noticed that the Canadian horsepower on rent at the end of the period has come down significantly through the year in 2023 in Canada specifically? Utilization has gone up. So it suggest maybe the fleet size is shrinking. Are you selling equipment out of the Canadian rental fleet or moving into the U.S.? Or how should we think about that?
Daniel Halyk: Yes. There's always some movement below the surface. And it's one of the challenges at a point in time. I think what we would expect to see over the course of 2024 is continued uptrend in our rental fleet utilization, barring some material change. But given some of the investments we've made, combined with our NOMAD fleet continues to be a very solid piece of our rental business in North America. But we also don't build rental equipment on spec. So obviously, existing idle equipment is available at all times, but we do not build new units for our rental fleet on spec.
Tim Monachello: Got it. Then I guess last one for me. Just wanted to circle up on your comment on gas prices. Are you seeing any immediate impact on demand, specifically for CPS related to lower gas?
Daniel Halyk: No, I would say we expect to see more of an impact on the front-end drilling. And what we're seeing is a rotation from gas to oil, some of our high-spec rigs in Canada transitioning from gas to oil. On the CPS segment, honestly, it's been a solid steady core demand driven by infrastructure that my take, just by the nature of the customers, is this is all about building infrastructure. It's not about putting on new gas wells.
Tim Monachello: Yes, that's kind of what I would have expected. I appreciate it. I will turn it back. Nice quarter.
Daniel Halyk: Thanks, Tim.
Operator: The next question comes from Josef Schachter of Schachter Energy Research. Please go ahead.
Josef Schachter: Good morning, Dan. Good morning, Yuliya. Dan, can you go a little bit more into the dynamics of what's going on in Australia? How many rigs are there? How many are active working? Is it more of an oil or gas market? And what – where do you see the growth longer term? Is it going to be from one or the other? And have there been any big discoveries like excitement like our Montney or our Clearwater going on into Australia that are increasing the activity there and you're wanting to build the business?
Daniel Halyk: Yes. So in terms of the overall active rig fleet, Josef, it's hard to get a super accurate number. They don't have the same reporting processes as we do in Canada, for example, with the CODC fleet disclosures and active reporting count. Our guess is there's probably 25 roughly rigs drilling onshore there, of which we're definitely, if not the biggest, certainly, rig posts being the biggest now in terms of active rig count. It's a gas-driven business or basin, but there's also oil there. Pre-Saxon, most of our, if not all of our exposure was to coal seam gas, the shallow end. We also, though, have been involved in hydrogen drilling in Australia recently, and that's an interesting opportunity. Again, it's not going to be put five rigs to work steady on hydrogen, but it's certainly a niche market that we tend to, I believe, have a front-end lead on. What the Saxon acquisition does for us is it increases our exposure to the medium and deeper parts of Australia. That's significant. And I think that's the opportunity we see really to grow our businesses, pursuing some of the deeper gas and oil basins in Australia. And the gas market over there is quite healthy. It's driven by LNG exports to Asia, and that market has been solid and strong. And we continue to expect that market to be relatively stable here over the medium to longer term. And we've – the other thing Saxon does for us is further diversify our customer base. We are now working for all the major onshore producers pretty much in the country. And like I said, we're excited to bring, I think, a desire to grow that business to the Saxon asset base, and there's definitely some opportunities to do some rig upgrades there that will further activate that fleet. So stay tuned on that front.
Josef Schachter: Is there any specific play that's really doing anything – is there something that we could be watching in the news of discoveries of – as I mentioned earlier, Montney, Clearwater, is there anything to be specifically keeping an eye on?
Daniel Halyk: Not particularly. I think obviously, we're going to be learning a bit about some of the more deeper basins there. So that's new to us. I know there's some excitement up in the Northern Territory. H&P brought in a big triple last year to drill some of that. We – interestingly, we're involved with the service rig work on some of those wells, which – with our heavier service rigs. I think it's a vast country. It has not – my general sense would be there's a lot of drilling opportunities within existing known reservoirs as opposed to, say, Western Canada where some of our mature basins have been drilled out and are kind of looking for new. So I would say, generally, it's probably a less mature basin. Again, that's just my anecdotal perception. But certainly, our focus now is to learn more about the opportunities in the deeper part of the market there.
Josef Schachter: You mentioned that there could be more consolidation. So are we looking from here not a big deal, but maybe companies with one or two rigs, so you – is that the consolidation potential there?
Daniel Halyk: In Australia?
Josef Schachter: Yes.
Daniel Halyk: No, I would say our focus would be North America and elsewhere. Australia is fairly – I would say it's – we've got a good position there. I think our focus will be on upgrading existing equipment of Saxon as opposed to looking to buy in that market. Never say never, but we need to – we've only owned it for a day. So I think my impression is there's some good opportunities to take that asset base and enhance the utilization.
Josef Schachter: Good. Last one for me. With the consolidation by Precision of High Arctic and then CWC, are you seeing the competitive pressures in Well Servicing in Canada not as intense? And is pricing power looking like they might be the price leader and then everybody benefits from their consolidation move?
Daniel Halyk: Yes. Precision certainly has done a good job in bringing some discipline there. It's still a very competitive market. And so relative to the drilling rig market, it's still quite fragmented. But it's definitely going the right decision. It comes down, Josef. Every company has got to make their own decisions on balancing utilization with price. And I think, generally, our approach, and there's no absolute right or wrong answer, but our approach has been rather than working too cheap and wearing your equipment out will stand back, I would say we're not in that zone within the Well Servicing. But in terms of is the market consolidated at the point that it's not competitive, absolutely not. It's still a competitive market there.
Josef Schachter: Okay. That's it for me. Thanks very much and congratulations on a very nice year.
Daniel Halyk: Thanks, Josef.
Yuliya Gorbach: Thank you.
Operator: [Operator Instructions] The next question comes from Cole Pereira of Stifel. Please go ahead.
Cole Pereira: Hi. Good morning, all and congrats on closing the acquisition. Dan, you talked about it a little bit earlier, but can you just talk about how you're thinking about the strategy in that market? It sounds like there's an opportunity to grow utilization. Is that through market share capture or maybe the broader market increasing, and is there also an opportunity to kind of raise prices across the board, just given you have a much higher market share now?
Daniel Halyk: So in response to your first question, I believe it's a combination of gaining market share and expanding market, really where we see some opportunity there is with the heavier rigs and some potential upgrade opportunities that exist. And so that will be our focus. Obviously, bringing the two companies together, integrating, realizing realistic synergies is a prime focus as well. But I expect – we're prepared to invest in good upgrade opportunities that's consistent with our desire to continue to grow the drilling business, where obviously, Schlumberger was looking to exit. So there's some good opportunities there. I think my sense is the Saxon employee base will thrive under our ownership, where we want to get more rigs to work. And it's a base in that I think there's some room for us to capture some market share in as well as expand into the deeper part, which is partly organic just by upgrading rigs. In terms of pricing, it's a competitive market, too. It's not – it's kind of similar to Canada in that regard. So I wouldn't see any significant any material pricing gains simply by bringing these two companies together. The reality is we really only overlap with two rigs. And so we had no involvement in the deep brand of the basin and Saxon for the most part, didn't compete with us in the shallow part. So it really doesn't change the market dynamics a whole bunch.
Cole Pereira: Got you. That makes sense. And then thinking about the Canadian side of the business on drilling and well servicing, commodity prices have been a bit volatile. We've seen some modest CapEx cuts from a few gas-focused producers. How are you thinking about the activity outlook for those businesses compared to 2023?
Daniel Halyk: Again, we're not going to give specific forecast. What I would say is when you watch our rig count here over the next – well, you can expect to see some migration of our bigger rigs from gas to oil. Not a huge thing, but I think you're going to see a bit of that migration of some of our high-spec deeper rigs. Most of our – pretty much all of our super singles are oil-focused already. So there's not a lot of change there. But I think on the deeper end, you'll see some migration.
Cole Pereira: Got you. That's all for me. Thanks. I'll turn it back.
Daniel Halyk: Thanks, Cole.
Operator: As there are no more questions on the phones, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Halyk for any closing remarks.
Daniel Halyk: Thanks, everyone, for participating, and we look forward to speaking with you after our first quarter. Have a great weekend.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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