Earnings Transcript for TOLWF - Q4 Fiscal Year 2022

Operator: Good morning, ladies and gentlemen. Welcome to the Trican Well Service Fourth Quarter 2022 Earnings Results Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Brad Fedora, President and CEO of Trican Well Service Limited. Please go ahead, Mr. Fedora.

Brad Fedora: Thank you very much and good morning, everyone. I’d like to thank you for attending the Trican Well Service annual results conference call. Here is a brief outline of how we intend to conduct the call. First, Scott Matson, our Chief Financial Officer, will give an overview of the quarterly results. I will then provide some comments with respect to the quarter, the current operating conditions and our outlook for 2023. We will then open the call for questions. Several members of our team are in the room with us today and they are Chika Onwuekwe, our Vice President, Legal and General Counsel; Todd Thue, our Chief Operating Officer; Daniel Lopushinsky, our VP, Planning and Analysis; and Brian Lane, our VP, Sales and Marketing. So we should be able to answer any questions that may come up. I will now turn this call over to Scott.

Scott Matson: Thanks Brad. So before we begin, I’d like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our annual MD&A for 2022. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2022 Annual Information Form and the Business Risks section of our MD&A for the year ended December 31, 2022, for a more complete description of business risks and uncertainties facing Trican. These documents are available on our website and on SEDAR. During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our 2022 annual MD&A. Our quarterly and annual results were released after close of market last night and are available both on SEDAR and our website. So with that, we will turn our results – turn to our results for the quarter. Most of my comments will draw comparisons to the fourth quarter of last year and I’ll provide some commentary about our annual activities and our expectations going forward. Revenue for the quarter was $236.5 million, an increase of just over 50% compared to Q4 of 2021. Our activity levels for the fourth quarter were generally higher across the board than the prior year comparative period as industry activity in the basin increased, driven primarily by stronger commodity pricing. This led to a significant improvement in demand for pressure pumping services and our services in general, which resulted in a more constructive pricing environment and an improvement in margins in Q4 of 2022 compared to the prior year. Adjusted EBITDA came in at $59.4 million, again, a significant improvement over the $28 million we posted in Q4 of 2021. And I would also note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $1.2 million in the quarter and were expensed in the period. Adjusted EBITDAS for the quarter came in at $60.1 million or 25% of revenues, a significant improvement, again, compared to the $27.6 million or 18% of revenue that we printed last year. To arrive at EBITDAS, 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. We recognized about $700,000 in expense related to cash-settled stock-based comp in the quarter. On a consolidated basis, we generated positive earnings of $26.2 million in the quarter or about $0.11 per share and generated free cash flow of $47.1 million during the quarter as compared to $17.9 million in the same period last year. Our definition of free cash flow is essentially EBITDAS less nondiscretionary cash expenditures including maintenance capital, interest, cash taxes and cash settled stock-based comp. Our CapEx for the quarter totaled about $33.2 million split between our maintenance capital of roughly $11.3 million and upgrade capital of $21.9 million. And our upgrade capital was dedicated mainly to our ongoing Tier 4 capital refurbishment program, which Brad will touch on later. The balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $169.4 million, including cash of $58 million. Finally, with respect to our return of capital strategy, we were quite active with our NCIB program throughout the year and repurchased and canceled 19.7 million shares at an average price of $3.50 a share equating to approximately 8% of the company’s issued and outstanding shares at the beginning of the year. We’ve remained very active as we move into 2023 and have repurchased an additional 7.7 million shares since January 1. And as you saw from our announcements last night, we have added an additional component to our return of capital strategy in the form of a quarterly dividend. The Board of Directors declared a dividend of $0.04 per common share to be paid on March 31, 2023, to shareholders of record as of close of business on March 15, 2023. And I would note that dividends are designated as eligible dividends for Canadian income tax purposes. So with that, I’ll turn things back to Brad for some comments on our operating conditions and our outlook going forward.

Brad Fedora: Thanks, Scott. Overall, the quarter went as expected. I mean, it was – it sequentially was lower than Q3, which I think will generally happen every year. As you know, Christmas comes every year and there is typically weather events as we transition from fall to the winter. And so our quarter went almost exactly as forecast. We did continue to see some cost inflation and subsequent price increases to offset that inflation. Inflation really seems to be moderating, still happening, but it’s certainly happening at a much lower rate of change than certainly the first half of 2022. And so overall, market feels quite stable from a pricing and cost perspective with just little tweaks here and there. In our fracturing – in the fracturing division, which represents about 70% of our revenue, the market feels very much balanced and stable. And I think it’s been like this now for a few quarters. There’s approximately 30, 31 staffed fracing crews operating in Canada and that this rig count, 250 rig counts – 250 rigs, give or take, it feels like we’re fairly balanced. We are still operating 7 frac crews. I think in the past, we had mentioned that we may go to 8% in the quarter. But I think given that we think the market is imbalance, I don’t – we didn’t – we made the decision not to add another crew and I think we’ll stay stable at 7 crews for the remainder of the quarter. On the cementing side, we are very happy with our cementing division. Cementing business in Canada is running at absolute capacity for the active and crude fleet that is out there. There is three main companies, including us, that provide cementing services immediately post the well being drilled. We added 4 cementing units to the field, which is about a 22% increase, and that allowed us to maintain our market share as the rig count went up. And we’re very much focused in the deep technical areas of the basin. And so overall, we probably have a 50% to 55% market share in the Montney and Deep Basin and a sort of a 35% market share in the basin as a whole, but very much focused in the Montney and the Deep Basin. And our market share gains in this division are really only limited by our ability to add staff. And so we’re always looking to add more qualified crews in the field, but in this labor market, that certainly takes time. On the coil side, the coil market for us is more lumpy but the pricing and the demand for our coil units has been at levels that we’re generally happy with. And that’s a division that we hope to grow significantly through the remainder of 2023. So our outlook for the remainder of this year is

Operator: The first question comes from Aaron MacNeil from TD Securities. Please go ahead.

Aaron MacNeil: Hey, good morning all. Thanks for taking my questions. Brad, you mentioned that your shareholders were looking for a more defined return of capital strategy. I guess that leads to the question, if you have a target in mind and maybe one that you would be willing to share in terms of the capital that you would like to return to shareholders this year on an ongoing basis either in terms of absolute dollars or a percentage of free cash flow or some other metric?

Brad Fedora: We don’t. And it’s because every day, every quarter, every year, we sit down and look at the opportunities that are in front of us and we invest in the highest return opportunities. To-date, that has been easy decision and there is no better investment that you can make than taking old equipment that’s not working and upgrading it to be the state-of-the-art equipment that’s in the basin and we’ve done that with the Tier 4s. But you can only go so fast on that. But every year is different. And so from there, we cascade down to the next opportunities, whether it’s the buyback or M&A or the dividends. And with what we did here is our NCIB has been active but inconsistent. And that was fine last year or even in 2021, but as the investors get more comfortable with this basin and the opportunity in front of us, they have been looking more for, okay, what exactly is the plan. And that’s very hard to do. I mean you can’t commit to an NCIB from a volume perspective because it’s very price-dependent. And so we’ve migrated over to the dividend. We’ve put in an amount that we think is attractive and very sustainable and defendable through various cycles, but we really did not start with a percentage return perspective. We look at that as one of many different uses of cash. And we sort of figured out an amount that would be left at the end of the year going forward over the next few years.

Aaron MacNeil: Makes sense. You mentioned or you reiterated that you continue to expect this year to be busier than last year. And this question isn’t meant to challenge that view at all. But I guess, hypothetically, if we were to see some weakness in completions activity this year, do you think we see the producers reigned in during breakup? Or are you essentially locked in there? Do you think it’d be a later in the year phenomenon? I guess how do you think a weaker outlook scenario might play out in terms of how capital is allocated to the quarters by your customers?

Brad Fedora: Good question. Probably would be a second half impact. I think certainly, Q1, probably Q2 is pretty much almost in the books at this stage. I mean, obviously, you can always meet up or slow down. But if we’re still having low gas prices come the summer, we get a cool summer something like that. I think you probably would see the impact starting in the second half. But I’m not the right person to ask.

Aaron MacNeil: Sure. Maybe I’ll sneak one other quick one in. You mentioned the potential for sand shortages. And I think you were speaking to fuel surcharges from the rail companies in last quarter’s conference call. I guess my question is, are you getting any sort of deflationary relief in those rail surcharges now that pricing has moderated?

Brad Fedora: No. But we may see some in Q2, but there has been no relief to date in 2023.

Aaron MacNeil: Okay, thanks, Brad. I will turn it over. Thanks.

Operator: The next question comes from Cole Pereira from Stifel. Please go ahead.

Cole Pereira: Good morning, all. Just wanted to go back for your outlook for Q3 to be busier, I think this would have been most outlook before the natural gas price declined. Can you just talk about what gives you confidence in this at this juncture? Are you seeing meaningful plans related to LNG in blueberry and none of the public pulling development plans thus far?

Brad Fedora: Yes. I mean we get the same information that you get I think people have, for the most part, have looked through this gas price decline as temporary given that we had a warm January and we had the U.S. LNG facility that was offline for a lot longer than people expected. And when that comes back on, you end up with an instant bump in demand or consumption, I guess. And assuming the weather normalizes going forward, I think we will get to a more balanced market, I guess. But I – we’re not on the inside of capital decisions by our customers. Certainly, what we hear from our core customers is that it’s business as usual. They are looking at this from a long-term perspective. Obviously, liquids pricing is still very attractive. And I think this gas price weakness would have to continue on for a lot longer than sort of a couple of months for it to impact programs. But again, we are not in the authority on our customers’ CapEx plans that are 6, 12 months out.

Cole Pereira: Got it. That makes sense. And so you activated another Tier 4 this quarter, and I believe you have plans for another, call it, mid-2023. Is it fair to say based on your comments about that 8th fleet that you’ll be flexible in these additions and that you’ll bring a Tier 4 into the field, but if there is an incremental demand, you’ll just kind of put another diesel fleet back in the yard?

Brad Fedora: Yes. And that’s exactly what we’ve done. This time last year, we would have expected that we would have had more than seven, eight crews even. And I think last conference call, we expected to have crews in Q1. We’re having – don’t get me wrong, we’re having a very good quarter so far. But yes, we are responsible. We don’t bring equipment into in a market unless there is demand for it. And so we’ve been feathering our Tier 4 equipment into other frac spreads, and it doesn’t always need to be a complete frac spread in the entirety of Tier 4 equipment. A lot of people want to try a couple of pumps here and there and the demand for the equipment is very high. But yes, to your point, we’ve been sort of displacing older equipment with this new – with our new low emissions equipment, and we will probably continue to do so.

Cole Pereira: Got it. And then just coming back to the dividend. So based on your comments, it kind of seems like you’re fine with the dividend sort of remaining at this level on a permanent basis given its sustainability in that any perhaps incremental free cash flow would just go to the buyback over the current to medium term?

Scott Matson: Yes. Well, it’s Scott. Our intention is that we put in a layer of very sustainable return to our shareholders to provide a bit clearer of a window in terms of what we’re going to spend there and then yes, remain opportunistic in the buyback, but it’s still a part of our core strategy. So you’ll still see us be waiting in and out of the market from that perspective and we will look at this every quarter in terms of what we’ve got from an opportunity set in front of us and allocate cash accordingly.

Cole Pereira: Got it. And then just one more quick one, how should we be thinking about the time line for cash taxability over the next few quarters and years?

Scott Matson: Yes. I mean you probably won’t see cash tax leaving the system until early next year and then it will be more regular from there. So we will likely move into a taxable status at some point this year, but our first installments will likely go out the door next year.

Cole Pereira: Okay, got it. That’s all for me. Thanks. I will tune in back. Thanks.

Operator: The next question comes from Waqar Syed from ATB Capital Markets. Please go ahead.

Waqar Syed: Thank you, and good morning. Brad, I saw in the MD&A that you’ve also ordered a 5th Tier 4 fleet. Could you maybe provide some color on the costs associated with it? And what’s the size of the fleet?

Brad Fedora: The size of the fleet is consistent at 14 pumps, 3,000 horsepower per pump. The cost has grown significantly for a couple of reasons. First, there is a lot of inflation by our suppliers. And as we go deeper into our equipment fleet, the quality of the equipment that we’re upgrading is lower. And it’s important, we didn’t talk about it in this conference call, but the parked fleet in Canada is hardly ready to go. And so as we go deeper into the inventory, there is more things that need to be replaced versus rebuilt or refurbished and that just ups the cost. And so the cost of these fleets now is in the $35 million range to refurbish a fleet into a low emission standard.

Waqar Syed: Okay. Great. And then in terms of – you mentioned that activity could be up like mid-single digits or so in Canada in 2023. To convert that into revenues for Trican in 2023, there is inflation as well. So how would you kind of – how should we be thinking about the revenue range year-over-year growth – from a year-over-year growth perspective?

Brad Fedora: Well, I’m roughly 15%.

Scott Matson: Waqar, I probably, I mean, guide you like you’ve got a single-digit activity multiplier, and you know what our pricing and kind of net margin movement has been over the last year, right, year-over-year. So you’re probably better at the math than I am.

Waqar Syed: Okay. Fair enough. And then how do you see Q2 – and you touched on that Q2 this year versus Q2 of last year?

Brad Fedora: Look, it feels very similar. But there is – it’s also very dependent on who your customers are, right? It’s – but I think the industry as a whole, Q2 will be very similar to last year, and we expect our Q2 to be similar to last year.

Waqar Syed: And when you say, similar, you, again, mean that activity would be relatively similar. But overall, pricing inflation would be there from – on both side, revenue side and cost side.

Brad Fedora: Yes.

Waqar Syed: Okay. It’s fair enough. And then just one last question, your – in Q4, your fluid in cost, either on an absolute basis or on a percentage of revenue basis where you tended a little bit lower, was it just like the seasonality that impacted that? Or is there something going on with the Tier 4 or new equipment that you’re getting that those costs have started to trend lower?

Brad Fedora: Yes. Exactly right, as we upgrade our fleet with whether it’s rebuilt or new equipment, there is a temporary decline in maintenance costs, and we’re experiencing that.

Waqar Syed: Okay, great. Thank you very much. That’s all I had.

Brad Fedora: Thanks, Waqar.

Operator: [Operator Instructions] The next question comes from Andrew Bradford from Raymond James. Please go ahead.

Andrew Bradford: Thank you very much. And thanks for taking my calls. Hey, Brad, you mentioned in your preamble there, that you were looking at expanding the coiled tubing fleet significantly – expanding your coiled tubing capabilities through ‘23. I wonder if you could expand on that statement for me.

Brad Fedora: Well, I should replace looking with what to. A vision that really hasn’t had a lot of focus at this company, and it’s frankly opportunity lost. Both the coil and the cementing division are opportunities for growth. We historically have been the number one cementer in Canada. I don’t foresee that changing. But I think we’ve fallen behind on coil. And I think we can do a lot better job with our coil division. And we should be able to achieve big percentage gains just because, frankly, it’s only sort of 7% to 10% of our revenue. So it’s – the opportunity there is to grow it significantly from a percentage perspective, but it will still be a fairly small division compared to the other two, even if we experience good growth. And that is just going to come from more of a focus on sales and marketing and providing value-added services to our customers. And it’s frankly has fallen behind as we’ve focused on other things over the last few years.

Andrew Bradford: It’s still the case that there isn’t necessarily a lot of marketing synergies between coil and fracturing. Is that correct?

Brad Fedora: No, there is. If you take advantage of them, and frankly, we just – we haven’t – there is lots of synergies there actually that we need to do a better job of – or we need to do a job, a better job of exploiting, so...

Andrew Bradford: Okay. I’ll ask a basic question now then. So are you running any non-dual fuel spreads right now?

Brad Fedora: Yes. There is always a place for a good old fashion diesel pump. There may not be access to gas where the well may only take a day, and it just doesn’t work to set up time. It’s like – but it’s only sort of one or two spreads now, although rest of our fleet – the rest of our fleet is low emissions.

Andrew Bradford: When you bring in the fourth spread here, the fourth Tier 4 spread, is it displacing what kind of equipment or what kind of fuel system is it displacing?

Brad Fedora: Dual fuel. So the basin switched to Tier 2 diesel pumps with a dual fuel get added to them. And that provided about 40% to 50% substitution of diesel for natural gas. And that was the best product that we had available at the time. What we found with doing studies is that it’s great from a cost savings perspective because obviously, natural gas is so much cheaper than diesel, but it was terrible from an emissions perspective. The amount of methane that was going into the engine that wasn’t being burned was fairly significant. And so if it wasn’t combusted in the engine, it’s emitted into the atmosphere. And we just, as the industry evolves, that’s no longer acceptable. And so we’re typically displacing our new gear – sorry, we’re typically displacing the old Tier 2 dual fuel equipment with our new gear.

Andrew Bradford: Okay. No, that’s perfect. And I guess my next question would be oriented towards the customers. The customer mix that you have today when we’re thinking about from the outside looking in at your natural gas orientation or the natural gas orientation of your customer base, for most of these customers, are you like – you would be a portion of their fracture – you provide a portion, but not all of their fracturing services. Is that correct?

Brad Fedora: Yes. But some we would provide all, but it’s reasonable...

Andrew Bradford: Larger ones would be less.

Brad Fedora: Yes, exactly.

Andrew Bradford: Okay. So then is the idea – I just want to flesh it out fully here. But the idea then is as you come in the Tier 4 equipment, like full spread of Tier 4 equipment that, that puts you in a competitive – your idea is that puts you in a competitive advantage with these customers regardless of what they do with their capital programs. Is that correct?

Brad Fedora: Yes, absolutely. There is – as we discussed, there is a cost savings to the customer by using natural gas instead of diesel. We try to capture a large majority of that cost savings, which allows us to get decent returns on our investments and the emissions reduction is significant, especially compared to dual fuel equipment. Good old-fashioned diesel pumps actually are pretty good from an emissions perspective, but the dual fuel kits that we added to them sort of they brought on a whole another level of emissions that we’re trying to eliminate. So yes, under any circumstances, the customers naturally, they want the most advanced equipment, getting lower footprint is an issue now as well. Ground disturbance, especially with the First Nations is a serious topic. And so we’re providing higher horsepower, more efficient pumps. So that means less equipment on location, less people on location. And certainly, when you’re using gas right from the pad, you’ve taken – you’re taking a lot of trucks off the road. And that’s a big deal in a lot of these communities, right? They don’t want fuel trucks, rumbling up and down the roads in the middle of the day, especially when kids are out going to and from school. So we’ve really designed our product offering to be low emissions, smaller footprint, more efficient and providing our customers with the ability to use their own natural gas at a lower cost.

Andrew Bradford: Okay. I appreciate that. And one last question from me would be, if you look at your – well, maybe this is looking too far down the road, but we obviously focus on the third quarter a lot. It’s usually our busiest quarter. And if you were to sort of characterize the job board, if you will, today versus what the job board might have looked like a year ago today. How do you – does it look fairly similar, more full, less full, give you pause or anything like that?

Brad Fedora: It would look similar, but I would say there is more long-term activity discussions happening than the more than a year ago. So we’re – we are very – we’re still very optimistic about the Canadian story.

Andrew Bradford: Follow-up then is that – when you say long-term, is that necessarily LNG oriented?

Brad Fedora: Yes, I think – maybe not. It’s not black and white, but of course, it has to – LNG is a significant issue, right? It’s 2 Bcf a day going to 4 Bcf a day, and we’ve got wood fiber in Squamish being built as well. I mean it’s smaller, it’s – all of that adds up, and it’s a long – those are 50-year assets. The world wants more Canadian energy, just like the T-shirt says. So we’re – there is always going to be bumps in the road, right, like we’re experiencing now with gas prices. But we don’t operate this business with a 3-month forecast, right? We build a sustainable and resilient business because we think the long-term environment is really attractive.

Andrew Bradford: Okay, thank you very much. I will turn it back.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Fedora for any closing remarks.

Brad Fedora: Okay. Thank you everyone. Thank you for your interest. Thank you for your time. We tried to wrap this call up quicker than normal because I know it’s a reporting season, everybody is busy. Scott and I are available for questions throughout today and tomorrow, if there is any follow-up questions, and thanks for dialing in.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.