Total Energy Services, Inc. (TOTZF) CEO Daniel Halyk on Q3 …

Total Energy Services, Inc. (TOTZF) CEO Daniel Halyk on Q3 …


Total Energy Services, Inc. (OTC:TOTZF) Q3 2019 Results Earnings Conference Call November 8, 2019 11:00 AM ET

Company Participants

Daniel Halyk – President, CEO & Director

Yuliya Gorbach – VP, Finance & CFO

Conference Call Participants

John Bereznicki – Canaccord Genuity

Daine Biluk – CIBC Capital Markets

Josef Schachter – Schachter Energy Research

David Vanderwood – Burgundy Asset Management

Aaron MacNeil – TD Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Total Energy Services Inc. Third Quarter Results Conference Call. [Operator Instructions]. I would now like to turn the meeting over to Mr. Daniel Halyk. Please go ahead, Mr. Halyk.

Daniel Halyk

Thank you, operator. Good morning, and welcome to Total Energy Services third quarter 2019 conference call. Present with me is Yuliya Gorbach, Total’s Vice-President Finance and Chief Financial Officer. We will review with you Total’s financial and operating highlights for the three months ended September 30, and then provide an outlook for our business and open up the phone lines for any questions.

Yuliya, please proceed.

Yuliya Gorbach

Thank you Dan. During the course of this conference call, information may be provided continuing forward looking information concerning Totals, projected operating results, anticipated capital expenditure trends and projected drilling 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 authorities that are available to the public at www.sedar.com.

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, 2019 reflect continued challenging industry conditions in Canada and reduced production activity in our Compression and Process Services segment set by relatively stable industry conditions in the United States and Australia.

By business segment, Compression and Process Services contributed 42% of 2019 third quarter consolidated revenues, Contract Drilling Services, 28%, Well Servicing, 21%, and Rentals and Transportation services, 9%.

Year-to-date, the CPS segment contributed 54% of consolidated revenues; Contract Drilling, 21%, Well Servicing, 17% and RTS, 8%. Geographically, 42% of third quarter revenue was generated in Canada, 34% in United States, 20% in Australia and 4% from the Rest of the World.

Year-to-date, 40% of revenues came from the United States, 39% from Canada, 20% from Australia and 1% from the Rest of the World.

Within our contract drilling services segments, an approximate 33% year-over-year decline in Canadian drilling festivity, as measured by industry’s operating days, results in lower third quarter revenues and an operating loss as compared to operating income in Q3 of 2018.

Despite a 14% decline in third quarter, operating days compared to 2018 improved day rate and increased operating efficiencies resulted in continuous bottom line improvement in U.S. drilling operation.

Sequentially from Q2, 2019 the operating loss within our U.S. drilling business decreased by 60%. As a result of cost management and completion of government optimization projects, the cost of which were primarily expand [ph] in prior quarters.

In October, our U.S. drilling subsidiary received $17.6 million as a compensation for the early termination of certain group contracts in 2017. These payments will be recorded as revenue in the fourth quarter of 2019. While utilization in Australia was four percentage points lower than in Q3, 2018, revenue per operating day in Australia was high in Q3 of 2019 as compared to Q3 of 2019 due marginally higher rates that were partially offset by lower camp and other ancillary revenue.

Operating income for the third quarter in our Australian drilling business was $0.3 million lower than prior year comparable quarter, due primarily to weakening Australian dollar relative to the Canadian dollar over the past year.

For the first nine months of 2019, 36% of contract drilling revenue came from Canada, 33% from the United States, and 31% from Australia. The substantial year-over-year decline in Canadian industry activity also contributed to a 44% decline in third quarter revenue in Canada revenue for our Rentals and Transportation Services segment.

This decline was offset by a 71% increase in United States revenue as we continued to relocate underutilized equipment from Canada to the U.S. market and made targeted investment in new equipment.

On a consolidated basis, third quarter RTS segments revenue decrease 20% compared to prior year comparable period. Third quarter revenue per utilize rental fees in RTS increased 10% from 2018, due to the mix of equipment operating, as well as higher realized pricing on equipment relegated from Canada to the United States.

Year-to-date 38% of RTS segments revenue was generated in United States as compared to 20% for the first nine months of 2018. During the third quarter, management conducted a review of depreciation estimates within the RTS segments, most of which were made over 20 years ago, when we commenced operations.

Generally speaking, we determined that our previous estimates as to the useful life of rental equipment were too short, but their estimated salvage values were too high. There were no changes to our depreciation estimates related to heavy trucks and trailers.

Accordingly, effective July 1, 2019, we changed our depreciation estimates within RTS segment and as a result, there RTS segment recorded one time depreciation expense of $7.9 million in the respect or now fully depreciated assets, as well as $1 million of incremental recurring depreciation expense.

The RTS segment also incurred $0.5 million of reallocation expenses during the third quarter as we continued to move underutilized equipment from Canada to the United States. Excluding the re-allocation expenses and the one-time depreciation expense The operating loss was $3.9 million for the third quarter of 2019 as compared to a loss of $0.6 million in the same quarter of 2019.

If one considers the additional $1 million of recurring depreciation expense in Q3 of 2019, resulting from our estimated change on an apples-to-apples basis, the year-over-year increase in operating loss was $2.3 million.

During the third quarter, RTS segment acquired certain oilfield transportation assets operating in the United States for $2.3 million. Within our Compression Process Services segments third quarter revenue for 2019 was $72.1 million, a 37% decrease compared to the third quarter of 2018.

This segment exited the third quarter of 2019 with the fabrication sales backlog of $39.8 million, a $37.4 million decrease from June 30, 2019. The decrease in revenue and the sales backlog are a result of lower customer orders. While quoting activity remains high during the quarter,…

Moving & Transportation Services Jonathan Cartu

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