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

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Second Quarter 2023 Earnings Results Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Brad Fedora, President and Chief Executive Officer of Trican Well Services Limited. Please go ahead, Mr. Fedora.

Good morning, everyone. Thank you for attending the Trican second quarter results conference call. To start the call, Scott Matson, our Chief Financial Officer, [indiscernible] overview of the quarterly results. I will then provide some comments [indiscernible] the quarter, the operating conditions and [indiscernible] I'll try to get through my comments as fast as possible. I know there's lots of [indiscernible] calls. So we're hoping to wrap this up within 20 minutes or so, and then we will then open the call for questions. Several members of our executive team are here today on the call and are available for questions. And I'd now like to turn the call over to Scott to start things off.

Thanks, Brad. So before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our MD&A for Q2 of 2023. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2022 Annual Information Form and the Business Risks section of our Q2 2023 MD&A and our MD&A for the year ended December 31, 2022, for a more complete description of the business risks and uncertainties facing Trican. These documents are available both on our website and on SEDAR. During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q2 2023 MD&A. And our quarterly results were released after close of market last night and are available both on SEDAR and on our website. So with that, let's move on to the results for the quarter. Trican's results were significantly improved with continued solid industry activity levels and a more moderate inflationary environment, which led to a more sustainable margin profile and improvements across virtually all major financial categories. Revenue for the quarter was $168.2 million, about a 10% increase compared to the same period in last year. This was mostly attributable to a more constructive pricing environment, which allowed us to offset some of the inflationary pressures we were facing at this time last year. Adjusted EBITDA came in at $31.9 million, a significant improvement over the $19.2 million we generated in Q2 of 2022. And I would note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $1 million in the quarter and were expensed in the period. Adjusted EBITDAS for the quarter came in at $32.9 million or 20% of revenues, which is stronger when compared to the $23.6 million and 15% of revenues we printed last year. To arrive at EBITDAS, we add back the effects of cash settled share-based compensation costs recognized in the quarter to more clearly outline the results of our actual operations and remove some of the financial noise associated with the changes in our share price as we mark-to-market these items. We recognized approximately $1 million in expense related to those items in the quarter. On a consolidated basis, we generated positive earnings of $9.8 million in the quarter, which translates to $0.05 a share basic and $0.04 per share on a fully diluted basis. We generated free cash flow of $22.7 million during the quarter as compared to the $14.6 million we printed last year. And again, our definition of free cash flow is effectively EBITDAS less nondiscretionary cash expenditures, maintenance capital, interest, cash taxes paid and cash [indiscernible] stock-based comp. CapEx for the quarter totaled $14.4 million, split between our maintenance capital program, about $8.8 million of that was maintenance capital and upgrade capital of $5.6 million. The upgrade capital was dedicated mainly to our Q4 capital refurbishment program and the ongoing electrification of some of the ancillary frac support equipment, which Brad will touch on later. Balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $128 million, including cash of about $40 million. And finally, in terms of return of capital, we were quite active in our NCIB program during the quarter and repurchased and canceled 7.5 million shares at an average price of about $3.24 per share during the quarter. We remained active in July and repurchased and canceled an additional 2.7 million shares, which successfully concluded our 2022, 2023 program. As noted in our press release, the Board of Directors yesterday declared a dividend of $0.04 per share to be paid on September 30, 2023, to shareholders of record as of close of business on September 15, 2023. And I would note that the dividends are designated as eligible dividends for Canadian tax purposes. So with that, I'll turn things back to Brad for some comments on our current operating conditions and our outlook.

Thanks. I'll try to get through this as fast as possible. Overall, Q2 pretty much went as forecast. We're happy with the quarter. We always budget for bad weather and activity interruptions. So the fires and then I believe it or not, some of the floods did not have a material impact on our quarter. Some of the work was delayed until the summer, but that's [indiscernible]. We did -- on the cost side, we did -- we are still experiencing inflation on certain items. But overall, I would say, inflation has really slowed down and with the improving exchange rate and some of the removal of some of the fuel surcharges, some of our items like sand [indiscernible] refreshing change for our customer base. On the pricing side, although the pricing has generally been stable for the last year or so, we did experience some pricing pressure during mid-season late in the quarter. It's always disappointing to see, but it feels like it's sort of stabilized here now that the bids are over. And I wouldn't expect there to be a lot of pricing changes for the remainder of this year [indiscernible] everybody is sort of [indiscernible] I would say, overall, [indiscernible] fairly full, I think [indiscernible] pricing pretty much stable [indiscernible] of 2023. On the fracturing side, we're still operating 7 frac crews. It's important to note, this means that we're operating about 60% of our equipment. We have sort of a maximum capacity of 11, 12 crews depending on the size of the crews. But in comparison to our competitors who are operating basically at capacity, Trican is still at a stage where I wouldn't say our business is operating [indiscernible] maximum efficiency with respect to revenue loss, we can still improve our situation as we add crews to the basin. And we will not add those crews to the basin unless there is incremental [indiscernible]. Certainly, I would say even quite profitable [indiscernible] in our space we can definitely improve on that as we bring more [indiscernible] field. On the cementing side, I'm really happy with that division. That's [indiscernible] our cementing [indiscernible] really speaks [indiscernible] how activity has [indiscernible] the year as I've made reference to in prior [indiscernible] I think [indiscernible] will get better and better [indiscernible] as the years go by [indiscernible] see more of a material slowdown in December just for the Christmas season like sort of every other business [indiscernible] I think that's a welcomed change [indiscernible] and certainly something I hope continue along this trend. Our market share in cementing is about 35% overall, but 50% in the Montney and the Deep Basin [indiscernible]. We feel we have the most value to add with our technical facilities and our [indiscernible] blends and our laboratory [indiscernible] full-service product offering. We're looking to add more into plays like clear water and heavy oil. We've previously pulled out of [indiscernible] labor shortages. So we're looking to get back [indiscernible] into those areas as we think they will be a continued focus of the [indiscernible] next 5 to 10 years. And our ability to add in those spaces is really only limited by our ability to add staff [indiscernible] as everybody knows [indiscernible] for good quality labor is tough. People have lots of choices. So we'll [indiscernible] high-quality labor so that we can continue on with our best-in-class service. On the coil side, we had a fairly slow quarter in coil, but so far, Q3 has started with a bang. So we're not discouraged by [indiscernible] we're operating sort of [indiscernible] units and although it's not a significant portion of our sales, we're still working to improve that division. I think I've mentioned in the past, it's not operating at a level that we're happy with. So we'll just continue to spend time on that. We've hired people that are dedicated full time [indiscernible] to getting that vision operating at a level that we're happy [indiscernible] it's keeping up with [indiscernible] internally with fracturing [indiscernible] perspective. So we'll just continue to grind away on that to make improvements. Outlook for the second half of this year, I think it's pretty similar to last year. The rig count, although it was much higher in Q1, it seems to be basically tracking so far in Q3, similar to last year's levels. And so I think the second half of this year looks a lot like last year. Maybe Q3 is slightly higher and maybe Q4 is even maybe slightly lower. But overall, I would say, should be kind of a repeat of last year to a large extent [indiscernible] even though our revenue is up 25% year-to-date [indiscernible] the second half is the range, like you said, to [indiscernible] last year. I would say the pressure [indiscernible] I don't think we're under-supplied, and I don't think we're oversupplied. And it seems like it's sort of steady as she goes here. Our customers [indiscernible] capital budget very thoughtful in the way they're allocating capital [indiscernible] and even just the timing of the completions, I think the industry is getting more and more sophisticated. So they're spending less than [indiscernible] free cash flow and [indiscernible] completions. And so as commodity prices [indiscernible] will always have volatilities [indiscernible] that sort of percentage of cash provides a really good shock absorber [indiscernible] and I don't think you'll see big [indiscernible] activity reactions to changes in commodity [indiscernible] marketing in the U.S. [indiscernible] they were sort of surprised how stable Canada [indiscernible] be and one of our answers was, hey, last year, when we had $100 oil [indiscernible] you didn't [indiscernible] to that and so they sort of [indiscernible] activity through these ups and downs in the commodity cycle. We've got a hot summer in the U.S. and Europe, helping to clear out some of the gas storage to more normal levels. And so if we get a normal winter, I would expect we'll see gas prices go high [indiscernible] and maybe we'll start [indiscernible] the activity [indiscernible] incrementally. We're very encouraged with the advancements of the industry's relationship [indiscernible] but we look at the LNG facilities being [indiscernible] over 7 Bcf [indiscernible] 2 of which is very near term. LNG drilling activity has started. The project is a very long life, 50-plus years, something the First Nations are very happy to be involved with. It's very much aligned with their investment profile and time line. So with various facilities, whether it's in Squamish BC at Woodfibre LNG, Canada in Kitimat, we expect this to be -- to build over time and really underpin long-term stability in this basin. Of course, the Montney Deep Basin [indiscernible] primarily gas-focused, which means they're very [indiscernible] intensive. So we think this is [indiscernible] Canada is a great place to invest in and do business with over the long term. And we think our product offering, in particular, is really well suited to this incremental LNG demand, high-pressure wells, customers want low emissions, both the customer and the First Nations want small footprints. They want less water consumption, clean air, all of that -- all of the technology that we've been investing in. On the supply chain, we are seeing just as the amount of the tons of sand per well is growing, and we have some big numbers in the Montney in particular. We are seeing what we will believe are current and future constraints within the logistics of sand. We think the whole transloading system, rail system, trucking industry is basically running at capacity. And we've already seen instances where there's a sand shortage in certain areas of Western Canada. We don't think this will get anything but worse, frankly, third-party trucks and just the logistics system in general is very tight. It's not that well built out as we expand into Northeast BC. There's less and less Class 1 drivers one to drive in the oilfield today. So this, of course, we see as an opportunity. We're looking at lots of different stuff. We want to invest in sand logistics and making sure that the last mile logistics is as low as possible, which has a drastic impact on [indiscernible] our product offering [indiscernible]. Again, we're very bullish on Western Canada. We think we're going to play a growing role in the overall global natural gas picture. So we [indiscernible] invested for the long term and make sure that we can deliver our services as efficiently as possible. We believe plays like the Montney combined with LNG exports [indiscernible] long-term base of activity. So we're [indiscernible]. We still have a pristine balance sheet. We exited the quarter with about $40 million of cash, lots of positive working capital and that just gives us the -- frankly, the luxury of looking at anything and everything to improve our business. We're going to invest [indiscernible] predictable long-term returns and making sure that [indiscernible] good for our shareholders [indiscernible] we continue on with our differentiation and modernization strategy, state-of-the-art equipment, making sure our systems are leading edge, really focusing on the ESG side of the business, developing out our partnerships with [indiscernible] in Alberta, that will play a role as we go forward. And this is all under the guiding principle of clean air and clean water. And we're making sure that our investments align with all of those principles. We've rolled out our first low emissions spread last year. We're really happy with how that technology is performing. We get our fifth Tier 4 fleet in late Q4 of this year. So 5 out of 7 crews will be state-of-the-art brand new Tier 4 spreads with low emissions, low footprint, less people [indiscernible] able to withstand [indiscernible] pumping times. We started this program [indiscernible] 38 million liters of diesel with natural gas. So something we're really proud of. It's something that our customers and the communities really want to see more [indiscernible] the lines [indiscernible] oil and gas activity and development with [indiscernible] what the public wants [indiscernible] smaller footprint, less carbon emissions, [indiscernible] et cetera. We expect this technology will continue. We expect it will become the standard in the industry. And so as a result, we need to continue to look at ways to differentiate ourselves. And as Scott was mentioning, starting in Q1, we've electrified the ancillary equipment [indiscernible] fleet, which means that means [indiscernible] enables us to reduce the number of people that we have in what we call the hot zone where the pressurized pipe has laid out. And it also combined with Tier 4 technology allows us to have gas substitution rates of over 90%. So again, our goal is to have 100% natural gas on location to pump no diesel at all. And this is just the next step in that overall goal. We'll continue to invest in that electrified equipment as we go forward as we think it's a win for us and for our customers, just the design of the [indiscernible] in particular. I think we've [indiscernible] reliability [indiscernible] still working out some gains in the design, but we think, overall, it will be a much improved piece of equipment. It's important to note, since we've upgraded so much of our fleet that we now actually have sort of 11 of 12 fleets that are field-ready [indiscernible] generally been upgrading parked equipment. And as we've been upgrading that equipment [indiscernible] we've been sort of displacing a traditional diesel spread. But now 11 -- we have 11 fleets field ready. And so when you think about the spare capacity in Canada, we pretty much have the bulk of it, and it is ready to go [indiscernible] any more capital investment for us. When you look at the parked equipment [indiscernible] our competitors, just like [indiscernible] so not only do we have the most technically advanced new fleet, but our entire fleet has basically been reworked. So you look back [indiscernible] to this industry and where we were at, even just a short few years ago, we've gone from an aging fleet that required a lot of [indiscernible] to basically [indiscernible] half our fleet is brand new and the [indiscernible] half is ready to go [indiscernible] so we feel like we're in a great position to take advantage of increasing activity and even just increasing focus in Northeast BC, Northwest Alberta. So really happy with where we're positioned [indiscernible]. On the return on capital side, our priorities have not changed. We want to build a resistant, sustainable and differentiated company, invest in growth opportunities that provide returns for our shareholders and our customers long term, and of course, provide a consistent return on capital for our shareholders through dividends and buybacks. So we finished -- we focused heavily on the NCIB this year. We finished it early. Like Scott was saying, we bought 23.1 million shares since last October at an average price of $3.37 a share. When you roll back -- when you roll this program back to 2017, overall, we've bought 143 -- over 143 million shares at an average price of [indiscernible] a share, which represents just over 41 [indiscernible] very successful program, regardless of how the market is valuing us in our space. We look at these multiples and think it's screaming buy, you can't go long. So we expect to renew our NCIB in October and remain committed to this program for what may be the long term. We now pay a quarterly dividend [indiscernible] just to provide some certainty [indiscernible] in our return [indiscernible] strategy, but we look [indiscernible] be active again in the fall on [indiscernible] shares back. I think I'll stop there, and I'll turn the call over to the operator for questions.

[Operator Instructions] The first question comes from Aaron MacNeil with TD Cowen.

As it relates to the quarter, I was a bit surprised to see proppant pump down 15% on a year-over-year basis, but revenue is up 10%. I know you referenced both stronger pricing and a change in customer well designs in the disclosures, but I'm hoping you can sort of parse that out a bit more for us. Like what was pricing? What was well design and what specifically changed in well design on a year-over-year basis?

We don't have all of that information with us here, but I wouldn't get too fussed by those stats like just depending on the customer base and what they're developed, what they're completing, that can change quite drastically from quarter to quarter, frankly. But I don't have any more detail handy here, Aaron, to give you much more than that. It's not something that we track that closely, frankly.

Fair enough. You sort of touched on this at various points of your prepared remarks, but you've seen ARC sanction Attachie, Strathcona just went public or intends to go public via Pipestone and are guiding to growth in the sort of high single digits, Logan, again, small but also committing to more of a traditional growth model. You highlighted the parked equipment in your prepared remarks. I guess I'm just trying to understand what do you think the likelihood is in your view that some of this equipment goes back to work in 2024 or another time frame that you think is reasonable?

I think for sure, we'll be bringing 1, maybe 2 spreads into the basin in the next 12, 15 [indiscernible] just the momentum. It feels like -- there's always slowdowns and there's always little pauses along the way, but it's in this business for the long term. And when you think about LNG and the transactions that you just mentioned, I mean those transactions, they result in increased activity, right? They don't -- you've taken sort of not as is, but maybe under capital [indiscernible] into a much stronger hands -- financially stronger hands. So that just means an increase in activity. And when you've got -- LNG is real, TMX is real, the world wants more Canadian natural gas, in particular, more Canadian oil. As we know, it's the cleanest [indiscernible] world. I look at this and I never felt -- I've said this before, I think, a few times, but never felt good -- this good about the business when I look out 5, 10 years. And I don't think it's going to go crazy, and I don't think we're going to see these huge swings in activity level from year to year that we all thought was normal when you go back pre-2017. So no, I think it's going to -- I think all of that parked equipment that we have or those 5 spreads that are [indiscernible] some of it comes off [indiscernible] this year and the next year.

The next question comes from Cole Pereira with Stifel.

Just thinking about capital allocation in 2024, I mean, with your 5 Tier 4s, do you feel there's adequate demand and upside for more of those upgrades? Are you kind of fine with your footprint in that regard? And how do you kind of think about -- you talked about share buybacks, but maybe further dividend increases, potentially M&A, et cetera?

Yes. I mean we are always pausing and reviewing different technologies. So we've got 5 [indiscernible] we're currently waiting on the results from what was 100% natural gas engine. We're still waiting to see how that works out. And so we might [indiscernible] our never ending pursuit of having [indiscernible] natural gas. But we don't sort of feel -- we feel like we're very much ahead of the game and that gives us the luxury of being able to pause and look around and say, hey, let's not get to -- let's not have the blinders on with our technology. So we'll figure out what's happening, and I still think more of our fleet will be converted. I think the industry is going to [indiscernible] just bake everything I've already said [indiscernible] so we have a placeholder for capital. It's very similar to this year. Our NCIB will be [indiscernible] this is a Board decision, not my decision. But I would expect sort of once a year we'll recalibrate our dividend so that the [indiscernible] overall aggregate dividend payout doesn't change from year to year. But just as our share count shrinks, you would expect the dividend per share to go up. That seems like a logical approach. And as far as M&A goes, nothing has changed. I mean, we're all trading at crazy low multiples, maybe makes it hard. But as with oil, looking back 20 [indiscernible] years, the market for M&A and oilfield is always [indiscernible] it's maybe a small -- it's a consolidated space already. So we continue to look at that and look at other operating divisions [indiscernible] company. So we're [indiscernible] clean balance sheet, excess cash in the bank. We have a relatively well-priced stock within [indiscernible] so we think we're in a great [indiscernible].

Okay. Got it. And just quickly, Scott, can you talk about how we should be thinking about working capital changing into Q3? And can you refresh the time line when you think Trican goes cash taxable?

Yes. I think we'll see a similar cadence in terms of working capital that we saw through 2022, like we saw a pretty big release coming out of Q1 into Q2. That will start to build a little bit as we come through 3 and 4, as you would expect, as activity increases from there. You'll note, one of the things we did make note of is that we are now moving into a cash taxable position. So we expect to actually fund some of the current tax liability that we've got in crewing on the books early next year when that goes out. So you'll see that number build through the year, and then we'll make our first payment likely in Q1 next year, and then we'll install as normal from there.

The next question comes from Keith MacKey with RBC Capital Markets.

I just wanted to start out on your differentiation strategy, which you've been very clear on in the last year to 2, Brad. And so you've got 4 to 5 DGB fleets, you're starting the electrification of the ancillary items. But I imagine, as you think about your competitors potentially catching up on some of those things, the differentiation strategy has to be a continuum. So what is next in your view on where you need to differentiate in order to maintain the position you've got and put yourself in potentially the best position to capture some of the emerging work, whether it's LNG or other types of work?

We're not going to -- yes, maybe I'll just say this. I absolutely agree with you that differentiation in our space is temporary because in general, you can replicate [indiscernible] almost any technology. And so it's very, very hard to continue to say that you are going to be a leader in technology. But so far, it's been working and we're -- but that's why things like, okay, [indiscernible] that's nice. But what [indiscernible] ancillary [indiscernible] right and probably will remain that way for some time. And so the differentiation gets maybe more difficult if technology isn't rapidly changing and you got to obviously make sure you get a return [indiscernible] in the near term. So I would say what's next for us is more on the logistics side of the business. And I'm not going to give you any more color than that. But it's -- there are a lot of product moving around. And when you've got Montney wells with -- and I'm talking metric tons here, it doesn't much matter, but you've got 10,000-plus tons in a well. There's an awful lot of product to get from A to B in a very [indiscernible] knowing full well that you just can't store it. And every time you take it from truck to rail or rail to truck, it's -- you add $10 a ton to the equation very quickly. So we're starting to look at -- almost turning the clock back and starting to look at the basics again because logistics can really have an impact on not just the quality of your service offering, but on the profitability of [indiscernible] looking for little places to squeak out little savings and efficiencies [indiscernible] when you're looking at this many tons per year of sand pumped, man, you scrape a few nickels off the edge as they add up quickly.

Yes. Got it. And just to follow up on that. So with the potential to get into more logistics type of offerings or whatever it ends up being in general, would you see a necessity for your capital intensity to change? Like could you continue to do those types of investments meaningfully without spending materially different from how your -- the amount of capital you're spending today at that kind of $100 million, $115 million? Or how should we think about that?

Yes. I mean that probably depends on the year, but I think it's a pretty good placeholder, when you look out a few years, I mean, I don't know the answer, and it can change every day. But it feels to me, I mean, you know how it goes in this business, you can only spend so much money intelligently without overbuilding or causing a bunch [indiscernible] product inflation and just [indiscernible] the supply chain of stuff, whether it's an engine or a railcar, it's [indiscernible] you just can't get everything you want in the time you want it. And so when you think about aggregate capital spend on a per year basis, it feels like what we've been doing [indiscernible] probably should be relatively consistent going [indiscernible] maybe -- and there's going to be years where it's less than there's going to be more, but I think that's a pretty good placeholder from building a cash flow model [indiscernible].

[Operator Instructions] The next question comes from Waqar Syed with ATB Capital Markets.

Brad, as you think about building your logistics business, your thinking is mostly confined towards fracs and logistics or you're also thinking of maybe [indiscernible] well distribution like natural gas, others? Number one. And number two, the logistics business, you're thinking about only to cater to your own fleet are also to be providing services to third parties as well?

I don't want to answer any of those questions, Waqar. I mean we didn't look at anything and everything and you've pointed out a good -- you found a good point. Like it's not just sand, right, our business is not just -- it's not just sand that's moving around. When you have these natural gas fleets, there's an awful lot of natural gas that needs to be delivered on location in a short period of time. And not everybody has the luxury of 10 wells that were drilled last year to tap into for gas supply, right. So it could be fuel, whether it's diesel and natural gas or the other big items, obviously, are sand and then there's some chemical, but that's probably time [indiscernible] and as far as we're going to do it for our own benefit or are these like sort of independently operating businesses. The answer is we're looking at everything. And there's no press release coming tomorrow. This is -- we are looking at it, we're being very thoughtful, very analytical. We're looking at the whole sort of value chain, I guess, [indiscernible] right from the beginning [indiscernible] and we love Canadian market. So we'd much rather grow our presence here than sort of take Hail Marys in other countries. So we're looking at -- that means we look at everything.

Makes sense. And then in terms of the supply chain for Tier 4 DGB, how has that improved or changed? And so what's kind of the previous delivery, if you were to order a new fleet today?

Yes, I'll hand that over to Todd Thue, your COO.

Yes. The supply chain has improved slightly, but it's still quite a long lead time, probably in the neighborhood of 12 to 18 months to -- for delivery and retrofit of equipment.

Okay. And any changes on the pricing side for that equipment?

Yes.

Okay. Thanks, everyone. I guess this concludes our call. There's no more questions in the queue. So thanks for joining. Thanks for taking the time. The executive team is available for the remainder of the day for questions [indiscernible] please call us directly, if there's any other questions you [indiscernible]. Thanks. We'll talk to you again next quarter.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.