Total (EPA:TTEF) Energy Services, Inc. (Ticker: TOTZF) has reported a record-breaking financial performance for the third quarter of 2024, with a notable increase in consolidated revenue and EBITDA.
The company's strategic acquisition of Saxon Energy Services earlier in March 2024 and strong demand for compression and process equipment in North America and Australia contributed to these results.
Total Energy also highlighted a solid financial position and a commitment to shareholder returns, with significant dividends and share buybacks to date.
Key Takeaways
- Total Energy's Q3 2024 consolidated revenue increased by 4% year-over-year.
- The company's EBITDA rose by 12%, with major revenue from the CPS segment at 46%.
- Geographical revenue distribution: 49% from Canada, 34% from the U.S., and 17% from Australia.
- Gross margin improved to 26%, up from 24% in the same quarter of the previous year.
- Total Energy holds a strong financial position with $97.3 million in working capital.
- Anticipated capital expenditure of $147.7 million for 2024, with a focus on enhancing Australian operations.
Company Outlook
- Expansion of the Australian business is a key focus, responding to increased demand for natural gas.
- The company is open to M&A opportunities, especially in the U.S., while maintaining disciplined asset acquisition.
Bearish Highlights
- A decline in U.S. drilling activity was noted, despite overall revenue growth.
- Challenges in the North Dakota well servicing market due to customer consolidation.
- A recent rig damage incident in Canada impacted Q3 performance.
Bullish Highlights
- Strong demand for compression and process equipment in North America and Australia.
- Positive market response to the Australian government's policy shift on natural gas.
- Increase in activity and investment in Australia, with plans to expand the drilling rig fleet and service rigs.
Misses
- Competitive pricing pressures in the U.S. drilling market, particularly in the Permian Basin.
Q&A Highlights
- Daniel Halyk discussed the strategic acquisition of Saxon to enhance the rig fleet in Australia.
- Halyk emphasized cost management and a cautious approach to pricing to avoid drastic reductions.
- The company aims to maintain a sustainable dividend, reviewed quarterly, and balance share buybacks with reinvestment opportunities.
Total Energy Services, Inc. has demonstrated resilience and strategic growth in a fluctuating energy market. The company's record Q3 results and optimistic outlook, particularly in the Australian market, signal a robust approach to navigating industry challenges and capitalizing on opportunities. With a focus on long-term contracts and strategic growth, Total Energy continues to prioritize shareholder value while expanding its global footprint.
Full transcript - None (TOTZF) Q3 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to Total Energy's Third Quarter 2024 Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Daniel Halyk, President and CEO of Total Energy Services, Inc. Please go ahead.
Daniel Halyk: Thank you. Good morning, and welcome to Total's Third Quarter 2024 Conference Call. Present with me is Yuliya Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the three months ended September 30, 2024, and then provide an outlook for our business and open up the phone lines for questions. Yuliya, please go ahead.
Yuliya Gorbach: Thank you, Dan. During the course of this conference call, information may be provided containing forward-looking information concerning Total's projected operating results, anticipated capital expenditure trends and projected activity in the oil and gas industry. Actual events or results may differ materially from those reflected in Total's forward-looking statements due to a number of risks, uncertainties and other factors affecting Total's business and the oil and gas service industry in general. These risks, uncertainties and other factors are described under the heading Risk Factors and elsewhere in Total's most recently filed annual information form and other documents filed with Canadian provincial securities authorities that are available to the public at www.sedarplus.ca. Our discussions during this conference call are qualified with reference to the notes to the financial highlights contained in the news release issued yesterday. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars. Total Energy's financial results for the three months ended September 30, 2024, represent record quarterly financial results. Relatively stable industry conditions in Canada and Australia, continued strong demand in North America for compression and process equipment, and acquisition of Saxon Energy Services in March more than offset a year-over-year decline in U.S. drilling and completion activity. Consolidated revenue for the third quarter of 2024 was 4% higher compared to Q3 2023. The addition of Saxon Australia, increased compression and rental revenue and improved fabrication margins in the CPS segment, together with effective cost management in all segments contributed to a 12% increase in third quarter EBITDA as compared to 2023. Geographically, 49% of third quarter revenue was generated in Canada, 34% in the United States and 17% in Australia as compared to the third quarter of 2023 when 48% of consolidated revenue was generated in Canada, 43% in the United States and 9% in Australia. By business segment, CPS segment contributed 46% of third quarter consolidated revenue, followed by the Drilling segment at 36%, Well Servicing at 10% and RTS segment at 8%. In comparison, for the third quarter of 2023, the CPS segment generated 48% of the third quarter consolidated revenue, followed by the Contract Drilling Services at 33%, Well Servicing at 10% and Rentals and Transportation Services contributing 9%. Third quarter consolidated gross margin was 26% as compared to 24% for prior year. Margin improvement in CPS and RTS segments more than offset a decrease in CDS segment. As compared to 2023, CDS segment saw third quarter revenue increase by 14%. A 16% increase in revenue per operating day more than offset a 2% decrease in operating days. Canadian CDS revenue was 5% lower in Q3 of 2024 as compared to the same quarter of 2023 as 2% increase in revenue per operating day partially offset a 7% decrease in operating days. Canadian operating days were negatively impacted when an AC double drilling rig was damaged in July during transit. The rig returned to service in mid-October following completion of repairs. In the United States, decreased activity and relatively lower pricing as a result of change in the mix of equipment operating during the quarter contributed to lower year-over-year revenue and the realization of a slight operating loss. In Australia, third quarter operating days increased by 93% following the acquisition of Saxon on March 7, 2024. Higher day rates on Saxon's deeper drilling rig – drilling fleet and a newly constructed drilling rig that was deployed in the third quarter resulted in a 42% year-over-year increase in Australian Q3 revenue per operating day and was the primary driver of a 16% year-over-year increase in third quarter consolidated CDS segment revenue per operating day. Revenue in the RTS segment decreased compared to Q3 of 2023 as a result of lower industry activity in the U.S. Consistent pricing, effective cost management and change in the mix of equipment operating contributed to a 13% increase in EBITDA and a 24% increase in EBITDA margin during the third quarter of 2024 as compared to 2023. Third quarter revenue in total CPS segment was consistent with Q3 of 2023. The deployment of several newly constructed rental units early in the year resulted in an 18% increase in the rental fleet utilization in the United States. This increased rental activity combined with improved fabrication sales margins and increased parts and service activity resulted in a 34% year-over-year increase in third quarter CPS segment EBITDA and a 31% increase in the EBITDA margin. The quarter-end fabrication sales backlog increased to $189 million compared to the $152.9 million back at September 30, 2023. Sequentially, the quarter-end backlog decreased by $15.6 million during the third quarter of 2024. Revenue in the Well Servicing segment was 5% higher as compared to the third quarter of 2023; an 11% increase in revenue per operating hour offset an 8% decrease in overall segment utilization. Increased Canadian and Australian service rig utilization was not enough to offset the substantial decline in U.S. activity due in part to significant customer consolidation. Price increases in Canada and Australia following the completion of rig upgrades more than offset weaker pricing in the United States, resulting in an 11% increase in the segment's revenue per operating hour. Increased utilization and pricing in Canada and Australia also contributed to a 20% increase in operating income during the third quarter of 2024 compared to the same quarter in 2023. Lower activity in the United States and reactivation costs in Australia contributed to a 2% decrease in third quarter Well Servicing EBITDA and 5% decrease in the segment's EBITDA margin. From a consolidated perspective, Total Energy's financial position remains very strong. At September 30, 2024, Total Energy had $97.3 million of positive working capital, including $61.9 million of cash. Working capital decreased from December 31, 2023 as $42 million of mortgage debt due in April of 2025 became current during the second quarter of 2024. Total Energy's bank covenants consist of maximum senior debt to trailing 12-month bank EBITDA of 3 times and a minimum bank-defined EBITDA to interest expense of 3 times. At September 30, 2024, the company's senior bank debt to bank EBITDA ratio was 0.26 and the bank interest coverage ratio was 10.15 times. Excluding $10.5 million of non-recurring interest expense relating to an income tax reassessment in Q1 of 2024, the interest coverage ratio was 26.65 times.
Daniel Halyk: Thank you, Yuliya. We are pleased with our third quarter results. The ability to generate record quarterly results despite softer industry conditions in the United States reflects the strength and resiliency of our business model. Key drivers to our business include a strong Asian LNG market, continued investment to increase North American LNG export capacity and the recent completion of the Trans Mountain pipeline expansion in Canada. Total's strategy to increase its exposure to the Asian LNG market by growing its Australian business continued in the third quarter with the deployment of a newly constructed drilling rig, an upgraded Saxon drilling rig and an upgraded service rig under long-term contracts. Another service rig is currently being upgraded and is expected to commence operations under a long-term contract by the end of this month. Additional opportunities to upgrade and reactivate Australian equipment exists, and in that regard, Total has increased its 2024 capital budget by $19.8 million. $13.1 million of this increase will target opportunity – growth opportunities, including the upgrade of two Saxon drilling rigs and one service rig in Australia. All three rigs are scheduled to commence operations in the first quarter of 2025 under long-term contracts. In addition, $1 million of new rental equipment is being purchased by the RTS segment for deployment by the end of this year. The remaining $6.7 million of capital is being allocated for the purchase of new drill pipe, Canadian drilling rig recertifications and the purchase of an operating facility currently leased by the RTS segment in the United States. Including the acquisition of Saxon and $14.2 million of 2023 capital commitments that carried into 2024, projected 2024 capital expenditures totaled $147.7 million, of which $112.4 million has been funded to September 30th. We expect the remaining $35.3 million of capital commitments will be financed by cash on hand and cash flow from operations with approximately $10 million of such commitments projected to carry into 2025. Our CPS segment continues to see strong demand for compression and process equipment, driven in part by continued investment to increase North American LNG export capacity. Immediate and growing demand for electricity is also driving demand for natural gas as coal power plants are decommissioned and consumers necessarily focus on cost and reliability. In addition, the ability to construct natural gas power generation in relatively short order as compared to other sources such as nuclear is a significant advantage that we believe will provide solid tailwinds for our CPS segment over the coming years. Despite committing significant capital to growing and maintaining our business, we continue to provide stable and sustainable returns to our owners. During the third quarter, $8.7 million was returned to shareholders by way of dividends and share buybacks. This brings to $323 million, the amount we have returned to our owners through dividends and share buybacks since inception. I would now like to open up the phone lines for any questions.
Operator: [Operator Instructions] The first question comes from Josef Schachter with SER. Please go ahead.
Josef Schachter: Good morning, Daniel, Yuliya. I've got a bit of a sore throat, so I hope you can hear me. Dan, can you talk about Australia? What's going on there? Has there been a new field found and they're active going after something like our Montney? Is it oil? What's going on? That's the increased activity and the increased investment on new equipment? Is it a specific play? And maybe you can throw some ideas of just how big this potential is?
Daniel Halyk: Good morning, Josef. I think I've got what you've got. So hopefully, you can hear me as well. But no, I think what's happened in Australia is they're short gas. Frankly, there was a fairly hostile federal government that's done a 180 on gas here earlier this year and has come around to promote development. You may recall several quarters ago, the federal Australian government had put a price cap on domestic natural gas, which generally price caps don't encourage additional production, and you had a very tight gas market there. And earlier this year, I believe it was in Q2, the government reversed course, issued a long-term natural gas development policy framework that literally did a 180 on natural gas and was intended to encourage development and production, and that's exactly what it did, so no really new plays. Obviously, we acquired Saxon, which gives us exposure to new plays with their deeper rig fleet. And so our timing on that acquisition in March was somewhat fortuitous insofar as the federal government changed its policy approach in May. And so we're simply responding to customer demand to accelerate production. And it's a very tight market there. They're short gas, and it's a good, stable environment. The other thing I would say is we've done a little bit of hydrogen drilling there as well, which is somewhat unique. And – but the primary driver of our business there is onshore natural gas. There's oil drilling as well, but this is really an Asian LNG story.
Josef Schachter: What kind of price do they get onshore for their gas, just to put that in context of Canada?
Daniel Halyk: Well, the cap, I believe, was $12. That's been removed. I haven't checked onshore spot lately. But if you look at Asian, Japanese LNG prices, they're in that U.S. kind of $12 to $15 range.
Josef Schachter: That's pretty – that's a very economically incentivizing activity.
Daniel Halyk: Well, and that's part of the reason why North America is building LNG plants like there's no tomorrow.
Josef Schachter: Next (LON:NXT) one, how do you see M&A opportunities at this point? The Saxon was a fabulous deal. And where do you see opportunities given how tough things are in the States? Are prices coming to realistic levels that you might do something in the U.S.?
Daniel Halyk: Certainly, we're seeing lots of opportunities. We remain disciplined. They have to fit within our core business focus. But definitely, we see the U.S. as an area where there's a lot of opportunity. But we're going to stay disciplined on price and also, obviously, quality of assets matters. But yes, we continue to work hard to identify and, if they make sense, complete M&A.
Josef Schachter: Super. That does for me. Thanks so much. Thanks Dan, and thanks Yuliya.
Daniel Halyk: Thanks Josef.
Operator: Thank you. [Operator Instructions] The next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.
Tim Monachello: Hey good morning.
Daniel Halyk: Good morning, Tim.
Tim Monachello: Just wanted to follow-up on some of the Australia opportunities that you're seeing, that sounds generally really positive. Can you say how many rigs you're running in Australia today on the drilling and on the well servicing side? And where you think you'll be in terms of rig activity by the time you deploy those upgraded rigs in Q1? So I guess by the end of Q1, how many rigs do you think you'll be running?
Daniel Halyk: So we're currently running 10 drilling rigs, and we expect to, as I mentioned in the notes, add another two here by the end of Q1. Service rig side, I believe we're running five today. Expect to be – the sixth will be going here shortly and then a seventh in Q1. Again, there's also spot market opportunities, so you can have some bouncing around. But typically, for us to react – well, for us to reactivate and spend capital on significant upgrades we're not going to do that for a spot market opportunity. So the rigs I've mentioned are all rigs that are – we're spending significant capital on to upgrade and deploy them under long-term contracts.
Tim Monachello: Got it. How long are those contracts?
Daniel Halyk: Not going to comment, but years, not months.
Tim Monachello: Okay. And I guess with the rigs that aren't working today, do you think those could go to work without upgrades? Or do you think those will all require upgrades to work?
Daniel Halyk: No, some of them can. There's – Australia is a bit of a different market, much less of a spot market situation, largely because it's a very concentrated market from a producer side, but there are spot market opportunities. And so we do have rigs that kind of bounce around. And so rig counts will bounce around a little bit on the margin with spot market work. But yes, it's – Canada is much more of a spot market environment than Australia.
Tim Monachello: Yes. I imagine Australia is a little bit tougher to get visibility on, both given the concentration on the operator and on the contractor side.
Daniel Halyk: Well, it's an extremely high-cost environment to work in. And so the ability to just go up and down from a staffing perspective, you have labor laws that are fundamentally different. It's just it's not that easy and so a lot of the drilling programs are fashioned around the labor laws, things like that. And it's a very tough labor market over there, and you can't just bounce around.
Tim Monachello: Okay. Do you have any other opportunities in Australia that you're tracking for rig upgrades?
Daniel Halyk: We do, but I'm not going to comment until something gets signed.
Tim Monachello: Okay. Can you talk at all about like your expectations for your 2025 capital program?
Daniel Halyk: That will come out in early January. We're going to approach it the same way as we always do, start at zero. And first of all, come up with a maintenance budget that reflects what we think activity is going to look like. And then obviously, any growth opportunities, those we tend to pursue in real time as opposed to we don't dedicate growth capital in the abstract. It's always targeted to opportunities that pass our muster.
Tim Monachello: Okay. How are you and the Board thinking about the dividend and growing that over the next few quarters?
Daniel Halyk: So we increased it, I believe, Q1 this year. Our Board reviews it quarterly and we want it to be something that is rock solid, which it is. And we also balance that with share buybacks and our ability to reinvest our owners' capital into investments that make sense. But I would describe our dividend right now is rock solid. We don't worry about it. It's not – it's sustainable, so I'm not going to usurp the Board's discretion, but it's reviewed quarterly, and my wife likes a higher dividend, and try and keep everyone happy, but...
Tim Monachello: Yes, absolutely.
Daniel Halyk: It's part of our balanced approach to shareholder returns.
Tim Monachello: I was just curious if you might be able to comment on the working capital performance in the quarter. Revenue was up pretty significantly quarter-over-quarter, and you had a pretty significant, well, working capital harvest, which is kind of counter to the way I thought it would have gone. Was there anything unique in that?
Yuliya Gorbach: Tim, this is actually interesting in asking that question. But as you might remember, we have been buying quite a bit of engines and major equipment for Bidell. And Bidell CPS was performing pretty well and using up that inventory and that actually your harvest of cash right there, so that for us, it's fully expected and it does come and go but this quarter was quite a bit of that.
Tim Monachello: Okay. Understood. And then can you speak to, I guess, the U.S. industry dynamics across your business lines? Have you seen pricing stabilize recently? Or are you continuing to see a lot of pressure?
Daniel Halyk: Our drilling is focused in the Permian. We're seeing a pretty competitive pricing, which we tend to want to see that bottom before we start getting into a severe knife fight. I think we're seeing that bottom out. On the well servicing side, we're focused on North Dakota. That's been a very interesting market in the sense there's been very significant customer concentration and consolidation, which when you're running a small fleet, that can hit you pretty hard. I would describe that market on the service rig side as very competitive. The rental side, I would say the quality of our equipment and the fact that we offer equipment that most competitors don't have, combined with we've really seen a lot of competitors exit through bankruptcy or consolidation or just shutting down auction sale, that's held up better. Again, I think I would describe the market as stabilizing, and – but it is competitive. But that said, I think our groups have done a pretty good job on cost management, and we're not going to dive to the bottom on price just to wear our equipment out.
Tim Monachello: Okay. And then in Canada, how is pricing dynamics? And what's your view on I guess stable next year?
Daniel Halyk: Good stable market here. As Yuliya mentioned, we had one of our high-spec AC double rigs get damaged during a rig move, and so that hurt our Q3. It happened in July. So missed almost the entire quarter, which that rig is back. But coincidentally, we also had an AC double in the U.S. here last week get damaged on a rig move. So in both cases, we'll be looking to third-party insurance for coverage. But in the short-term, it hits your utilization and income statement. But when we recover anything through insurance, that will be reflected when that's recovered.
Tim Monachello: That's all for me. Appreciate the details.
Daniel Halyk: Thanks Tim.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Halyk for closing remarks.
Daniel Halyk: Thank you, everyone, for joining us this morning, and we look forward to speaking with you when we return or when we have our Q4. Have a good rest of your day.
Operator: This brings the closing for today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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