Pason Systems Inc. (PSI) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Annual Meeting of Stockholders of Pason Systems Inc. Please note that today's meeting is being recorded. It's now my pleasure to turn today's meeting over to Natalie Fenez, Corporate Secretary to the Board of Directors for Pason Systems, Inc. Ma'am, the floor is yours.

Thank you for joining us today. My name is Natalie Fenez, and I am the Corporate Secretary of the Board of Directors of Pason. Before we begin, I'd like to provide a quick overview of the Lumi virtual meeting platform. You should now see the agenda on your screen. At the top of the agenda page is a legend showing 4 different icons you may click on the screen to access different parts of the platform. For example, to ask a question at any time, click the comment bubble icon. To view the PowerPoint slides for the second half of the presentation, click the icon shaped like a broadcasting tower. If your screen shows only the PowerPoint slides or the questions page, and you wish to return to the agenda, click the eye icon. The voting icon will only be displayed once the polls are open. Thank you, and I will now turn it over to our Chairman, Mr. Marcel Kessler.

Thank you, Natalie. I would like to welcome all our virtual attendees to Pason Systems Inc. 2021 Annual General and Special Meeting of Shareholders. I am happy that you are able to join us today. I am Marcel Kessler, Chair of the Board of Directors of Pason. As for the formal part of today's meeting, Jon Faber, our CEO, will take us through 2020 and first quarter 2021 operational and financial results. Jon will take any questions after the formal part of the meeting. You are also welcome to join the quarterly investor call to be held tomorrow morning at 9:00 a.m. Mountain Time. Let's now begin the official part of today's meeting. I call to order the Annual General and Special Meeting of Shareholders of Pason Systems, Inc. I'll chair the meeting; Natalie Fenez, Pason's Corporate Secretary, will act as secretary of the meeting; Jennifer Oliver of Computershare will act as scrutineer. The notice calling this meeting of shareholders was mailed to all shareholders in advance of the meeting and is dated March 17, 2021. That notice will be attached to the minutes of today's meeting, which will be available in a few days. According to the attendance report the scrutineer gave me, the quorum requirement set out in Pason's bylaws has been met. I will now turn the call back to Natalie Fenez to explain the voting process for this virtual meeting.

Thank you, Mr. Chairman. We have received all proxy voting results for today's resolutions in advance of this meeting. Anyone in attendance today, who has not yet voted and is not signed in as a guest, will have an opportunity to vote online in real-time using the Lumi platform. Rather than hold up the business of the meeting for the final tabulation of votes cast on each motion, the Chairman will be providing the preliminary results received from the scrutineer in advance of this meeting on each of the motions presented. The Chairman has directed that the final combined results of the advanced polls and the votes entered through the virtual platform on all motions today be included with the minutes of this meeting. These results will also be available in the report on voting results posted on SEDAR following the termination of this meeting. The polls are now open. Shareholders and duly appointed proxies will now see your screens change to show the various items of business for today's meeting. You will have from now until the conclusion of this meeting to cast your votes on each of these items. Over to you, Mr. Chairman.

Thank you, Natalie. The minutes of the last shareholders' meeting and the voting results from last year's meeting held on April 30, 2020, are in the corporate records and are available for any shareholder to review. If you would like a copy, please contact Natalie Fenez or you can access the information on SEDAR. Unless someone wants them read or takes issue with them, I will entertain a motion to adopt the minutes from last year's annual meeting. As a reminder, only registered shareholders or proxy holders are entitled to make a motion or vote in favor of a motion made during this meeting.

Hello. My name is Ryan van Beurden, and I am a shareholder of Pason. I move the minutes from last year's shareholder meeting held on April 30, 2020, be approved.

Hello. My name is Andrew Lambert, and I'm a shareholder of Pason. I second that motion.

Thank you. Are there any questions on this motion? Seeing none, I declare the motion carried. The next item of business is to receive Pason's 2020 year-end financial statements, which are included in the annual report to shareholders, along with the auditor's report on those financial statements. Copies of the financial statements have been previously made available on SEDAR. If you would like a hard copy, please contact Natalie Fenez. If any shareholders have questions regarding the financial statements, Jon Faber will take them after the formal part of the meeting. The next item of business is to fix the number of directors to be elected at this meeting. Pason's articles provide that it may have between 1 and 15 directors on its Board. According to Pason's bylaws, at every annual meeting, shareholders must fix the number of directors to be elected at that meeting. The Board has recommended in the management information circular that shareholders fix the number of directors at 6, and 6 individuals have been nominated to stand for election.

This is Andrew Lambert, and I move to fix the number of directors at 6.

This is Ryan van Beurden, and I second that motion.

Thank you. Are there any questions on this motion? Seeing none, let's proceed to the scrutineer's report. According to the report, the preliminary results of vote to fix the number of directors at 6 are as follows: votes for, 60,887,498; votes against, 560,396. I declare the motion carried. The next item of business is the election of the 6 directors. I would ask someone to nominate those persons whose names appear as nominee directors in the management information circular.

This is Ryan van Beurden, and I nominate each of the following for election as directors: Marcel Kessler, Jay Collins, Jon Faber, Judi Hess, James Howe and Laura Schwinn.

Thank you, Ryan. Are there any questions on the director nominations? Seeing none, may I please have a motion to close nominations and elect the directors?

This is Andrew Lambert, and I move that nominations be closed and that the 6 individuals nominated be elected as directors of the corporation.

This is Ryan van Beurden, and I second that motion.

Are there any questions on this motion? Seeing none, let's proceed to the scrutineer's report. According to the report, the preliminary voting results are as follows. For myself: votes for, 60,009,947; votes withheld, 1,437,947. Jay Collins: votes for, 61,216,997; votes withheld, 230,897. For Jon Faber: votes for, 61,434,423; votes withheld, 13,471. Judi Hess: votes for, 60,045,188; votes withheld, 1,402,706. James Howe: votes for, 59,680,005; withheld, 1,769,889. And last but not least, Laura Schwinn: votes for, 59,859,158; votes withheld, 1,588,736. I would like to remind you that Pason's voting policy requires that each director nominee receives more than 50% of the votes cast. I see that all the directors have received more than 50%. Therefore, I declare that the 6 nominees have been duly elected as directors of Pason. As noted previously, the final voting results for each director will be available on SEDAR after this meeting and will also be disclosed by press release. The next item of business is the appointment of Pason's auditors for 2021 and authorizing Pason's Board of Directors to fix the auditor's compensation. The accounting firm of Deloitte has been nominated. May I please have a motion to appoint Deloitte as Pason's auditors and authorizing the Board to fix the auditors remuneration?

This is Andrew Lambert and I so move.

This is Ryan van Beurden, and I second that motion.

Are there any questions on this motion? Seeing none, let's proceed to the scrutineer's report. According to the report, the preliminary voting results for this item are: votes for, 60,163,648 million; votes withheld, 2,393,215. I declare the motion carried. The next item of business is the advisory vote on the Board's philosophy on executive compensation. This is referred to as a say-on-pay vote because it gives shareholders an opportunity to comment on how the Board approaches the compensation of the CEO and other executives. But it is not a motion for approval of executive compensation. As indicated in the scrutineer's report, the preliminary results of the vote are as follows: votes for, 59,583,597, votes against 1,864,297. This is a 1-minute warning prior to polls being closed. If you are participating in this meeting with the virtual platform, please ensure your votes are recorded now. [Voting]

The next item of business is the approval of Pason's 2021 stock option plan as presented in the management information circular. According to the scrutineer's report, the preliminary voting results are as follows: votes for, 59,802,871; votes against, 1,645,023. I declare the motion carried. The polls are now closed. Is there any other business to discuss at today's meeting? Seeing none, I will now entertain a motion to end the meeting.

This is Andrew Lambert, and I move this meeting be concluded.

This is Ryan van Beurden, and I second that motion.

Are there any objections? If not, then I declare this meeting ended. And this concludes the formal part of Pason shareholder meeting. I would now ask Jon to give us a presentation about Pason's operations and financial performance for 2020 as well as the results from the first quarter of 2021. Thank you for your attention.

Thank you, Marcel. For those of you following along online, I'll be referring to the corporate update presentation posted on Lumi, beginning on Slide 4, titled Corporate Update, and I will reference the slides as we go through the presentation this afternoon. In my update this afternoon, I intend to cover a few areas. First, I'll provide a brief overview of Pason for those who are less familiar with the company. I'll speak briefly to some of the company's achievements in the face of a very challenging year in 2020. And finally, I'll provide some thoughts around our outlook, both in the short to medium term as well as our longer-term strategy for continued growth. Those who are familiar with Pason will know that in July 2020, we announced the leadership transition that was aligned with the company's long-term succession plan. Slide 5 provides evidence that while some of our leadership has transitioned, our legal counsel remains unchanged. I would highlight that some of the comments I will make today are forward-looking in nature, and I would encourage listeners to use appropriate caution as a result. Pason has a history of more than 40 years, and Slide 6 summarizes some of the areas where I believe our track record has been enviable. Pason is an innovative company, Pason is a profitable company, and Pason is a responsible company. The remainder of the presentation will flesh out these 3 areas, but allow me to make a few summary comments. Over the years, Pason has been innovative in the development of technologies and service, allowing the company to carve out a leading position in providing end-to-end data solutions for the oil and gas drilling industry. The scope of our technology platform and the scale of our business have made it immensely challenging for other companies to compete in this space for decades. Pason has built a profitable company by maintaining a disciplined approach to operating costs, capital investments and capital allocation. As a result, as industry conditions become more favorable, we generate strong free cash flow. Our significant operating leverage means that as revenue improves, we see significant improvements in our earnings. That operating leverage also means that we need to maintain a prudent balance sheet to withstand the inevitable swings in industry activity. Nowhere was this more clear that in 2020 when industry activity decreased by nearly 2/3, and yet we were able to generate positive free cash flow. Our leading position in the drilling market, a minority investment in the completions market and our efforts in the solar and energy storage market through Energy Toolbase, position us for continued growth in the future. And finally, we are a responsible company. We have built a strong and unique corporate culture where we empower people to do the right thing. We have strong corporate governance practices to provide confidence to our shareholders that their investments are being managed appropriately. And we look to contribute to the communities in which we operate. Slide 7 provides an overview of our senior management team. What I would have you take away from this slide is that while I mentioned our earlier leadership transition, the vast majority of our management team has been at Pason for many years. So the ways in which we think can operate have not significantly changed from the success of the past decade or so. Slide 8 provides an overview of our drilling-related business. The top of the chart illustrates what we do. The middle graphics show where we do it, and the bottom highlights why it matters to customers. By making drilling data visible and accessible to users on the drilling site and in the office, or remotely, we allow customers to collaborate on real-time decision-making. The data is used at the drilling site to improve the efficiency and safety of drilling operations. And increasingly, customers are looking to automation technologies to deliver these results, and the data that we provide is used to power these efforts. In the office, the data provides real-time visibility into activity at the rig. Customers are then able to use that data to report on current operations and to inform plans for future drilling activity. The growing use of analytics in evaluating drilling performance drives the need for accurate, reliable and timely data. All of these activities are supported by a best-in-class service organization, as outlined on Slide 9. We provide a variety of services to customers at the rig, in the office and to third parties, both through our team of highly skilled field technicians and our 24/7 help desk. Slide 10 provides a summary of our efforts in the solar and energy storage industry. We are developing an integrated platform of tools to model the economics of a proposed project to control the energy storage device once commissioned and to monitor the performance of the system over time. Each of these tools equip project developers and asset owners to fulfill the number of objectives as depicted on the diagram. Importantly, by using common logic and models throughout the platform, customer confidence in the ability of the project to deliver its expected results is increased. Across our business, we generate the majority of our revenue from North American markets, as shown in Slide 11. We also have leading market share positions in Latin America and Australia as well as a growing presence in the Middle East. The one number I would highlight on Slide 11 is the number of unique rigs serviced last year. Often when we speak about rig counts, we refer to the average number of working rigs. But when you think about the challenges of installation and service, it is more useful to consider the number of unique rigs. The fact that we serviced nearly 1,500 unique rigs last year through a global pandemic further underscores the difficulty in replicating Pason's service. Turning to Slide 12. I would like to highlight a couple of other achievements from 2020. First and foremost, I want to applaud the extraordinary efforts of our people in maintaining our service delivery and technology development through the pandemic. Our field organization has long worked remotely to ensure rigs remain up and running, and our office colleagues were able to transition to remote working arrangements without missing a beat a year ago. In addition to our leadership transition, we also consolidated our North American operations. This has allowed us to manage our assets more efficiently and to deliver more consistent product and service offerings for our customers. We also completed the integration of Pason Power and Energy Toolbase. Most importantly, we made the necessary investment through the depths of the downturn to strengthen our leading service and technology position. I've noted a few times in our quarterly filings, and it bears repeating here that competitive gaps tend to expand the most and persist the longest based on relative levels of investment through downturns. Our competitive position remains strong, as evidenced by our ability to grow North American revenue per industry day by 6% from 2019 levels. We adjusted our cost structure to reflect our expectations of what medium-term industry activity levels would look like rather than in response to the severe short-term decreases in activity. We also maintained disciplined oversight of capital expenditures and working capital. And as a result, we were able to generate free cash flow of $54 million and returned $50 million to shareholders through dividends and share repurchases. In short, we protected our competitive position through the pandemic. We protected the capabilities required to strengthen that position as the industry recovers, and we protected our strong balance sheet. And now as we emerge from the lowest parts of the downturn, Pason is in a strong competitive and financial position. I'll now turn to our outlook. We are encouraged about the prospects for increasing drilling activity and stronger profitability going forward. On Slide 13, we show some of the leading indicators of U.S. drilling activity. In the top-left chart, we show the long-term global energy demand forecast from the Energy Information Administration. Global demand for energy is expected to continue to increase over the next 30 years. Renewables will be an important contributor to meeting that growth in demand, but you can see from this chart that there is a significant role for hydrocarbons going forward. In fact, demand for oil and gas is expected to continue to grow between 2020 and 2050. Looking at the shorter-term demand for oil in the chart on the top right, global demand is expected to return to prepandemic levels by next year. Even today, while we continue to navigate the pandemic, global oil demand is at 95% of its prepandemic highs. Demand needs to be met by supply, and some of that supply will be met by production increases from OPEC+ countries. And as they continue to increase production, their excess capacity begins to decline. The bottom 2 charts on Page 13 point to the supply picture in the United States. Oil supply needs to come from current production, from previous production held in storage or from new production. Current U.S. oil production remains approximately 15% below prepandemic levels. Oil storage remains above prepandemic levels, but continues to decline. Today, there are 33 days of supply in storage, which is down 15% from a year ago. New production needs to come from new wellbores. The inventory of drilled but uncompleted wells, which we often refer to in the industry as DUCs, has been steadily declining since last summer, as seen in the chart on the bottom right. The only remaining source of supply then is from new drilling activity, and Pason stands to benefit as that activity increases. Pason's revenue is highly correlated to North American drilling activity, as seen in the chart on the left side of Slide 14. We have managed to grow revenue per industry day consistently through industry cycles. As such, if North American drilling activity continues to increase as it is expected to do, Pason's revenue should follow suit. Looking at the left-hand side of Slide 15, you can see that our operating costs, represented by the gray bars, do not significantly change based on revenue. We expect this to remain the case going forward and, accordingly, revenue increases should translate into meaningful earnings increases. The right-hand side of Slide 15 illustrates that as the business has become less capital intensitive, well over 50% of adjusted EBITDA is converted to free cash flow. Slide 16 illustrates the change in the capital intensity of the business, particularly after a significant capital program in 2014, where we deployed a new platform of computing and communications capabilities that we can now leverage through more software offerings. We have also been disciplined in returning capital to shareholders through dividends and share repurchases. Earlier this afternoon, we released our first quarter 2021 financial results. Our CFO Celine Boston and myself will discuss these results in more detail in a conference call tomorrow morning. But on Slide 17, we note some of the highlights. Compared to the first quarter of 2020, these results are down quite significantly because the first quarter of last year was prior to the full effects of the COVID-19 pandemic. However, sequentially from the fourth quarter of last year, industrial activity and financial results are improved. We generated $43 million in revenue, $13 million in adjusted EBITDA and $9 million in free cash flow during the quarter, and we continue to have a strong balance sheet. The benefits of our operating leverage have shown over the past 2 quarters, with incremental adjusted EBITDA margins of 73% since industry activity bottomed in the third quarter of 2020. Looking at our 2021 priorities on Slide 18. First and foremost, our company's success has always been rooted in the people we have and in the culture we've built. Continuing to motivate, develop, attract and ensure the well-being of exceptional talent will always be our first priority. We expect the industry to continue to recover through 2021, and we are focused on ensuring that we fully participate in that recovery. The industry looks increasingly to technology to improve drilling performance. We are well positioned for growth, particularly with our Drilling Intelligence and data delivery technologies. We will remain disciplined in managing our capital and operating costs. And we will advance our growth-related investments in other industries, namely in completions through intelligent wellhead systems and in solar and energy storage through Energy Toolbase. Our 2021 priorities are aligned with our long-term strategy for growth, depicted on Slide 19. We will work to maintain our leadership position in Drilling Data technologies and deliver additional value for our customers through our existing product suite and new product innovations in all of our global markets. We will look for additional sources of revenue and earnings growth in other markets, both within oil and gas and in other industries, where we believe Pason's capabilities can be uniquely applied in a compelling manner. Finally, I'd like to make a few comments about Pason as a responsible company, as outlined on Slide 20. Earlier, I highlighted the important roles that both hydrocarbons and renewable energy sources will need to play in order to meet growing global demand for energy. As a society, getting to a cleaner energy future will require that we both find ways to develop hydrocarbons with less environmental impact and advance the development of alternative energies. Pason's products help increase the efficiency of drilling operations and reduce nonproductive time. Together, these impacts reduce overall time, thereby reducing the carbon impact of the drilling operation. Our PVT helps eliminate potential significant environmental impacts, such as surface spills. And we also look to minimize the environmental impact of our own operations, including through the cleaning, recycling and disposal of equipment. Through Energy Toolbase, we're developing technologies that seek to improve the economics and system deliverability of solar and energy storage solutions. We are committed to the total well-being of our colleagues and ensuring their safety. Our products improve the safety of drilling operations. We make significant investments to protect our customers' data. And finally, we ensure we have strong corporate governance practices in place. We have an experienced and diverse Board of Directors, who provide oversight of our strategic planning, risk management and executive leadership and who ensure that our policies, procedures and incentives are aligned with the interests of our stakeholders. Slide 21 summarizes our strengths. We are a clear market leader with a distinctive technology position. We have outstanding financial strength and free cash flow generation capabilities, and we are well positioned for growth in 2021 and beyond. We are innovative, we are profitable, and we are responsible. At this point, I'd be happy to take any questions. I know we have many employees joining us today for our annual general meeting, and I look forward to our regular quarterly town hall scheduled for next week as well, if you have questions at that time when we can virtually see each other face to face. It doesn't appear we have any questions this afternoon. So I'll thank you for taking the time to join our annual general Meeting. We hope to speak with some of you tomorrow morning at 9:00 on our quarterly conference call, and we look forward to seeing many others of you at a future date. Thank you very much.

That concludes today's conference. Thank you all for participating. You may now disconnect.