Expro Group Holdings N.V. (XPRO) Earnings Call Transcript & Summary

Great. Good afternoon. We're going to keep things moving. I'm again Arun Jayaram from JPMorgan's OFS and E&P research teams. Delighted to wrap up day 1 at our conference with one of our favorite SMID-Cap OFS companies, Expro, thrilled to welcome Michael Jardon, who is the CEO of Expro. We're going to do a fireside chat, but I thought I'd turn it over to Mike with some -- just some introductory comments just to get the juices flown. Mike.

Good. Thank you, and thanks to JP, and thanks for Arun for doing us this week. I guess for me, just a couple of things to kind of level set some thoughts I'd like for all of you to kind of take away is really about Expro. Number one, I think we're in a very strong macro environment. despite some of the changes that we've seen here with OPEC and the production quarters, those type of things, Fundamentally, I think what we're going to see is investment dollars shift internationally and in particular, internationally, offshore. And for us as a company, we're 70% offshore levered. We're 80% international. I think that's actually quite strong. Second point is we're very levered to the drilling completion cycle. That 70% of our activity, 70% of our revenue comes from our customers' CapEx spend. So as we're coming into this time of continued investment, you look at the FID dollars that have been approved and sanctioned here, we're finally back to the same level we had back in 2012, 2014. So to be levered to the drilling completion cycle like we are right now, I think, is a really good spot for us to be in. The third element for us is really we're moving into a time of a very strong margin expansion. We created the company by doing a reverse public merger in to Frank's International. We've really been able to create a tremendous amount of operating leverage, cost synergies and those type of things, and we're really able to expand margins kind of going from 14% in '21 -- excuse me, 14% in '22 to 16% in '23. Our midpoint of our guidance this year is 21%. And we've got a real clear pathway to 25% EBITDA margins in the not-too-distant future. So I think that's quite strong. The fourth element I would highlight is we've been able to do a number of strong technology bolt-on M&A transactions. We developed a really good playbook on integration and how to do those type of things when we created the original Expro as a company. So I think we have a really good playbook, we can leverage and take advantage of. And finally, I think we're really coming into a point in time for Expro were to an inflection point. We're kind of seeing the drilling completions activity come together. We're finally seeing the kind of cost-out synergies, those type of things folding in our M&A transactions, we'll really be able to hit the ground running and really be effective in in 2025 and beyond. So I'm really excited about kind of where we're at as a company. I think despite some of the concerns around some of the macro, I think that's going to be really strong for offshore internationally. And quite frankly, we're almost a pure-play offshore international company. I think that makes us comment a unique position today.

Great, Mike, great with your introductory comments. So let's see if we can unpack some of those. Let's start with the macro. Any investment in an oil and gas lever name kind of starts with the macro. Give us some thoughts on what you're seeing internationally and offshore and what is driving some of the enthusiasm that you're seeing in terms of favorable trends.

A couple of things I would highlight is. Number one, I think the kind of that golden triangle of Gulf of Mexico, Brazil, West Africa, that's going to continue to be strong and continue to have a strong level of activity. And fundamentally, let's keep in mind that especially for deepwater and ultra-deepwater projects, the efficiency has had a massive impact on those type of operations. So you've now got breakeven economics that are in the -- begins with a 4. So you've got $40-ish barrel breakeven economics. It completely changes. A lot of people ask, well, what's changed? How come it so much better today? Fundamentally, it's the drilling efficiency, the completion efficiency, how the operations are run. If you take a project like Guyana, there's a number of wells in Guyana today that are drilled and completed in 35 days. Very similar structure, very similar, geologically very similar reservoir, very similar completion designs and Ghana. And back in 2013, 2014, those were wells that were going to be 100 to 120 days drill in complete time. So as you get more and more efficiency and you start to move into much lower days to complete and days to drill, that's why you get that cost leverage to move into it. So I think the macro is that's why I said earlier, I think the investment dollars are going to shift not only internationally, but in particular, into offshore projects. So I think places like Brazil, Gulf of Mexico, West Africa, in particular continue to be strong.

Yes. One of the questions that's come up more recently is some noise, I'd say, out of Saudi Arabia. As you know, earlier this year, Saudi Aramco announced its decision to maintain its MPC at 12 million barrels, and they lowered some CapEx. Broadly, can you talk about how much of Expro's business is in the Middle East? And does this kind of softening of potential CapEx trends in Saudi impact you anyway?

That's a good question. Frankly, it's one we get asked by a lot of investors. And fortunately for me, I lived and worked in Saudi earlier in my career. So I've got a long history and a fair bit of knowledge with the Kingdom. I think that whatever you have to keep in mind is they're producing about 10 million barrels a day today. They have capacity to produce about 11. The original plan was to try to get them to having 13 million barrels a day of capacity. They weren't -- they didn't intend to produce it. So to some sense, to have that capacity and to not produce it because they're trying to maintain proper balance within OPEC was a little bit -- a little bit confusing to some. But let's also keep in mind, even with the investments that Aramco is now going to make over the course of the next several years, it's still going to be single to double digits of investment growth in the next several years. it's still going to be very strong. And for us, one of the things you have to -- one of the realities you have to live with dealing with the national oil companies is it takes a long time to build a relationship, it takes a long time to build a footprint and we've had activity in the Kingdom for 35 years -- excuse me, for about 30 years, and we've got that relationship. And even we were able to lever one of the first revenue opportunities -- revenue synergy opportunities we had when we first made the merger with Frank's and Expro was in Saudi. We were able to leverage some of the well construction activity because of our long-standing expert relationships in the Kingdom. So it's one -- it's going to have a strong level of activity and let's keep in mind, the very lowest lifting costs anywhere in the world is in Saudi. The very last barrel of oil that will be produced in the world will come out of Saudi. So I think it's going to continue to be strong. And it's an area in a market we continue to provide a lot of support into.

Okay. You highlighted the company's leverage to international offshore fundamentals. You mentioned that 70% of your top line maybe driven by D&C activities. Can you talk a little bit about your core portfolio and maybe a little bit about your strategic -- your core strategy?

Sure. So we -- really, the company is really organized around four key business lines: Well construction, well flow management, subsea well access and our production and our well intervention integrity businesses. Within all four of those, particularly in well construction, well flow management, subsea well access, we have really strong moats around that, whether it's been all throughout the pandemic, we continue to invest in technology, we continue to invest in our people. But we've really got some really strong levels of activity in each of those three business lines that oftentimes, it's a 2-horse race with ourselves or some of our bigger competitors. And we continue to invest in our technology to drive efficiency, to reduce the number of personnel on board, those type of things. and it just really makes it a defensible scenario, in essence, it becomes higher barriers to entry. And so our strategy really has been to continue to grow that. We've got great relevancy with our customers today and the product lines that we provide, but we need to be able to do more for our customers and be able to provide more services, more solutions on an international footprint, and that's why we continue to try to lean hard into that.

Okay. You mentioned earlier you expect to deliver above 20% EBITDA margins this year. I think your 2024 outlook calls for -- and I'm using midpoint is about $1.65 billion of revenue $350 million of EBITDA. Just talk to us about just general confidence on delivering on that outlook and some of the pushes and pulls.

No. So we reaffirmed our guidance after Q1. Q2 is -- continues to be strong. The production activity or excuse me -- the outlook we see for our customers and their projects throughout the rest of the year are quite strong. The guidance -- the midpoint of our guidance is, I'm not going to say it's a layup, but it certainly is one we have a lot of confidence in today that we can continue to deliver on that. . And a lot of it is really maintaining some of the operational leverage we've been able to create the efficiencies, new technology introduction, those type of things, but we feel really strongly. We feel really good about how we're sitting for 2024.

Great. You talked a little bit about the M&A playbook that you and Quinn have been executing on. Could you talk a little bit about the Coretrax acquisitions which recently closed and maybe a little bit ahead of expectations.

Yes, we were able to -- we thought we'd be able to get that closed by July 1. We actually were able to close it for the 1st of May. So it got done, and we were just waiting on some regulatory approvals. Ironically in Saudi was the one we were waiting for. And that took a little bit more time that happened during Ramadan. We were able to close that first of May, again, gives us -- that's a business that has some great drilling -- I mean, some great drilling technologies, ancillary services add-ons that will complement our portfolio well construction today. We also have an expandables business that's much more of a kind of through tubing as more of a remediation going and repair old wells, type activity very strong here in the U.S. It's one we're really excited about. It operates in probably 9 or 10 countries today. Greater Expro, we operate about 60 countries. We really think we can internationalize that business. Really great team, really high energy. We're really excited to bring those guys in and obviously being able to get it closed a couple of months earlier was helpful for us, too.

Got it. Got it. So can you talk a little bit about the overlap in Coretrax and how you can integrate a kind of solution to your customers, integrate, there are only 9 or 10 countries of -- just trying to understand what the...

Yes. So it really is -- we've got some really strong niche drilling tool technologies today that exist in legacy Expro. This will actually help us add more to the portfolio, have more -- be able to add more wellbore cleanup tools and circulating tools and those type of things, just adds more to the portfolio. Really becomes a -- just becomes more of a complete drilling service for our customers. It just gives us more of kind of a catalog, so to speak with them. And because of the nature of that business relatively new, has not been able to have some of the market penetration into other countries, very strong. About half of the revenue comes today comes from Saudi. So that's a great place for us. We don't see any impact of that with the rig count changes and those type of things from Aramco, but really been able to leverage that. And even the expandables business in places like Australia, some of the coal seam, gas operations in Australia. A lot of corrosion related damage in wellbores. We can go in through casing, run it's an expandable patch, and you can remediate those wells. So really kind of strengthens our OpEx spend from our customers because they're existing wellbores that they've not been able to continue to produce through this allows us to kind of remediate those. So good technology, we can leverage and certainly leverage some of the really good customer relationships we have, both with the IOCs as well as the NOC type customers outside of a market like Saudi.

Okay. And that's the type of business. I think the Street had been thinking is a $10 million to $12 million a month kind of business, 20% margin, there was something...

Yes. I mean, what we said was when we announced the transaction was this is probably $140 million to $160 million annual business, and it's going to be accretive to our EBITDA margins today. It's probably going to be closer to 30%. So it's a very, very high-quality business with some good technology. It's one of the few -- we're only about 5% of our revenue today comes from U.S. land. We have very intentionally continued to rightsize our business in the U.S. land for us, the services we provide has just become too commoditized to too much competition. The Coretrax expandable business is very strong and very solid in U.S. land. It's a unique technology. The competitive landscape is pretty narrow. Can do the same thing. You can go into wellbores that they've either had damage from corrosive damage or erosive damage from fracs and those type of things. So, gives us a way to play in the U.S. land market. It's not really people-dependent, more on technology, more on metallurgy, we can really kind of leverage that. So it's a great business. We're really excited to be able to go out and bring it in under the house, so to speak.

Okay. Quickly on -- how is the integration going with the PRT acquisition that goes in 4Q?

It's going well. I mean it's -- that business is predominantly Gulf of Mexico. So it was not -- it's not a real complicated one to integrate because it's largely Gulf of Mexico, really helpful because it is a -- this really is much more along the subsea landing string type business in completions operations. It's a fit-for-purpose technology. We kind of went out there with our traditional landing string business. Analogy is we kind of went out there with a Cadillac and what the market really needed was a Buick. The CapEx cost for our equipment is probably closer to $8 million or $9 million of string. The PRT solution is much more kind of $1.5 million of CapEx. It's much more fit for purpose, and we've been able to -- we've already been able to really establish that. The benefit with that one is we think that some of the ancillary services that PRT provides today in the Gulf of Mexico, we're going to be able to leverage that into more of the international markets. So we think there's some good pull-through with that, that we can -- we're not going to internationalize the landing stream business because it's a different technical requirements. But the rest of the kind of hook-to-hanger concept is something we'll be able to globally deploy as well.

Okay. On the 1Q call, you and Quinn talked a little bit about some M&A opportunities and you kind of characterize those in smaller, I should -- less than $100 million, kind of $100 million to $500 million, maybe even some opportunities greater than that, but give us a sense of the opportunity set and what you're thinking about?

Yes, I mean we -- so we actually looked at in 2023 38 or 39 M&A targets. And this ranged from a couple of million bucks to $500 million plus. And we did some level of diligence on those that could have been very superficial or much more extensive. But for us, it all starts with what's the industrial logic. Does the industrial logic fit? Does it make sense? And I can tell you, it's -- as I -- as we did the Frank's merger, as we did PRT, as we did Coretrax, I would go see customers, and I'd be all excited to talk to him and tell them about this great acquisition we made and almost every instance, this is what I got, they gave me a stop sign. We know you, we know Coretrax, you don't have to explain it to us. When the industrial logic is so obvious to our customers, it makes it really easy for Quinn and I to stand up and explain to the investment community of why this makes sense. So for us, it really starts with the industrial logic. And then the other addition to that is we're going to be patient to get these things done. The economics are going to have to make sense as well. Coretrax probably took us two years to get done. We could have done it a year before at a much higher price point, but we were patient because we felt like it was the right thing for them and the right thing for us. So lots of opportunities. I think fundamentally, the needs to continue to be consolidation within oilfield services. There's far too many sub billion-dollar market cap companies. And I think we've seen some bigger ones that have happened. I think we'll continue to see some M&A activity going on in the space because I think it's fundamentally what we need.

Yes. So if we look at some of your more recent M&A activity has been focused on selectively building out your well construction portfolio. Is that fair?

Well, really it's been well construction. It's been -- we've really covered three of the four product lines. It's been well construction, it's been intervention in integrity and it's also been around our subsea well access business. So we've done all through. Yes, we try to cover the basis, so to speak.

Yes. And I know -- and I wasn't able to attend, but you had an event to showcase some of your select well construction technologies in Houston. Maybe give us a sense of what I have -- may have missed.

No, it was a great opportunity for us to really highlight -- we're talking about a well construction business that we've been doing this for 80 years. I mean, so there is a tremendous amount of knowledge. We invest in technology. Everybody that was there, we had a mix of a lot of customers. We had a few analysts that were there as well. And everybody walked away and said, "Wow, I didn't realize there was so much technology involved in well construction. " And we've really tried to accelerate that the last few years, especially around how are we going to improve operational efficiencies, how are we going to improve red zone management. We don't want people to have hands on equipment. We've moved to much more automation, more machine learning and that's really helped us because not only does it give you some HSE benefits, it gives you some efficiency benefits. But also, quite frankly, it also reduces the number of personnel on board as required. So you would go from a traditional crew of 9 down to a crew of 2. And not only is that helpful for the operator because bed space is always a challenge for operators, it's also helpful for us because hiring people in the industry today is a bit of a challenge, that same crew of 9, now we've got 7 crew that we can send to cover 3.5 other rigs worth of activity. So it gives us that efficiencies, brings more repeatability to our customers. But really, it was around the level of technology that was there that everybody can start to see that there's been a lot of evolution and a lot of very purposeful engineering to start to make these things more efficient and more and just more operationally sensitive.

You've always had a leading market share in TRS. But what are some of those technologies that you're excited about, whether in development or recently deployed?

So really around -- I just highlighted our CENTRI-FI technology and our iTONG technology. It truly it's the automation aspects of it. It's being able to demand, derisk. We've developed some -- we had a collaboration and eventually led to an acquisition of a very novel flexible coil hose. Operations, a much smaller footprint. It allows you to do kind of lightweight coiled tubing interventions, you can do gas lift improvements. You can spot asset and those type things, but it's on a much smaller footprint and you actually run it in conjunction with a traditional wireline unit. So you can go to smaller platforms, you can go to weight restricted platforms and probably more importantly for operators all of a sudden now you rig up that equipment in a matter of hours, not days, like you do with traditional coiled tubing equipment. So very much around how do you drive the operational efficiencies, but how do you drive those kind of improvements. Because there's a tremendous number of wells that needed to be intervened on globally, and it just helps provide that additional support for it.

Okay. You mentioned a pathway longer term to $2 billion of revenue and 25% EBITDA margins versus this year's guide again is $1.65 billion of revenue at 21% margins. Talk to us about that pathway what needs to happen to be able to get to that.

And it's -- that's not an aspirational -- that's not an aspirational number for us. It's very much we see a clear pathway to $2 billion of revenue and 25% EBITDA margins. And we'll see that -- we'll see that happen in 2025. And a run rate like that? Is it going to be the month of December? Is it going to be the fourth quarter? We're going to see those kind of run rates next year. And part of why I can have confidence in that is the margin expansion for us is really going to happen because of three things. One is going to be a little bit of pricing, get some net pricing improvement, but that's not the key element. The operational leverage that we've created, because we've really driven efficiency as we've done the integration with well construction. We've taken a tremendous amount of support costs out, which makes us run a lot better. And the third element really is around mix. And the mix, as you start to see more drilling and completions-related activity, more deepwater, ultra-deepwater type activity, those come at much higher fall-through margins for us. And as we continue to see that evolve, that's going to allow us to be on that kind of path. So it's not -- 25% EBITDA margin is not aspirational for us. You got to keep in mind, if you look at a pro forma of the two companies back in kind of 2014, 2015, it was 30%, 31% EBITDA margins. So it's -- and we don't have to get back to the same pricing levels that we had then to be at mid- to upper 20s EBITDA margins. We just have to have that -- keep that operational leverage, continue to see the mix change. That's why I think, for us, the macro environment is actually going to be a positive. Because I think as I said earlier, those investment dollars are now only going to shift internationally. They're going to shift offshore and shift to deepwater. So I think we're in a good position to be able to capitalize on that and it's just something we're focused on, how do we continue to drive efficiency, whether it's technology or training or those kind of things, we're trying to drive efficiency and really kind of reduce our personnel dependency around some of these things.

Okay. Just a couple of more questions, and we'll turn it over for audience Q&A. Broadly in the deepwater, Mark, you talked about the Golden Triangle. I wanted to see if you could talk a little bit about West Africa. I met with Halliburton today, and they're starting to see some things that make them a little bit more optimistic about Nigeria, Angola, but maybe you could start there because I think that could be an important potential [indiscernible].

Sure, No, it's a great question. If you go back and you look at -- so globally, if you look at the number of FIDs or the dollars of FIDs that have been approved, kind of 2012 to 2014 versus 2024 to 2026, we're back to kind of the same level very consistent. But I think it's important. You've got to really peel a couple of layers back on that onion. And if you look at West Africa, in particular, and you look at deepwater, Deepwater 2012 to 2014, there was about $70 billion of FID sanctioned projects. Today, it's about $37 million or $38 billion. We're only about halfway there when it comes to West Africa projects. And I think that based on the technical inquiries we have, the budgetary pricing discussions we have, just the overall customer engagements, I think we're going to continue to see West Africa firm up. We're going to see the number of projects that are going to come around there. Those are -- and the level of FID approval today isn't because of the reservoir or the geology. It's much more around the conviction that the operators have ongoing and sanction these projects because you don't go to Angola and drill two wells. You go to Angola and you drill a 24, a 30-well project. And so I think that's why we'll start to see those. And I think it's also really helpful for us because we're so levered to drilling and completions and so levered to the CapEx spend, like more broadly to the industry as well, those projects are going to be 3- to 5-year projects. Even if they sanction it today, they won't start drilling that project until they get to '25, which means we've got some legs and we've got some runway into '28, 2029, 2030, I think we have some longevity to this. And I think that's when we'll start to see some of the drillers have some of their contract length and contract durations start to really pick up and those type things. So I agree. I think we're starting to see West Africa. We continue to see signs, and I think that will just especially as you kind of layer in the places like Namibia or those kind of places because they're not even in any of those numbers. They won't start drilling until probably '28 or '29. So I think it's just very positive. And when you're in a -- when you're in a high spread rate environment, offshore deepwater West Africa, it's going to be for a lot of our services, it's going to be a 2-horse race. And I guess we have some technical advantages there. I think we'll be able to really leverage that with our customers, and that's why we're excited to see that kind of activity occur down the road.

Do we have any questions in the audience? If not, I'll sneak in one more. Can you talk about -- obviously, you and Quinn are being disciplined but looking at some inorganic opportunities. How do you balance as you know, today's energy investors are looking for a little bit of return of capital, how do you balance some of those opportunities?

It's -- we've -- Fortunately, the two transactions we've been able to announce here with -- over the course of last year, I mean my 7-year-old grandson could do the math and see that it was accretive on day one with these. I mean it wasn't complicated. The technology fit gave us -- really protected our moats, but also was -- made sense to our customers, but also made sense to the market. So we continue to look at those kind of things. And we want to have a balanced capital return policy and sometimes doing M&A is a good use of our capital, but we let that whether it's our CapEx spend or it's M&A or it's share repurchase, those kind of things, we look at that kind of holistically. We look at how all of that capital competes for all of those. And we're mindful that there are expectations within the market for us to deliver on all those aspects.

Yes. Do you have a zero net balance sheet, right?

We do. We do. So we're in a -- we've got a strong balance sheet position. That's really helpful for us. And I think as we continue to -- I kind of -- you asked earlier, we kind of highlighted, we focused on a couple of those three product lines. I think over the course of time, today, we're very focused on customer CapEx spend. If I've learned nothing over the last 32 years, this is a cyclical business, and we're going to have a cycle and we're going to have -- you have to build to weather those cycles. So for us to start to -- not today, not tomorrow, but down the road to start looking more at how do we -- when you're 70% CapEx and 30% OpEx, how do we get to more of a 55, 45, we need to evolve towards that because we need to be more cycle-proof. I think we've got a few years to solve those things, but I think it's part of the calculus we look at as well.

Great. Thanks, Mike. I think we're out of time. Really appreciate your presentation today.

Thank you, everybody.