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

This is Andrew Lambert, 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: myself, Marcel Kessler, 94.6% for, 5.4% withheld. Jay Collins, 98.7% for, 1.3% withheld. Jon Faber, 98.8% for, 1.2% withheld. Judi Hess, 97.7% for, 2.3% with ; Ken Mullen, 99.6% for, 0.4% withheld. And lastly, Laura Schwinn, 96.0% for, 4% withheld. I would like to remind you that Pason's voting policy requires that each director nominee received more than 50% of the votes cast. I see that all 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 2023 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 for the 2023 fiscal year and authorizing the Board to fix the auditor's compensation.

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 89.7% for, 10.3% withheld. 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 it say on pay vote because it gives shareholders an opportunity to comment on how the board the compensation of the CEO and other executives, but it is not a motion for approval for executive compensation. As indicated in the scrutineer's report, preliminary results of the votes are as follows: 96.5% for and 3.5% against. This is a 1-minute warning prior to the 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 to approve an ordinary resolution approving, ratifying and confirming the adoption of an amended and restated bylaw #1 for Pason. The amended and restated bylaw #1 was approved by the Board of Directors on November 2, 2022. Among other things, the new bylaw reflects recent amendments to the Alberta Business Corporations Act that have been implemented since the corporation's previous bylaw was adopted in 2014. In particular, the new bylaw updates the language to remove the Canadian residency requirements for directors in accordance with recent amendments through the Alberta Business Corporations Act; and secondly, adds additional language protecting directors in the event of their involvement in any civil, criminal, administrative, investigative or other action or proceeding to align with the language of the Alberta Business Corporations Act. May I please have a motion approving, ratifying and confirming the new bylaws.

This is Andrew Lambert, and I so move.

This is Ryan van Beurden, and I second the 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 on the new bylaw are as follows: 37.5% for, 62.5% against. I therefore declare the motion defeated, and the bylaw amendment not confirmed. As noted in our information circular, revisions made to the bylaw are limited to removing the Canadian residency requirements for directors and expanding the director indemnity language to align with the maintenance to the Alberta Business Corporations Act. As the motion has been defeated, Pason will fall back on its existing bylaw. 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.

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 Faber to provide an update on Pason's operations and financial performance for 2022 as well as the results from the first quarter of 2023. Over to you, Jon.

Thank you, Marcel. Thank you to those who are joining us for today's meeting. We appreciate your support and your interest in Pason. This afternoon, I intend to cover 3 main areas in my presentation. I'll begin by providing a brief overview of Pason for those who might be less familiar with the company. I will then speak to some of the company's recent performance. And finally, I will provide some thoughts around our outlook both in the short to medium term as well as our 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. At Pason, we take pride in being innovative, profitable and responsible. Today's presentation will provide more context in each of these areas, but I will start with a brief overview of each. Pason's 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. We maintain a prudent capital structure, while providing cash returns to shareholders. By being disciplined with 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, but their investments are being managed appropriately. As our industry looks to help meet the world's energy needs while minimizing the impact on our environment, we offer products and services that help reduce the environmental impact of drilling operations by helping customers drill more effectively and efficiently. Pason has a strong senior leadership team. Many of our team members have significant Pason experience and have been with the company for more than a decade. 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 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 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 automation and analytics technologies to improve their performance and the data we provide is used to power those initiatives. In the office, the data provides real-time visibility into the 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 capture in the field all the way through to making the data accessible for use like Pason products, customer proprietary technologies and 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 requires not only a wide 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 of 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 additional energy storage assets, optimizing the performance of these assets through intelligent controls becomes increasingly important. Across our business, 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 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 is more useful to consider the number of unique rigs. The fact that we serviced more than 1,600 unique rigs last year further underscores the importance of our deployment, service and support capabilities. In addition to our operational and financial performance, 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 bills. While minimal to begin with, given our technology-based business model, where possible, we also look to minimize the environmental impact of our own operations, including the cleaning recycling and disposal of equipment. We have a unique and inspiring workplace culture, and we are committed to the total well-being of our colleagues. We are not only focused on 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 significant and growing 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, I will turn to our recent performance. 2022 brought a continuation of strong growth in industry activity with a 48% increase in North American land drilling activity compared to 2021. We maintained our leading competitive position based on the strength of our service and technology offering. As a result, we saw North American revenue per industry day grow by 14%, resulting in a 62% year-over-year increase in consolidated revenue, which significantly outpaced underlying drilling activity. Despite high prevailing levels of inflation and ongoing supply chain challenges, we were able to carefully manage our operating costs and deliver a 120% increase in adjusted EBITDA. Free cash flow increased to $70 million, $43 million of which was returned to shareholders through regular dividends and share repurchases. We continue to have a strong balance sheet, which allows us to protect against the volatility of industry conditions, while positioning us to pursue attractive organic and inorganic growth opportunities. In addition to our excellent profitability, we also delivered against our priorities to be innovative and responsible. With customers adopting a wide range of automation and analytics technology, we see growing demand for our data, which has driven greater adoption, particularly among our data delivery products. Our safety performance was exceptional with a total recordable incident rate of 0.27. We also released our inaugural sustainability report. Pason's revenue is highly correlated to North American land drilling activity, as seen in the chart on the left side of Slide 15. We have managed to grow revenue per industry day consistently across industry cycles, including through the COVID-19 pandemic. Since 2013, Pason's revenue per industry day has increased by 81%, representing a 6% compound annual growth rate. Slide 16 illustrates the attractive margin profile of Pason's business. As the business has recovered since 2020, margins have returned closer to the historical levels, with an adjusted EBITDA margin of 48% in 2022, up from 35% in 2021. Our capital expenditures totaled $34 million in 2022 after being at abnormally low levels through a series of successive industry downturns after 2014. Pason has also consistently generated positive free cash flow through industry cycles. The majority 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. We are committed to returning capital to shareholders. We entered 2022 with a quarterly dividend of $0.05 per share and exited the year at $0.12 per share. We also spent $14 million on share repurchases in 2022. We favor flexibility in our capital allocation. As such, we anticipate shareholder returns will continue to be comprised of a fixed component in the form of regular dividends, alongside share repurchases, which can be scaled based on available cash, free cash flow generation and the attractiveness of additional growth opportunities. Earlier this afternoon, we released our first quarter 2023 financial results. Our Chief Financial Officer, 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. Our first quarter financial results reflected our continued ability to outperform increasing levels of North American land drilling activity. Revenue of $98 million was 32% higher from the first quarter of 2022, while North American industry activity was up 18%. Our competitive position is strong with North American revenue per industry day of $922, representing the first time this metric has broken through the $900 level. Adjusted EBITDA margins above 50% illustrated the operating leverage in our business and resulted in adjusted EBITDA increasing by 57% year-over-year to $52 million. We generated $35 million of free cash flow during the quarter, returning $20 million to shareholders in the form of regular dividends and share repurchases. Our balance sheet remains strong with $185 million in cash and short-term investments. As we look forward with an expectation of continued steady growth in industry activity, Pason is in a strong competitive and financial position. Slide 20 illustrates at a high level, the oil and gas value chain and reflects the supply and demand factors that we see as supportive of increasing drilling and completions activity. All major supply indicators are lower than March 2020, while global demand for oil is at a pre-pandemic level. 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 measured by current production, wells which have already been drilled and are awaiting completion, measured by the inventory of drilled but uncompleted wells, or from newly drilled wells measured by the drilling rig count. With the current inventory of drilled but uncompleted wells, 45% below pre-pandemic levels, reversing the trends in supply will need to start with additional drilling. Our strategy for growth over time remains unchanged. We see opportunities to defend and grow our core drilling-related business. We have entered the adjacent oil and gas completion space through our noncontrolling interest in intelligent wellhead systems. And we are establishing a pillar for growth outside of oil and gas with our majority ownership of Energy Toolbase in the solar and energy storage market. In each of our markets, we see favorable macroeconomic trends and opportunity for organic growth over and above industry growth. Our core drilling-related business will benefit not only from growing activity levels, but also from growing demand for data as customers look to use analytics and automation technologies to drive operational performance. Within that growing demand for data, we have opportunities to further increase product adoption and market share and realize higher prices over time. Given its close relationship to drilling in the well construction process, we expect the completions industry to see similar activity increases to those in drilling. The completions industry is in the earlier stages of adopting the types of technologies that Pason has delivered to the drilling industry, and as such, we expect greater technology adoption to drive a higher rate of growth for technology than the underlying rate -- growth rate in completions. As that market continues to develop, Intelligent Wellhead Systems will have opportunities to make additional inroads into the market, increase product adoption among existing customers and achieve greater price realization. Growing demand for renewable energy and the introduction of government policies, which incentivize the deployment of additional energy storage assets, notably the Inflation Reduction Act in the United States are favorable for Energy Toolbase. We will continue to build our pipeline of control system sales and expand the functionality of Energy Toolbase's leading economic modeling software tool. Pason is well established 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. We will remain disciplined in maintaining our capital and operating costs. As the industry looks increasingly to technology to improve drilling performance, we are focused on growing the adoption of our data delivery technologies. 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 24 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. We are innovative, we are profitable, and we are responsible. And with that, we would be happy to take any questions that you might have. It doesn't appear that we have any questions. Thank you for joining us this afternoon. I would invite everyone to join our quarterly conference call with analysts and investors tomorrow morning at 9:00 a.m. Calgary time. Thank you.

This concludes the meeting. You may now disconnect.