Trican Well Service Ltd. (TCW) Earnings Call Transcript & Summary

Hi. Welcome, everyone. My name is Andrew Herring. I'm associate in Sean Meakim's oil services and equipment team here at JPMorgan. I do apologize, having some video technical difficulties. So I think I'll be audio-only for the duration. Hopefully, that's not too disruptive. But joining us up next, we have Trican Well Services. Trican is a pure-play Canadian pressure pumper which has made strides in recent years to streamline its business, focus on core Canadian fracturing and cementing operations. It's my pleasure today to welcome President and CEO, Dale Dusterhoft. Dale served as CEO since 2009, prior to which he was Senior Vice President of Technical Services. And Dale has been with the company since its inception in 1996 after beginning his career with position at another major Canadian pressure pumper. So Dale, we're happy to have you here. The floor is all yours, and we can open up to Q&A at the end.

Yes. Thanks, Andrew. I am going to run through a brief presentation today. So any of you that want to follow it on the presentation, the presentation is available through the JPMorgan site. I'll just refer to slides and kind of point you to any points that I'm making off those slides as we go through. So thanks for listening in this afternoon. Appreciate a lot. Just a little bit on Trican. I think most of you know the company. But essentially, if you looked at it, we're the -- we're Canada-linked. We're the largest pressure pumping company in Canada. 70% of our revenue comes from our fracturing service line, about 20% from our cementing service line, and the remainder primarily comes from coiled tubing. We did have an industrial pipeline service line. We actually announced this morning that we sold that to an industrial and pipeline company at pretty minimal dollar value. So it wasn't material to the numbers. So we didn't do an official press release on it, but we certainly did announce it to our employees on that. So if you look at the company, if I point you to Slide 4 for those of you that are following along, if you look at the services we provide, it's basically 60% to 70% of the spend on a wellsite in today's world with horizontal wells that we're doing. And then if I point you to Slide 5, you really see the foundation of the company and what our strategic goals have been for some time now. We've had this slide in place for at least 3 years. The focus is return on capital. You've seen us kind of at -- everything we've done over the last 3 years has been a return on capital-focused decision-making, including buying back a lot of our equity over the last 3 years. All of the decisions are really tied to that. So achieving the top quartile ROIC in our sector is the overarching goal. And then we have a number of sub-pillars to that. Strengthening our existing businesses. If I looked at our existing businesses right now, which are frac, cement and coil, I'd say cement and coil are actually in pretty good shape if I looked at 2019 and even Q1 '20 levels. Fracturing is the one that's still being the weaker one since kind of that 2017 time frame, which is really the supply/demand balance in that service line. And I'll talk about that as we go through. But we're very focused on strengthening those service lines so that we've got sustainable business generating ROIC that we're shooting for minimum 10%, which is above -- kind of right out our weighted average cost of capital and continue to work on that. Growing in the existing service lines. We certainly want to do that at the right time. But again, growth with capital discipline is the key. And as I mentioned, if you look to how we've managed ourselves as a company over the last 3 years, we've looked at lots of opportunities to grow our existing service lines. But in all cases, we stack it up against our share buyback, and we've always kind of trended back towards buyback our own stock and have bought back about 23% of our stock over the last 2.5 years. Shareholder return. We've returned value to the shareholders through the buyback. We also had a dividend in place prior to the 2015 downturn. There's a slide in the deck that I'll point to later just how much money we return to shareholders, but we're very conscious of the fact that this is a big part of what shareholders are looking for and a big part of our -- how we manage and govern ourselves. And then the last piece is probably the most important piece, in particular, in today's world, and that's cost control and efficiency. We live in a world where you have to be as brutally efficient and you're grinding every single cost out of your business. And it's a big focus of our company, and it has paid off substantially going into this downturn, and we'll pay off coming out of it as well. On the next slide, which is Slide #6, if you follow it along, we talk about our financial position. Basically, summary of the financial position is that we're debt-free. We had a working capital release out of Q1. The money from that working capital release paid off any revolver debt that we had. We're sitting on a cash balance at the moment. We are debt-adverse. We -- you go back through time, we've sold assets in the company back in the 2015 time frame and '16 time frame. We did that so that we could make ourselves resilient through all parts of the cycle. And we're certainly happy we did as we're -- in the current cycle and down cycle that we're in, sitting with no debt is -- leaves us in a really strong position. I talked about the services, which is on Slide 7. If you looked at our 2019 revenue, it was certainly down. 2019 was not a good year in Canada. We were down to $636 million in revenue. That was on about a 4,500 well count. That was really just due to pipeline and takeaway constraints and low gas -- natural gas prices for our clients, which were also tied a little bit to pipeline and takeaway as well. 2018, we were sitting around -- it was around 5,600 well count, somewhere in that range, probably much more. There's a little bit of growth at that well count at a 4,500 well count. We don't believe our clients are growing production, and we saw that last year. So that's maybe your stable well count of no growth and just investing to keep up with decline rates. I'm going to skip Slide 8. It basically talks about efficiency. Well, maybe I won't skip it. I'll just talk briefly. There's 2 parts of the efficiency that we strive for. One is getting better efficiency on location. That is pushing our clients 20 to 22 hours of pumping time. And our best clients, the best clients, the ones that are very organized themselves, are getting those 20 to 22 hours. And that increases our revenue per day. It increases our profitability. It's a win for us. The other part of efficiency is internal efficiencies. So that's just looking at every process within the company. And we've been a Lean Six Sigma company now for a couple of years. We're starting to see the benefits of that, where we've leaned up processes in the company. But I'd say that we are still only getting 3 of that. We have a lot more that we're working on and a lot more that -- in particular during this downturn, that we've really escalated working on to just lean ourselves up further. Some of the innovations, I've listed on Slide #9. Trican has had a history of being a technically innovative company. We certainly have seen a shift in technology where the technology now is more towards driving that efficiency and also driving internal cost reductions as compared to technology that may be reservoir-related. I'd say that we still spend money on fracturing fluids. We have a new, high-viscosity friction reducer that is actually very well accepted by the clients and, and so it's not that we throw that away. It's just that most of our work is on how do you drive efficiency in and outside the company. Some of the initiatives that we have had underway and that we have underway right now is a dual fuel. We can substantially reduce the fuel cost of our clients and ourselves when we're picking up fuel by switching to natural gas-powered equipment. And we've got the largest fleet, about 145,000 horsepower within Canada that's dual fuel. And we'll continue to invest in that as we attrition out old motors. It's a significant win in terms of cost efficiency. We have technology underway to reduce tractors on locations. Tractors are capital cost for us. They take up space. They need maintenance, and we've implemented some technology in the first quarter and at Q4 last year that allows us to remove those tractors, and we're just in the process of kind of looking at whether we want to expand that technology going forward. We've implemented new iron. It's a large bore. We've implemented hoses that makes us much more efficient during well switching. It gets us to that 20 to 22 hours of pumping time per day. Some of the more recent innovations that we've had is in regards to data. Data is kind of 2 parts for us. One is internal use of data. Internal use of data has been to optimize our costs primarily on repairs and maintenance. We're to a point now where we track what happens in every piston and every pump. And we're just using that data now to optimize our repair and maintenance cost to reduce our downtime to ensure that we extend life of components. There's going to be some significant wins coming on that one. We're really just at a point now where we're starting to analyze that data and apply it to our business. And then external data, we have a software company that we own that we sell our fracturing software -- this is our data collection software, to producers. It allows them to receive fracturing software from any fracturing company and then use that data in analyzing their wells. And it's actually -- it's a unique software that has competitive advantage, and it's become quite popular with a lot of the customers in Canada, and we're going to continue to invest in that. Then we continue to develop flows, as I mentioned, and cement blends. On the -- on Slide #10, I talk about just our fracturing fleet. It's very much designed for continuous duty pumps. The vast majority of it is 2,750 or 3,000 pumps designed for higher pressure, continuous duty work, and it's something that we've invested in some time ago on that one. Slide 11 is one that I get a lot of questions on from investors right now. That's what's the Canadian market look like from a capacity side. And that's the big difference in Canada from the U.S. It's that we only have 5 competitors and really only 4 that are of various size. We have one that's really just running 1 crew in the basin now and was running 2 in Q1. But that has left the basin in a much better spot competitively. And having less competitors and less available horsepower means that we can rightsize the market quicker. My analysis -- our analysis at Trican has been that if you look to 2019, which was a reduced well count of 4,500 wells, we probably only had 5 or 6 crews, 250,000 to 300,000 horsepower too much in the basin. And so it doesn't take very much to rightsize that. Essentially, if you drilled another 700 or 800 wells within the basin, you're going to be there. And also, if you had a competitor move out equipment or something changed in the competitive dynamic, we'd be rightsized quite quickly even for a 4,500-well market, which is on the low side. And that's the difference between Canada and the U.S., and that's why I get quite a few questions on this. We have 3 American competitors, Halliburton, Schlumberger and BJ, and BJ is quite small in Canada. And we have 2 Canadian competitors. And I'd say though it helps our pricing as well, pricing hasn't dropped back during this downturn in Canada as much as it has in the U.S. market partially because we don't have a lot to give. I think we were down on pricing earlier in the U.S. as well. But also with less competitors, I don't -- you don't see quite as much market share grabbing going on because all of us are trying to make a living in this market. On the available capacity side, both on Slide 11 and then on Trican stats on Slide 12. If you look at the total macro within the basin, there -- we say there's 1.96 million available. Actually, that's probably a lot closer to 1.8 million horsepower available right now. And I suspect that even drops further, then there'll be some more retirements that comes out of this downturn that we're in now. The basin at 4,500 wells probably needs 1.4 million to 1.6 million horsepower. So that leaves you -- that's where I get that 5 to 6 crew number. But if you looked at a 5,500-well market like we had in 2018, we're there, we were basically running 1.6 million to 1.8 million in that market. And that's basically where Canada is even today, not all of that staffed, of course. And in response to the downturn, we've all scaled back. I'd say our analysis is there's only going to be 9 or 10 crews running in all of Canada for Q3 as customers have slowed their spending. We're going to be running 3 ourselves on the fracturing side, and that will scale that coiled tubing and spending to about the same level, about 60% down from Q1 levels. And that's just the reality of trying to rightsize our business, make sure we run high utilization on the equipment we're going to run because that's our best profitability. On equipment that we parked, we've basically parked in whole. If we were running it in Q1, we don't scavenge it. If we've got some older stuff, it may take a little bit of money, like a couple of million dollars per crew or something, to pull back. We'd only really have 2 of those crews. The rest has been parked and could be brought back really just with people. And I've had questions from investors today on how quickly we could bring crews back, and this is the people side of it. Our view would be that you could bring back, say, another 3 crews of people to get us up to 6 relatively easily and maybe more than that, but I worry a little bit about people leaving the industry from going from 6 to 8. But we'll kind of cross that bridge if we get there. I can hardly wait to get there actually. And then on the cost side, which is Slide #13, that's been a focus of ours for some time now. But if you looked at the Canadian market, Canada was already, as I mentioned, in a downturn due to the pipeline takeaway issues in '19. So ourselves, our customers as well have been in -- leaning ourselves up for some time. We're 1.5 years to even longer into really heavy cuts to lean ourselves up to make ourselves more efficient. And so we've been at this a while. We were rightsized, I think, in Q1. We were net earnings positive, heading on a trajectory that we liked in terms of return on capital for January, February, and then the March COVID thing hit. But I'd say we're rightsized at that point in time. And now as things fell off really hard in mid-March, we've just scaled back our staff at every -- all costs across the company through Q2. Q2 is also a weather quarter. We don't get to do a lot of work because the weather is too muddy, and so that affects things. But if you combine weather with COVID, there's virtually no work going on through most of Q2 this year. So it's just a matter of controlling our costs. And so it's all discretionary spending. It's cutting back our people. We keep all of our -- kept all of our senior staff, so all of our supervisors, so that we can scale up. But a lot of our variable staff are on temporary layoffs, and we hope to bring them back as we start adding crews going forward here. And we've cut our G&A staff by about 50%. Now that -- we have a lot of fixed G&A costs with locations in that. So that doesn't transfer to 50% on the G&A number, but it does knock our G&A back by at least 30%, 30% to 35% with just those staff numbers. And if you looked at capital spending, of course, we reduced that like everyone, but we won't reduce it to a point. We've got the financial flexibility to still invest in our equipment. So we will invest in our equipment. It runs about 3% of our revenue, and that's a good number to use when you're modeling Trican as to what our CapEx will be. Slide 14. I'll basically just touch on how we return capital to shareholders and -- over time. And as I've said, we've reverted to buying back shares over the last number of years, and I think that's been a good strategy for us. If you go to Slide 16, you can kind of see the well count over the last number of years. And as I mentioned, we've seen a decline in '19. And I would say that if you look at the Canadian market right now, our customers are certainly underspending. So we're anticipating that we're going to have to get back up to that 4,500, 4,800 well range at least to '21, if not higher, well count just to have our customers get flat on their production again. Cement and coiled tubing, cementing basically follows the rig count; coiled tubing, we just adjust with our fracturing business. And if you looked at the potential of the company, which is Slide 19, in 2017, we generated $183 million worth of revenue. It's the same asset base we have. We've sold a little bit of old stuff out since then. So we've got a lot of potential still and we've got a lot of much lower cost structure than 2017. As I mentioned, all the downturn that we've seen, we've cut -- we cut $40 million out of our cost structure last year, and then we've cut a bunch out this year again. So that's -- that bodes well for good torque on our cost structure coming out of this, whenever that may be. So what's the outlook look like? Well, I won't talk about -- too much about Q2. We're in it now. And it is bad but we're doing a good job on cost controls. In Q3, we're starting with the 3 fracturing crews running. That's all dry gas work for our clients, comfortable with those clients maintaining their programs. I'd say we're locked into schedules for July. We're getting a lot of inquiries for additional work to be added now with some of the commodity price raises that we've seen. And in Canada, it's -- there's 3 commodities here that make a big difference. It's natural gas, which is up substantially year-over-year. It would be up 5x over this time last year, and it's probably double what our customers were budgeting for us due to some of the pipeline improvements that have already happened in it. Condensate is a big driver of the Canadian market because it's used to dilute heavy oil. And the condensate market -- condensate basically tracks WTI with no discount, and it has come back quite a bit. It's not quite -- well, it's not where it was, but a good gas price with condensate even at $35 a barrel WTI and a low Canadian dollar has a lot of our liquids-rich clients looking at these programs. So we're talking to a lot of people about potential adds later in Q3. I think it's September time frame at the earliest, but discussions are underway, not a lot of oil, additional oil work right now, just nothing at the start of the quarter. I think all of our clients across the board are kind of waiting to see where commodity prices stabilize and get a little more visibility before they pull the trigger on spending. We would have some oil projects that are tentatively scheduled for September, but we'll have to see how commodity prices hang in on that. Our view is the way things are now, if everything stayed the way it is and condensate, gas kind of hanging in, we're probably going to be building into Q4 maybe up to that 5 crew on the fracturing side of the business. I'd say there's a reasonable demand for that as long as it all materializes. And I'm going to caution everyone by saying it's not booked into the schedule by any means, but there's some positive indications that we can continue to add to our fleet as we go forward here. And Slide 23 is why invest in Trican. Well, our low debt allows us to -- there's no risk on us going away. It allows us to survive this downturn. It actually allows us to potentially take part in consolidation if it does come our way here. On the consolidation side, I've been asked a lot about that recently. We'll look at it. There's value at it strategically, of course. It depends on what you have to pay. If the dollar value is too high and it's better off buying our shares, we'll revert to buying back our shares, taking into account the strategic value, but we're not going to stress the balance sheet to do it to take on a bunch of debt. To do any acquisition will be difficult for us. And currently, all of our -- all the guys we can acquire are heavily debted and so pretty reluctant to take on that debt unless there's a way of removing that debtor or restructuring or something that comes from it. We're going to be here. We've got a lot of torque on our fixed cost structure that's even getting smaller. It's just a matter now of how quickly Canada recovers. And as I mentioned, I like the competitive dynamic. So if we can kind of continue to see improvements there, that's going to bode well as well. So I'll turn it over to Andrew now if you have any questions. I think you have some, Andrew, and any from the audience. Thanks for your time today.

Great. Yes. Thank you so much, Dale. It was very helpful. So definitely, I appreciate the kind of outlook you gave into 3Q and 3 fleets working. I was wondering if we could dive into that a little bit more just how might the work composition have changed relative to 1Q in terms of number of pads you're working on. And any changes you can talk about in the efficiency when those fleets are working?

Yes, yes. So I guess on the work complement, as I mentioned, it's really shifted to dry gas work right now, very even little condensate work at the start of the quarter. The customers that are working are all the ones that have good balance sheets, have positive cash flow even at today's reduced commodity prices, don't have any debt or bank issues. And those are the ones that are going ahead with their programs at the start of the quarter. The customers that are looking at adding in are probably more condensate -- or adding programs kind of later in the quarter are more condensate-focused customers. And as I mentioned, there's -- the economics start to look a little bit better for them. In terms of the types of work, we would have a bit of a mix, some smaller pad work in the start of the quarter, so 3 days on a pad right up to some 3 weeks on a pad work. And I would say that on the efficiency -- the daily efficiency number, the clients that we're working for right now are some of our most efficient clients. And we were even in -- we were doing some work for one of these clients in the April time frame, and that's where -- we were getting 20 to 22 hours pumping a day. So our customers are all focused on efficiency as well. So I'd say this group of clients are going to be quite efficient.

Great. Yes. And then you were talking about the ease with which some additional fleets could go back to work later in the year if we do see the demand come up. Could you just talk about the cost that might be associated with getting those leads back into the field and maybe how that differs from those first 3 versus -- eventually if we get above kind of 6, how might the cost change at that point?

Yes. We could add back 5 crews with very little money. So that's the 5 we've parked since Q1. And so if I look at them, they'd be parked mostly whole and there's repair and maintenance. So maybe you're talking $1 million or $2 million, $1.5 million just to do some minor maintenance on all that parked equipment, so not a lot of cost on the equipment side. On the people side, bringing back our labor force and our good people, as I mentioned, up to 6 crews, I think, is going be -- not be a problem. I don't think it's going to be a problem. From a cost side, bringing back more than that will be a problem potentially from a timing side. But I don't see a lot of inflation in the Canadian market even to bring back 8 crews. I don't think you're going to see us have to pay a lot of wage to do that.

Got it. Okay. That make sense. It looks like we're bumping up against the end of our time here. I just want to pass it back to you for any closing statements.

Yes. No, that's it. If you have any other questions, feel free to reach out to me through either JPMorgan crowd or to me direct. Thanks for your time today. Have a great afternoon. Stay safe. Make sure you stay isolated. Thanks.

Excellent. Thank you so much, Dale.

Thank you.