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

Hello, and welcome to the Annual Meeting of Shareholders of Pason Systems, Inc. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Marcel Kessler, Chief of the Board of Directors. Mr. Kessler, the floor is yours.

Thank you. I would like to welcome all our virtual attendees to Pason Systems, Inc's. 2022 Annual General Meeting of Shareholders. I am pleased that you're able to join us today. I am Marcel Kessler, Chair of the Board of Directors of Pason. After the formal part of today's meeting, Jon Faber, our CEO, will take us through 2021 and first quarter 2022 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 a.m. Mountain Time. Let's now begin the official part of today's meeting. I now call to order the Annual General Meeting of Shareholders of Pason Systems, Inc. I will 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 the shareholders in advance of the meeting and is dated March 16, 2022. 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 that scrutineer gave me, the quorum requirements set out in Pason's bylaws have been met. I will now turn it over to Natalie to explain the voting process for this virtual meeting.

Thank you, Mr. Chair. 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 virtual platform. Rather than hold up the business of this meeting for the final tabulation of votes cast on each motion, the Chair will be providing the preliminary results received from the scrutineer in advance of this meeting on each of the motions presented. The Chair has directed that the final combined results of the advanced poll and the votes entered through the virtual platform on all motions today be included with the minutes of this meeting. The 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 are now able to vote on all 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. Back to you, Mr. Chair.

Thank you, Natalie. The meetings of the last shareholders meeting and the voting results from last year's meeting held on April 29, 2021, are in the corporate records and are available for any shareholder to review. If you would like a copy, please contact Natalie or you can access this 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 motions made during this meeting.

Hello. My name is Andrew Lambert, and I am a shareholder of Pason. I move to dispense with the reading of the minutes of the last shareholder meeting held on April 29, 2021, and as such minutes be approved.

Hello. My name is Ryan van Beurden, and I am a shareholder of Pason. I second that motion.

Are there any questions on this motion? Seeing none, I declare the motion carried. The next item of business is to receive Pason's 2021 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. If any shareholder has questions regarding the financial statements, Celine Boston, Pason's CFO, 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. Based on 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 Ryan van Beurden, and I move to fix the number of directors at 6.

This is Andrew Lamberts 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 results of the vote to fix the number of directors at 6 are as follows: 99% for, 1% against. 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 Andrew Lamberts, 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, Andrew. 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 Ryan van Beurden, and I move that nominations be closed and that the 6 individuals nominated be elected as directors of the corporation.

This is Andrew Lambert, 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 voting results are as follows: Marcel Kessler, myself, 96% for, 4% withheld. Jay Collins, 93% for, 7% withheld. Jon Faber, 99% for, 1% withheld. Judi Hess, 93% for, 7% withheld. James Howe, 92% for, 8% withheld. Laura Schwinn, 96% for, 4% withheld. 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 Deloitte has been nominated. May I please have a motion to appoint Deloitte as Pason's auditors and authorizing the Board to fix the auditor's remuneration.

This is Andrew Lambert, and I so move.

This is Ryan van Beurden. 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 84% for, 16% withheld. I declare the motion carried. And this is a 1-minute warning prior to polls being closed. If you are participating in the meeting through the virtual platform, please ensure your votes are recorded. 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 for executive compensation. As indicated in the scrutineers report, the preliminary results of the vote are as follows: 94% for, 6% against. The polls are now closed. Is there any other business to discuss at today's meeting or questions from any of the shareholders in attendance? 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.

Thank you. Are there any objections? Seeing none, then I declare this meeting ended. That concludes the formal part of Pason's shareholder meeting. Thank you, everyone, for your attention. I will now ask Jon to provide an update on Pason's operations and financial performance for 2021 as well as the results from the first quarter of 2022. Over to you, Jon.

Thank you, Marcel. Let me first thank those joining us today for your interest in Pason. My update this afternoon will cover 3 areas. First, I'll provide a brief overview of Pason for those who are less familiar with the company. Second, I'll speak to some of the company's recent performance. And finally, I'll provide some thoughts around our outlook both in the short to medium term as well as our long-term strategy for continued growth. Before I begin, I would note that some of my comments today are forward-looking in nature, and I would encourage listeners to use appropriate caution as a result. Pason is an innovative, profitable and responsible company. Today's presentation will provide more context in each of these areas, but allow me to start with a brief overview of each. Pason is a leading position as a global provider of end-to-end drilling data solutions for the oil and gas drilling industry, is rooted in our innovative approach to technology, customer support and service. 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 many years. We are focused on generating free cash flow and strong returns on invested capital. This allows us to maintain a prudent capital structure while providing cash returns to shareholders. By maintaining a disciplined approach to operating costs, working capital and capital investments, we are able to generate additional profits as the industry grows. We are making investments that allow us to achieve growth within the drilling and completion segments of oil and gas development, while positioning us for longer-term profitability within other forms of energy development, including solar and energy storage. 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. As our industry looks to help meet the world's energy needs while minimalizing the impact on our environment, we are proud to offer products and services that help reduce the environmental impact of the drilling operations by helping customers drill more efficiently and more effectively. Pason has a strong and committed senior leadership team. Many of our team members have been with Pason for more than a decade. As a result, we have a strong understanding of our unique strengths and capabilities and how to best apply them for continued success within our core business, as well as when we consider opportunities for new sources of growth. Slide 9 provides an overview of our drilling-related business. The top of the chart illustrates what we do. The middle graphic illustrates where we do it, and the bottom highlights why it matters to our 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. Increasingly, customers are looking to use automation and analytics technologies to improve their performance and the data that we provide is used to power those initiatives. 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. In order to effectively provide end-to-end management of drilling data for our customers from capturing the field all the way through to making the data accessible for use whether by Pason's products, customers' proprietary technologies or other third-party offerings, Pason develops and deploys a wide range of technologies. There is a significant scope of technical capabilities required to build and integrate the various technologies required to provide a seamless delivery of high-quality data. Providing these products and services not only requires a breadth of development capabilities, but also a highly motivated, best-in-class service and support organization. We provide a variety of services to customers at the rig, in the office and to third parties through both our team of highly skilled field technicians and our 24/7 help desk. Slide 11 provides a summary of our efforts in the solar and energy storage industry. We are developing an integrated platform tools to model the economics of a proposed project, control the energy storage device once commissioned, and monitor the performance of the system over time. Each of these tools equip project developers and asset owners to fulfill a number of objectives as depicted in the diagram. As customers deploy more and more energy storage assets, optimizing the performance of these assets through intelligent controls is becoming more important. And as a result, we are seeing growth in our pipeline of new project opportunities. Across our businesses, we generate the majority of our revenue from North American markets. 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 that I would highlight on this slide is the number of unique rigs serviced in the last year. Often when we speak about rig counts, we refer to the average number of working rigs. When you think about the challenges of installation and service, however, it's more useful to consider the number of unique rigs. The fact that we serviced nearly 1,500 unique rigs last year further underscores the importance of our deployment, service and support capabilities. We are concerned not only with our operational and financial performance, but also with ensuring that we are acting responsibly in the areas of environmental, social and governance matters. Both hydrocarbons and renewable energy sources will play important roles in meeting 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 Pit Volume Totalizer helps eliminate potential significant environmental impacts, such as blowouts and surface fills. While minimal to begin with, given our technology-based business model, where possible, we look to minimize the environmental impact of our own operations, including through the cleaning, recycling and disposal of equipment. Through Energy Toolbase, we are developing technologies that seek to improve the economics and system deliverability of solar and energy storage solutions. We have a unique and inspiring workplace culture, and we are committed to the total well-being of our colleagues. We are not only concerned with the safety of our own employees, but our products also help improve the safety of drilling operations for our customers. We make material investments to protect our customers' data in a world of growing and significant cybersecurity threats. 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 ensure that our policies, procedures and incentives are aligned with the interests of our stakeholders. Having provided a bit of an introduction to who Pason is, let me now provide some comments about our recent performance. In 2021, we faced the challenge of meeting a 20% growth in industry activity, while adapting to changing public health guidelines and restrictions related to the COVID-19 pandemic throughout the year. Through the worst of the downturn, we made the necessary investments to strengthen our leading service and technology position and customers rewarded us with the highest North American market share in the company's history in 2021. A significant driver of our stronger market share can be attributed to the increased focus customers are putting on the quality of data that they use to power their automation and analytics efforts. This has driven increased adoption in both our data delivery and Drilling Intelligence product categories. Importantly, we maintained our strong safety performance again in 2021. Our strong competitive position was evidenced by our ability to again grow Revenue per Industry Day by 6% from 2020 levels. Our disciplined management of operating costs, working capital and capital expenditures allowed us to generate $55 million of free cash flow, nearly half of which is returned to shareholders through regular dividends and share repurchases. Pason's revenue is highly correlated to North American drilling activity. As seen in the chart on the left side of Slide 15, we have managed to grow Revenue per Industry Day consistently through industry cycles. Since 2012, Pason's Revenue per Industry Day has increased by 77%, representing approximately 6.5% compound annual growth across the cycle. As such, if North American drilling activities to increase as it is expected to do, Pason's revenue should follow suit. Slide 16 illustrates that Pason has consistently generated positive free cash flow through industry cycles. A significant portion of our costs are fixed in nature, and as a result, as revenue improves, we expect that we will continue to post sector-leading margins and generate strong free cash flow. Our business has become much less capital intensive, 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 products. While our capital expenditures have been abnormally low over the last couple of years due to our ability to redeploy existing rental assets, we anticipate capital expenditures will normalize around $30 million to $35 million per year, which is still substantially lower than levels seen prior to 2014. We have also been disciplined in returning capital to shareholders through dividends and share repurchases, including a recent 60% increase in our quarterly dividend in March of 2022. Earlier this afternoon, we released our first quarter 2020 financial results. Our CFO, Celine Boston, and I will discuss these results in more detail in a conference call tomorrow morning. Allow me to provide a couple of highlights. The first quarter saw a continuation of the trend in growing industry activity that we have witnessed since the industry bottomed in the third quarter of 2020. North American land drilling activity was 57% higher in the quarter than in the prior year period. Better industry activity, including our international markets and record Revenue per Industry Day helped drive a 75% year-over-year increase in consolidated revenue. Revenue of $74.5 million was comparable to Pason's revenue in the first quarter of 2020 prior to the global shutdown due to the COVID-19 pandemic, and adjusted EBITDA margins also returned to prepandemic levels. Pason generated $33 million in adjusted EBITDA and $24 million in free cash flow during the quarter and exited the quarter $172 million in cash and cash equivalents with no interest-bearing debt. In short, our recent financial and operational performance illustrate our leading competitive position. We have maintained the capabilities required to strengthen that position as the industry continues to grow, and we have protected our strong balance sheet. As we look forward with an expectation of continued steady growth in industry activity, Pason is in a strong competitive and financial position. Our strategy for growth remains unchanged. We see opportunities to defend and grow our core business. We look to outperform growth in the underlying industry by providing the products and services that allow us to grow our market share, increase adoption of both existing and new products, and translate additional customer benefits into higher realized prices. I have already mentioned our expectation for continued steady growth in land drilling activity. Slide 20 illustrates at a high level, the oil and gas value chain. We have highlighted associated metrics as they compare to March 2020 prior to the global shutdown as a result of the COVID-19 pandemic. Global demand for oil is currently at pre-pandemic levels. While there are growing concerns around the demand impacts that might result from the current COVID-19 situation, particularly in China, as well as potential economic impact as central banks wrestle with high levels of inflation, the imbalance between supply and demand for oil remains significant. All major supply indicators are lower than March 2020. Supplies of oil and petroleum products are at their lowest level since 2008. There are 26 days of supply and storage, down 20% from a year ago. In response to high oil prices, the U.S. government recently announced plans to release 1 million barrels per day from the strategic petroleum reserve for up to 6 months, a plan which when fully implemented would result in shrinking the reserve to its lowest level since 1984. If the trend in storage is to be reversed or even slowed, new production will need to come on stream. That production can only come from existing wells represented by current production, wells that have already been drilled and are awaiting completion measured by drilled but uncompleted wells or newly drilled wells measured by a drilling rig count. Over the past 21 consecutive months, companies have drawn down their inventory of drilled but uncompleted wells through completions to bring on new production. As a result, the current inventory of [indiscernible] is now 49% below pre-pandemic levels and at its lowest level in more than 8 years. This inventory of wells awaiting completion will need to be replenished through new drilling and Pason stands to benefit as that activity increases. The Energy Information Administration expects global demand for energy to increase over the next 30 years. While renewables will be an important contributor to meeting that growth in demand, 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. The circumstances surrounding the current military conflict in the Ukraine are both troubling and unpredictable. The situation has caused governments to reconsider the geographic sources of their oil and gas supplies. How this will ultimately impact longer-term demand for North American oil is uncertain. However, even without considering the potential increase in demand, supply and demand fundamentals are supportive of continued industry growth in North American land drilling. Pason is well positioned to fully participate in this growth. In order to do so, our first priority remains ensuring that we are able to retain, motivate, develop and attract exceptional talent. An important part of our commitment to our employees is ensuring their safety and well-being. As the industry looks increasingly to technology to improve drilling performance, we are focused on growing the adoption of our data delivery and drilling intelligence technologies. We will remain disciplined in maintaining or managing our capital and operating costs. And we will continue to position ourselves for longer-term profitability and free cash flow generation by advancing our growth-related investments in other industries, namely completions through Intelligent Wellhead Systems and solar and energy storage through Energy Toolbase. Slide 22 summarizes our strengths. We are a clear 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 2022 and beyond. We are innovative, we are profitable and we are responsible. Before we take questions, I know that we have many employees joining us today for our Annual General Meeting and I look forward to our upcoming regular quarterly town hall as well if you have questions at that time. I would also invite everyone to join our quarterly conference call with investors and analysts tomorrow morning at 9:00 a.m. Mountain Time. And with that, we would be happy to take any questions you might have. I don't see any questions on the platform. So thank you very much for joining our Annual General Meeting today, and we look forward to speaking with many of you tomorrow on our quarterly conference call.

This concludes the meeting. You may now disconnect.