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

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: myself, Marcel Kessler, 97.2% for and 2.8% withheld; Jay Collins, 98.7% for, 1.3% withheld; Jon Faber, 98.9% for, 1.1% withheld; Sophia Langlois, 99.7% for, 0.3% withheld; Ken Mullen; 97.2% for, 2.8% withheld; and finally, Laura Schwinn, 85.0% for, 15.0% withheld. I would like to remind you that Pason voting policy requires that director nominee received more than 50% of the votes cast. I see that all the directors have received more than 50%. Therefore, I declare that all 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 2024 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 motion to appoint Deloitte as Pason auditors for the 2024 fiscal year and authorizing the Board to fix the auditor's 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 94.5% for and 5.5% 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 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: 96.7% for and 3.3% 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 the approval of Pason's 2024 stock option plan as presented in the management information circular. May I please have a motion to approve the 2024 stock option plan?

This is Andrew Lambert, and I move that the stock option plan as presented in the management information circular be approved.

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: 95.5% for and 4.5% against. I declare the motion carried. 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.

Any objections? Seeing none, then I declare this meeting ended. This concludes the formal part of Pason's shareholder meeting. Thank you, everyone, for your attention. I will now ask John Faber to provide an update on Pason's operations and financial performance for 2023 as well as the results from the first quarter of 2024. Over to you, Jon.

Thank you, Marcel. We appreciate those of you online joining us virtually today for our Annual General Meeting. We are grateful for your support and your interest in Pason. I should note that we have chosen to hold our AGM virtually this year as we will have an opportunity to meet with shareholders and interested individuals at our upcoming Investor Day on May 30. If you have not yet had a chance to indicate that you plan to attend, please register on the Investors section of our website or send a note to Investor Relations at pason.com so we can be prepared to greet you appropriately. As with prior AGMs, this afternoon, I will 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. This will include information about the business of Intelligent Wellhead Systems, which I will refer to as IWS. 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 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 has been innovating in the area of end-to-end data solutions for the drilling industry for more than 4 decades, and we are now making more meaningful inroads into the completions market with the acquisition of the remainder of IWS. Our success has been 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. Our financial focus is on generating free cash flow and strong returns on invested capital over time. 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. Our proven ability to outpace underlying industry conditions in our drilling segment as well as the revenue we generate from completions and solar and energy storage mean that we are not dependent on higher levels of North American land drilling activity to generate meaningful growth. 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. We offer products and services that help reduce the environmental impact of energy development by helping customers develop oil and gas wells more efficiently and effectively and by facilitating solar and energy storage projects. Pason has a strong and committed 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. The most significant change at Pason since last year's AGM was the acquisition of all of the remaining common shares of IWS for $88.2 million in cash and the assumption of $7 million in net debt, which we closed on January 1 of this year. We made our initial investment into IWS with a common share investment in 2019. Since that time, we have deployed additional capital to both increase our ownership percentage and to fund growth capital through both common share and preferred share investments. IWS generated approximately $45 million in revenue in 2023, primarily from its wellsite automation products. These products are helping improve wellsite safety and efficiency by automating workflows and processes at the completion site. At the same time, we see an opportunity to address a need in the completions market for better aggregation and management of multiple data sets at the completion site and for delivery of that data to the users, whether that be humans or machines to make decisions. Bringing together the unique capabilities and experience of Pason and IWS will allow us to deliver solutions for customers that neither company would have been able to provide independently. Slide 10 provides an overview of our data management offerings in both the drilling and completions markets. 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 data visible and accessible to users in the field and in the office or remotely, we allow customers to collaborate on real-time decision-making. The data used in the field to improve efficiency and safety of 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 happening at the rig or at the wellsite. Customers are then able to use that data to report on current operations and to inform plans for future well construction activity. The growing use of analytics in evaluating performance drives the need for accurate, reliable and timely data. In order to effectively provide end-to-end management of data for our customers from capture in the field all the way through to making the data accessible for use by Pason products, customers' proprietary technologies and other third-party offerings, we develop and deploy 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. As I mentioned on the previous slide, the strengths of IWS today are most evident on the left-hand side of the slide, primarily focusing on the capture and display of data at the wellsite to help automate parts of the completions process and improve safety. Pason's capabilities around the aggregation of additional data sources and the effective delivery of that aggregated data into the hands of a wide range of users will help drive further collaboration, enhanced reporting, improved analytics and further opportunities for automation and safety improvements. 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 at IWS remote operating center. Slide 12 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. In addition, we provide advisory services to assist customers through all parts of modeling, controlling and monitoring their installed storage assets. 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 valuable. In addition to our operational and financial performance, we act responsibly in the areas of environmental, social and governance matters. Both hydrocarbons and renewable energy sources will play important roles in meeting growing global energy demand. 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 well construction operations and reduce nonproductive time. Together, these impacts reduced overall time, thereby reducing the carbon impact of the drilling or completions operations. 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 product also helped improve the safety of field 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 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. 2023 was an excellent year for Pason despite a 5% reduction in North American drilling activity. 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 11%, averaging $950 per day for the year, a new record for Pason. Despite lower drilling activity, consolidated revenue increased 10% and adjusted EBITDA increased 7% compared to 2022 levels. Free cash flow increased to $97 million, $66.5 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 technologies, we saw greater adoption particularly among our data delivery products. Late in the year, we brought the first units to market of our innovative mud analyzer, which has received very positive initial customer feedback. Importantly, given our role in managing data on behalf of customers, our cybersecurity performance was exceptional, being recognized by BitSight with an advanced performance rating. Revenue of $369.3 million and adjusted EBITDA of $171.5 million were both at their highest level since 2014 even while North American land drilling activity was 18.5% lower than in 2019. Disciplined management of our operating costs resulted in an adjusted EBITDA margin of 46.4% for the year. As industry activity has recovered from the depths of the global '19 pandemic in 2020 and 2021, we have increased our investments in capital expenditures to ensure our communications and computing hosting platform is capable of managing a growing number of data streams with higher volumes, speeds and throughput being used by a growing number of users, including both humans and machines. As always, we evaluate our capital program with a focus on supporting increasing revenue, generating free cash flow and creating value for shareholders over time rather than simply in response to prevailing near-term industry conditions or with a short-term view. Free cash flow of $97 million highlighted our disciplined management of working capital as the industry slowed down. We remain committed to returning capital to shareholders. We returned $66.5 million to shareholders in 2023 through regular dividends and share repurchases. Since the significant reduction in our regular dividend in response to the COVID-19 pandemic in 2020, we have increased our quarterly dividend from $0.05 per share to $0.13 per share. We favor flexibility in our capital allocation. As such, we anticipate that 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 2024 financial results. Our CFO, Celine Boston and I will discuss these results in more detail in a conference call at 9:00 a.m. Mountain Time tomorrow morning. Allow me to provide a couple of highlights. Our first quarter reflected the first time we have fully consolidated the financial results of Intelligent Wellhead Systems in Pason's financials. Revenue of $105 million was 7% higher from the first quarter of 2023 while North American industry activity decreased by 15%. Our competitive position is strong. In the first quarter, we achieved a notable milestone for Pason, with North American revenue per industry day of $1,000 for the first time in the company's history. IWS achieved revenue per IWS day of $5,026 and posted the highest quarterly revenue in its history. Adjusted EBITDA margins 40.5% reflected lower levels of North American land drilling activity and the early stage of IWS' development. We generated $12 million of free cash flow during the quarter. Following the acquisition of the remainder of IWS, which we fund entirely with cash on hand, our total cash holdings, including short-term investments as at March 31, stood at $74.2 million. As we look forward with an expectation of steady growth in industry activity beginning later this year, Pason is in a strong competitive and financial position. We see favorable macroeconomic trends in each of our segments as well as compelling organic growth opportunities. Our core drilling-related business will benefit not only as industry levels begin to recover, which we expect to have this year but also from a 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, realize higher prices over time and offer compelling new technologies to the market. Given its close relationship to drilling in the well construction process, we expect lesions industry to see similar activity increases to those in drilling. The completions industry is in the earlier stages of adopting the types of technology that Pason delivers to the drilling industry and as such, we expect greater technology adoption to drive a higher rate of growth for technology than the underlying growth rate in completions. As that market continues to develop, Intelligent Wellhead Systems will have opportunities to make additional inroads into the market, increased product adoption among existing customers, achieve greater price realization. As I noted earlier in my presentation, we also see a significant opportunity to deliver similar data aggregation and management solutions to the completions industry that Pason has offered in the drilling market for many years. Growing demand for renewable energy and the introduction of government policies, which incentivize the deployment of additional energy storage assets are favorable for Energy Toolbase. We see a growing pipeline of control system sales opportunities to execute against, and we will expand the functionality of Energy Toolbase's leading economic modeling software tool. Our drilling and completion segments will both ultimately be impacted by the trajectory of North American land drilling and completions activity. 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. Major supply factors are significantly lower than March 2020 while global demand for oil is above pre-pandemic levels. While U.S. production is slightly above early 2020 levels, growth in production has been insufficient fully meet demand, resulting in a 16% decrease in U.S. storage levels of crude oil and petroleum products. 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 which have already been drilled and are awaiting completion measured by drilled but uncompleted wells or newly drilled wells as measured by the drilling rig count. With the current inventory of drilled but uncompleted wells, 47% below pre-pandemic levels and at a level that a number of industry analysts estimate to be near minimum sustainable levels, reversing the trends in supply will need to start with additional drilling and ultimately be followed with completions. Pason's ability to generate meaningful growth in revenue and earnings is not dependent on growth in North American land drilling activity, though that would certainly be additive to our growth profile. Since 2019, we have grown North American revenue per industry day at a compound annual growth rate of 9.3%. This is an important measure of the amount by which Pason has outperformed underlying drilling activity. The chart on the right-hand side of Slide 21 highlights how the path of North American drilling revenue has diverged from the North American land rig count, particularly from 2021 to 2023. We have very high operating leverage, meaning that a large portion of our cash costs are fixed. And as a result, our earnings growth significantly outpaces our revenue growth when revenue increases. The combined effect of our demonstrated ability to grow North American revenue per industry day and high operating leverage, together with our expectations for stable capital expenditures would allow for meaningful growth in free cash flow even if drilling activity remained flat at current levels. Our expectation is that activity levels will begin to slowly move upward later in 2024 and into 2025. Our reliance on North American land activity is further reduced as we grow our international drilling, our completions and our solar and energy storage revenue streams. The dark blue portions on the rings on the chart -- on the far right-hand side of Slide 22 highlights the growing proportion of revenue being generated outside of our North American drilling segment. In the first quarter of 2024, 30% of Pason's revenue was generated outside of our North American drilling segment. 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. We will continue growing our free cash flow from our drilling-related business at a much higher rate than the underlying growth in North American land drilling activity through increasing our North American revenue per industry day and growing our international business. Growing customer demand for data is expected to generate further adoption of Pason's data delivery products, and our recently introduced mud analyzer has the potential to deliver material revenue growth going forward. IWS has posted impressive growth in revenue in its automation product offering, and we will work to build on this momentum as the industry continues to adopt more technology as part of its efficiency and safety improvement efforts. Bringing together the unique capabilities and experiences of Pason and IWS, we are focused on developing a compelling data aggregation and data delivery offering for the completions industry, similar to what Pason has provided the drilling industry. And finally, as the deployment of energy storage assets to increase, ETB will execute against a growing pipeline of energy management control systems opportunities and expand the functionality of its ETB developer economic modeling tool. Pason is a clear market leader with a distinctive technology position. We have outstanding financial strengths and free cash flow generation capabilities, and we are well positioned for growth across all of our segments. 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 we have any questions. Thank you for joining us this afternoon. I invite everyone to join our quarterly conference call with investors and analysts tomorrow morning at 9:00 a.m. Calgary time. And I would again remind you of our upcoming Investor Day on May 30 at our Calgary office for which you can register on the Investors section of our website or by e-mailing investorrelations@pason.com. Thank you very much for joining our AGM and have a great day.

Thank you. This concludes the meeting. You may now disconnect.