Total Energy Services Inc . (TSX:TOT) (TESI) has announced a record performance for its second quarter of 2024, with a modest revenue increase of 2% compared to the same period last year. The company attributes this growth to stable industry conditions in Canada and Australia, a surge in demand for compression and process equipment in North America, and the successful acquisition of Saxon Energy Services.
With a strong financial position, including CAD71.8 million in working capital and CAD24.8 million in cash, Total Energy is poised to generate significant free cash flow for the rest of the year. The company has also strategically reduced its outstanding share count by 2.8% through share repurchases.
Key Takeaways
- Total Energy's consolidated revenue rose by 2% year-over-year, driven by stable industry conditions and strong demand for specific equipment.
- Geographically, the United States led with 46% of revenue, followed by Canada at 36%, and Australia at 18%.
- The Compression Process Services (CPS) segment was the top revenue contributor at 51%.
- A notable increase in revenue and EBITDA was observed in the Contract Drilling Services (CDS) segment.
- The company's commitment to safety is highlighted by a rolling 12-month total recordable incident frequency of less than 1.
- CEO Daniel Halyk expressed gratitude to employees for their contributions to the company's success.
Company Outlook
- The second half of the year looks promising with expectations of growth in the Australian business and continued strong demand in North America.
- The company anticipates a significant generation of free cash flow.
Bearish Highlights
- There may be a small carryover of capital expenditures from 2024 to 2025.
- Fewer opportunities for equipment upgrade capital expenditures are expected going forward.
Bullish Highlights
- The acquisition of Saxon Energy Services has exceeded expectations, allowing for the redeployment of previously idle equipment.
- The fabrication sales backlog in the CPS segment continues to grow.
Misses
- The company did not provide specific details regarding the small carryover of capital expenditures to 2025.
Q&A Highlights
- Daniel Halyk discussed the capital budgeting process, stating that the preliminary budget for maintenance capital will be released in early January 2024.
- The company plans to complete most major projects by the end of the current year with approximately CAD30 million left to fund.
Total Energy Services Inc. remains focused on its growth strategy and operational efficiency. Daniel Halyk's discussion during the earnings call highlighted the company's robust financial health and strategic initiatives that have positioned it for continued success. With a solid performance in the second quarter and a positive outlook for the remainder of the year, Total Energy Services Inc. appears well-equipped to navigate the future market landscape.
Full transcript - None (TOTZF) Q2 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to Total Energy’s Second Quarter 2024 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 the 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.
Daniel Halyk: Thank you. Good morning and welcome to Total second quarter 2024 conference call. Present with me is Yuliya Gorbach, our Vice President, Finance and CFO. We will review with you Total’s financial and operating highlights for the three months ended June 30th, 2024. We will then provide an outlook for our business and open up the phone lines for questions. Yuliya, please go ahead.
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 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 June 30, 2024 represents record second quarter financial results. Relatively stable industry conditions in Canada and Australia, continued strong demand in North America for compression and process equipment, and the acquisition of Saxon Energy Services in March more than offset a year-over-year decline in U.S. drilling and completion activity. Consolidated revenue for the second quarter of 2024 was 2% higher compared to Q2 2023. The addition of Saxon in Australia increased compression rental revenue in the CPS segment following the additional new rental units in the first quarter and effective cost management contributed to a 24% increase in second quarter EBITDA as compared to 2023. Geographically, 46% of second quarter revenue was generated in the United States, 36% in Canada, and 18% in Australia as compared to second quarter of 2023 when 47% of consolidated revenue was generated in the United States, 40% in Canada, and 13% in Australia. By business segment, the CPS segment contributed 51% of second quarter consolidated revenue, followed by the Drilling segment at 32%, Well Servicing at 9%, and the RTS segment at 8%. In comparison, for the second quarter of 2023, the CPS segment generated 54% of second quarter consolidated revenue, followed by Contract Drilling Services at 26%, and each Well Servicing, Rentals, and Transportation Services contributing 10%. Second quarter consolidated margin was 23% as compared to 19% for the prior year. Margin improvement in CDS and CPS segments more than offset a decrease in the Well Servicing segment. As compared to 2023, the CDS segment saw second quarter revenue increase by 25% and EBITDA by 47%. And depending this improvement with stable industry conditions in Canada, cost management in the United States, and the acquisition of Saxon on March 7, 2024 in Australia. Canadian Drilling activity and financial results for the second quarter of 2024 were consistent with 2023. In the United States, efficient operational and cost management more than offset the 39% year-over-year decrease in second quarter operating days such that second quarter operating income increased by 9% as compared to 2023. In Australia, second quarter operating days more than doubled following the acquisition of Saxon on March 7, 2024. The additional Saxon's deeper rig fleet resulted in a 32% year-over-year increase in Australia in Q2 revenue per operating day, which was also the primary reason for a 19% year-over-year increase in the second quarter consolidated CDS segment revenue per operating day. Revenue in the RTS segment decreased compared to Q2 of 2023 as a result of lower industry activity in the U.S. A modest increase in revenue per utilized piece of rental equipment mitigated the negative impact of lower equipment utilization in the segment's EBITDA given this segment's relatively high fixed cost structure. Second quarter revenue in total CPS segment decreased slightly as compared to 2023 due to increased demand for rental equipment in the United States. The deployment of newly constructed rental units late in the first quarter and into the second quarter resulted in a 15% increase in rental fleet utilization in the United States. This increased rental activity, combined with improved fabrication sales margins and increased Parts and Service businesses. resulted in a 42% year-over-year increase in second quarter CPS segment EBITDA and a 508 basis point increase in the EBITDA margin. The quarter end fabrication sales backlog increased to CAD204.6 million compared to CAD185.6 million backlog at June 30, 2023. Sequentially, the quarter end sales backlog increased by CAD18.9 million during the second quarter of 2024. Second quarter Well Servicing segment utilization decreased 20% compared to prior year quarter due to lower activity in all jurisdictions, particularly in the United States as a result of lower industry activity that was due in part to significant customer consolidation. Price increases in Australia following the completion of rig upgrades more than offset weaker pricing in the United States, resulting in a 5% increase in the segment's revenue per operating hour. However, this increase was not enough to offset the decrease in service are such that segment revenue decreased by 16% and the segment EBITDA by 27% compared to the second quarter of 2023. From a consolidated perspective, Total Energy's financial position remains very strong. At June 30, 2024, Total Energy had CAD71.8 million of positive working capital, including CAD24.8 million of cash. Working capital decreased from December 31, 2023, at CAD42 million of mortgage debt due in April 2025 became current during the second quarter of 2024. Total Energy paying covenants consist of maximum senior debt to trailing 12 months bank-defined EBITDA of 3 times and the minimum bank-defined EBITDA to interest expense of 3 times. At June 30, 2024, the company's senior bank debt to bank EBITDA ratio was 0.45 and the bank interest coverage ratio was 10.7 times, excluding CAD10.5 million of non-recurring interest expense. Relating to an income tax reassessment in Q1 2024, the interest coverage ratio was 27.99x.
Daniel Halyk: Thank you, Yuliya. Our record second quarter results reflect the strength of our diversified business model; our continued investment in growing, upgrading, and maintaining our equipment fleet; and the quality of our people. During the second quarter, we continued to execute on our 2024 capital expenditure plan with CAD20.7 million of capital investments, CAD50.3 million of our budgeted CAD80.5 million of 2024 capital expenditures, which includes CAD14.2 million of capital commitments carried forward from 2023 was funded to June 30th, 2024. We expect to fund the remaining CAD30.2 million of 2024 capital expenditures with cash on hand and cash flow from operations. In addition to funding CAD50.3 million of capital expenditures during the first half of this year, in the first quarter, we funded the CAD47.4 million acquisition of Saxon and CAD19.7 million of non-recurring income tax and related interest expense following a Canadian income tax reassessment related to our conversion from an income trust. With these major expenditures behind us, we expect to generate significant free cash flow for the remainder of the year. During the second quarter of 2024, CAD26.1 million was returned to our shareholders by way of CAD12 million of share buybacks, CAD10.5 million of debt repayment and CAD3.6 million of dividends. Year-to-date, Total has reduced its outstanding share count by 2.8% with CAD12.7 million of share buybacks. Looking forward, we are optimistic as to the prospects for the second half of this year. The significant investment we have made to grow our Australian business began to pay dividends in the second quarter. Synergies arising from the ongoing integration of Saxon with Savanna Australia and the completion of several capital projects during the third quarter will see this momentum continue. As noted in our press release, two drilling rigs and a service rig will be reactivated in the third quarter. This includes a Saxon drilling rig that was reactivated in late July and a service rig that just returned to service earlier this week following completion of recertification and upgrades. In addition, a newly constructed drilling rig is scheduled to commence operations in late August. All three of these rigs are under long-term contracts. Looking into the fourth quarter, another Saxon drilling rig and a service rig are scheduled to commence operations following completion of recertification and upgrades. These two rigs will also operate under long-term contracts. Despite weak North American natural gas spot prices, demand for compression and process equipment remains strong, driven primarily by infrastructure investment to support expansion of North American LNG export capacity. This demand is evidenced by the increasing CPS fabrication sales backlog, which exceeded CAD200 million at June 30th and which gives us visibility to the first quarter of 2025. The impact of our significant investment to grow our U.S. compression rental fleet was reflected in the CPS segment second quarter results and will continue to benefit the CPS segment in the quarters to come as such investment was supported by long-term contracts. Finally, I'm pleased to report that for the first time since Total began consolidating safety statistics in 2008, our consolidated rolling 12-month total recordable incident frequency, or TRIF, at June 30th was less than 1. Specifically, it was 0.96. Further, we had zero lost-time incidents during the quarter, and our 12-month rolling LTI rate is 0.04. This is a tremendous achievement that reflects the continued commitment of our employees in all businesses and in all countries to operating in a safe and responsible manner. There's also no coincidence that this achievement occurred at the same time as we recorded record second quarter results as conducting our operations in a safe and efficient manner is good business. Congratulations, and thank you to each and every one of our employees for making this happen and please keep up your excellent performance. I would now like to open up the phone lines for any questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Jonathan Orford with ATB Capital Markets. Please go ahead.
Jonathan Orford: Morning. Thanks for taking my questions. Dan, it looks like the CPS segment is well-positioned for growth here. And you touched on improving demand. I'm just wondering if you're able to provide a bit more color on the outlook for bookings within the CPS segment?
Daniel Halyk: Good morning Jonathan. I would say that we continue to see positive momentum today with our fabrication sales backlog.
Jonathan Orford: Okay.
Daniel Halyk: I'm hesitant to give specific numbers, but it continues to grow.
Jonathan Orford: Yes. Okay, got it. And then I'm just also -- I got a question related to CapEx. Wondering you're able to provide some color around 2025 CapEx expectations related to 2024 now that some of those one-time costs in early 2024 are out of the way?
Daniel Halyk: So, we'll -- our process for capital budgeting, effectively, we start at zero. And the first line of CapEx is focused on maintenance capital, what do we need to expand to keep our fleet running based on expected activity levels. And so that process will begin late in the -- in fourth quarter and into Q1, which we'll release our preliminary budget in early January. In terms of growth CapEx, really, that is addressed on an opportunity-by-opportunity basis. I think what I would say is over the past three years, we've done a lot of equipment upgrade capital expenditures that have served us well, particularly within our Contract Drilling business. As you do those upgrades, there's less to do going forward. So, everything else being equal, there's just less of that opportunity available. Not to say there's none, but I would expect that those opportunities will pursue as the market makes sense. The one area that I would say is a bit of an exception to that will be Australia. Just the Saxon acquisition has been -- I would say, has exceeded our expectations so far and the opportunity to redeploy previously idle equipment is significant, and we're seeing that over into Q3, Q4 this year, and I expect that will continue next year. So, stay tuned on that.
Jonathan Orford: Okay. Got it, that's helpful. And just curious if you anticipate any carryover from 2024 CapEx guidance in the 2025?
Daniel Halyk: No, there's probably always a little bit. Last year 2023, we had a fair amount, I think it was CAD14 million roughly. Most of that was within our Compression and Process Services group with a number of Compression rental units that we commenced construction in Q4, but the bulk of it was done in Q1. Again, depending on what kind of happens here over the next several months, that will play out. But we do not budget or construct Compression rental units on spec. They are all budgeted for and funded only once firm contracts have been entered into. And so you don't -- we won't have a Compression Process Services capital budget for rentals based on speculation. And so I can't predict the future. So, if we get a big order for rental units in Q4, that likely would cause some carryover, but I'm not going to speculate at this point.
Jonathan Orford: Okay. Thanks for the color.
Daniel Halyk: We hope to have most of our non -- basically most of our major projects done by year end. We have three rigs in Australia coming into service Q3, another two in Q4. A bunch of our rental CapEx will come into Q3, early Q4, upgrades within our Well Servicing Group in Canada will be done here. So, if everything kind of stays to plan, barring any major changes, should be pretty clean here. And there's about CAD30 million left to fund here.
Jonathan Orford: Okay. Thanks for the color. That was it for me. I will turn it back.
Daniel Halyk: Thank you.
Operator: Thank you. [Operator Instructions] And that concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Halyk for any closing remarks.
Daniel Halyk: Thank you, everyone, for joining us this morning and we look forward to speaking with you after our third quarter. Have a wonderful summer.
Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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