Total Energy Services Inc.

Daniel Halyk - President & Chief Executive Officer Yuliya Gorbach – VP, Finance and CFO

Scott Treadwell - TD Securities Mike Mazar - BMO Capital Markets John Gibson - AltaCorp Capital Jon Morrison - CIBC World Markets John Bereznicki - Canaccord Genuity

Thank you, and good afternoon. Welcome to the Total Energy Services' fourth quarter and year end 2014 conference call.

Present with me this afternoon is Yuliya Gorbach, our Vice President Finance and Chief Financial Officer. We will review with you Total's financial and operating highlights for the three and twelve months ended December 31, 2014.

We will then provide an outlook for our business and open up the phone lines for any questions. I would ask Yuliya to review our financial results for the three and twelve months ended December 31, 2014.

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 drilling activity in the oil and gas industry.

Actual events, results may differ materially from those reflected in Total's forward looking statement due to a number of risks, uncertainties and other factors affecting Total's business and oil and gas 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 the Canadian Provincial Securities authorities that are available to the public at www.sedar.com.

Our discussion during this conference call is qualified with reference to the notes to the financial highlights contained in the press release issued earlier today. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollar.

Total Energy results for three and twelve months ended December 31, 2014, reflect high revenue and net income than 2013, generally due to higher revenues in all business division arising from increased customer demand and high equipment utilization. For the fourth quarter of 2014 compared to the fourth quarter of 2013 revenue increased 39% to $121.1 million as compared to $86.9 million in prior period.

The revenues are broken down as follows. In Contract Drilling Services, the revenue reported from Total's Contract Drilling Services division, or Chinook Drilling decreased by 11% for the three months ended December 31, 2014 to $16.2 million, compared to $18.3 million for the same period in 2013.

Chinook had 755 operating days on a spud to release basis during three months ended December 31, 2014 as compared to 881 days for the three months period ended December 31, 2013. Rig utilization during the fourth quarter of 2014 averaged 49% on spud to release basis as compared to 60% for the same period in 2013.

The decrease in operating days and revenues for the fourth quarter of 2014 compared to 2013 was due to unanticipated and substantial reduction in the drilling program of a significant customer. The short notice received did not provide sufficient time to re-market for the idled rigs.

Revenue per operating day received for Contract Drilling Services for the three months ended December 31, 2014 increased by 4% as compared to the same period in 2013. The changes in revenue per operating day were due primarily to increase day rate pricing and the mix of equipment operating.

This division had operating earnings of $4.3 million for the three months ended December 31, 2014 as compared to $5.5 million for the comparable period in 2013. In Rentals and Transportation Services, the revenue reported from Total's Rentals and Transportation Services division increased 22% for three months period ended December 31, 2014 to $36.3 million as compared to $29.7 million for the same period in 2013.

The revenue increased was due primarily to high equipment utilization for a slightly larger fleet of equipment. Average utilization of rental assets was 44% for the three months period ended December 31, 2014, as compared to 43% for the same period in 2013.

This division exited the fourth quarter of 2014 with approximately 10,000 pieces of rental equipment and 109 heavy trucks as compared to 9,700 and 100 heavy trucks in the fleet at December 31, 2013. This division had operating earnings of $8.6 million for the three months ended December 31, 2014 as compared to $6.7 million for the comparable period in 2013.

In Compression and Process Services, the revenue reported from Total's Compression and Process Services division increased by 76% for the three months ended December 31, 2014 to $68.6 million as compared to $39 million for the same period in 2013. The revenue increased from the prior year comparable period was due primarily to increased customer demand and expand in manufacturing capacity.

Utilization for the compression rental fleet was 89% for the three months period ended December 31, 2014 as compared to 87% for the same period in 2013. On the consolidated basis, EBITDA increased 27% to $29.3 million in the fourth quarter of 2014, or $0.85 per share diluted from $23.2 million in the fourth quarter of 2013, or $0.67 per share diluted.

Cash flow increased 26% to $30.3 million in the fourth quarter of 2014, or $0.88 per share diluted from $24 million in the fourth quarter of 2013 which was $0.69 per share diluted. Net income increased 24% to $13.3 million, or $0.42 per share diluted in the fourth quarter of 2014 from $10.7 million, or $0.34 per share diluted in 2013.

For the 12 months ended December 31, 2014 compared to 12 months ended December 31, 2013, revenue increased 26% to $428.1 million compared to $339.6 million. Revenues are broken down as follows.

In Contract Drilling Services, the revenue reported from Chinook Drilling increased by 11% for the 12 months period ended December 31, 2014, to $62.4 million as compared to $56 million for the same period in 2013. Chinook had 3,038 operating days on a spud to release basis to 17 rigs for the 12 months period ended December 31, 2014 representing a utilization rate of 51%.

This is compared to 2,814 days with 16 rigs or 48% utilization for the same period in 2013. Revenue per operating day for 2014 increased 3% relative to 2013 due to increase day rate pricing and the mix of equipment operating.

In Rentals and Transportation Services, the revenue reported from Total's Rentals and Transportation Services division increased by 15% for the 12 months period ended December 31, 2014 to $124.8 million as compared to $108 million for 2013. Average utilization of the rental assets was 41% for the year ended December 31, 2014 as compared to 38% in 2013.

In Compression and Process Services, the revenue reported from Total's Compression and Process Services division increased 38% for the 12 months ended December 31, 2014 to $241 million compared to $174.7 million for 2013. Utilization for the compression and rental fleet was 89% for the year ended December 31, 2014 as compared to 86% for 2013.

At December 31, 2014, this division had approximately 45,000 horsepower of compression [rate] [ph] on lease as compared to 43,900 horsepower at December 31, 2013. At December 31, 2014, this division had fabrication sale backlog of $108 million as compared to backlog of $60.1 million as of December 31, 2013.

On this balance sheet comparing December 31, 2014 to December 31, 2013, total asset increased 15% to $595.9 million as compared to $518.8 million at December 31, 2013. Net debt which equals convertible debenture plus long-term debt plus obligation under finance leases plus current liabilities minus current assets remained at nil on December 31, 2014.

Shareholder equity increased 12% to $382.1 million at December 31, 2014 versus $340.6 million at December 31, 2013. Working capital increased 12% to $82.3 million at December 31, 2014 versus $73.5 million at December 31, 2013.

Thank you, Yuliya. 2014 began with optimism and ended with caution.

Drilling and completion activity levels in Western Canada steadily improved during the year as compared to 2013 until a substantial decline in global oil prices began in the fall. This oil price decline initially gave rise to uncertainty but as it accelerated during the first part of 2015, it gave rise to substantial cuts to plan capital expenditure levels by oil and natural gas producers.

Western Canadian drilling activity during the first quarter of 2015 has seen a substantial decline as compared to 2014 as well as historical winter drilling activity levels. While completion and production activity is held up better, drilling activity is generally seen as a leading indicator for such activity as such Total Energy expects that 2015 will be a challenging year for the energy services industry.

And we have taken steps to right size our operations and response to reduce customer demand, particularly in the contract drilling services and rental and transportation services divisions. While the challenging industry environment is expected to way upon the compression and process services division, a record fabrication sales backlog at the end of the 2014 as well as a lower Canadian dollar provides a measure of support for 2015 activity levels.

While 2014 witnessed an increase in Western Canadian oil and natural gas industry activity levels which in turn contributed to improve financial results for Total Energy, continued uncertainty over the state of the global economy continue to way somewhat on industry sentiment. In this environment, Total Energy attempted to strike the right balance between growth and preservation of financial strength and capacity.

During 2014, Total Energy invested approximately $91.2 million into new capital equipment and infrastructure to support the continued growth of the company. Offsetting this investment was $32 million of cash proceeds from the sale of capital assets, primarily natural gas compressor sold from the compression rental fleet.

In addition to investing in the future growth of the company, during 2014 Total Energy return $19.4 million or approximately $0.63 per share outstanding at the year end to shareholders in the form of dividends and share buyback. $11.9 million was invested in the purchase and cancellation of 595,100 common shares or just under 2% of the issued shares at the beginning of 2014 pursuant to the company's normal course issuer bid, $7.5 million of dividends were paid to shareholders.

Total Energy's capital investment program, share buyback and dividends were all paid with cash on hand such as the company remained bank debt free throughout the year. All three of Total Energy's divisions continue to grow during 2014 despite ongoing weakness in North American natural gas prices; Total Energy's Compression and Process Services division achieved significant growth during the year.

Division of revenue for 2014 was a record $241 million, an increase of 38% from 2013. This division exited the year with a record fabrication sales backlog of $108 million as compared to $60.1 million at the end of 2013.

Despite marginally higher equipment utilization, the company's Rental and Transportation Services division increase divisional pretax income for 2014 by over 13% as compared to 2013 due to a slight larger equipment fleet and economies of scale. Competition in this business remains strong and limited our pricing gains despite generally higher activity levels on a year-over-year basis .Within the Contract Drilling Services division, improved activity levels over the first nine months of 2014 contributed to improve year-over-year financial results as compared to 2013.

As mentioned earlier the decrease in drilling rig utilization during the fourth quarter of 2014 as compared to the prior year was due to the sudden and unexpected decrease in a significant customers drilling program. A primary objective for a Contract Drilling Services division is to take active steps to diversify its customer base as we come out of the current drilling slowdown.

And in that regard I am pleased to report that some progress is beginning to be made and so far as our newly constructed 18th rig is just commenced operations with a new customer in Northeast British Columbia. In January, Total Energy announced a preliminary 2015 capital budget of $13.6 million.

The expenditure of this budget is almost entirely discretionary and no substantial capital expenditure commitments have been made to date under such budget. With over $82 million of positive working capital including $7.7 million of cash at the beginning of the year and no bank debt, Total Energy will look to utilize this balance sheet's strength during 2015 to pursue investment opportunities that will build long-term and sustainable shareholder value.

All of our capital assets are free and clear including our land and buildings. Our land and buildings have a net book value of $49.9 million at yearend and in February we received a third party opinion that estimates the current market value of such real estate portfolio to be at least $105 million.

Total Energy's substantial tangible asset base will provide us with the opportunity to refinance the $69 million of convertible debentures that come view on March 31, 2016 in a very cost effective and non dilutive manner. And we are currently exploring several options in that regard.

Our sustainable dividend policy has always been based on a pragmatic view of the nature of the Canadian energy services industry, an industry that is both capital intensive and cyclical. And one that requires balance sheet strength at all times to ensure that business decisions such as product and service pricing are made for the right business reasons and not simply to generate cash to maintain and otherwise unsustainable dividend.

The current industry downturn reinforces our commitment to such a dividend policy as such no changes are required. Despite entering an undoubtedly difficult period for North American energy services companies, Total Energy remains open for business.

We are ready, willing, enable to invest in our business so as to continue to provide our customers with all the equipment and high level of service. While difficult time reinforces the need for focus and discipline, they do not prevent stable organizations from continuing to improve and grow.

I would now like to open the phone lines for any questions.

Thanks, afternoon, guys. I wanted to actually just focus on the compression, pretty impressive step up in backlog there.

I know you typically don't like to give out a bunch of details, was that the result of just ongoing success across the board or was there perhaps like was there a big order or something sort of more momentous in the quarter that came to pass.

You know without getting into specifics on income, we continue to be a solid number two player in Canada, definitely we are seeing our international business become a little more significant and we did receive some nice large orders.

Okay, perfect. And then just sticking with the compression side, one of the other competitors talked about beginning of some cancellation and deferrals, have you seen anything like that yet in your backlog to date or maybe with forecast work in the service or rental side.

Within the compression process side, our backlog is holding up well. Certainly we are working with customers more to manage delivery times, that's not all bad for us.

We are certainly able to manage our workforce in a way that is helpful and protect and maintain I'd say the A team, these are unlike say drilling rig take or pay contract, these are very detailed contracts where we then go and procure equipment and raw materials so the contract cancellation experience is fundamentally different in that business say to a take or pay contract in the drilling rig business. That said, we work with our customers but overall I am pleased with how things are going on the order front there.

Okay. The only other question I wanted to ask on compression was just trying to kind of calibrate how 2015 might look.

Would it be a fair calculation if I took the yearend backlog at 2013 and subtracted that from your sort of yearend revenue, your total year revenue of 2014, would that be a good sort of breakdown of sort of backlog or contracted purchase order work versus sales and service that's more may be transactional.

I’ve never have done that so I couldn't answer yes or no. I think our business today is materially different than it was a year and four months ago.

Obviously, we’ve opened a new shop in first quarter of 2014 which has provided us with incremental capacity, efficiencies that came with that. The other thing is the -- all of our backlogs are net of percentage of completion, so that's revenue that's not been recorded yet.

So that skews things a little bit but the $108 million will fall into 2015, absolutely none of it has been recorded in 2014. The final point I'd make is our parts and service within our compression group is much larger.

And again we are in new territory here, as we go in a new territory your guess is probably better than mine, obviously macro environment drives things but as we continue to grow that business we are learning as much as you are in terms of what we can expect on a go forward basis. So as per usual I am not going to give forecast, the $108 million backlog within compression and process provide us with a good degree of stability coming into the year.

We are seeing continued demand albeit the current market obviously is going to weigh on things but certainly we are aligned with some major players in both fronts and as customers continues to need equipment we will be there to provide it for them. So time will tell how much they need and how much they want to service it.

Okay, perfect. Last one for me specific to I guess on the rental side but probably a bit more of a general question.

With now being kind of through the winter and I would suggest Q1 probably been below everyone's expectation and for some people meaningfully so, have you seen a change in the mindset of your potential acquisitions if you are out there on the hunt, the smaller guys maybe people who have some segments that maybe aren't material for them that might be -- may find a better home under the total umbrella. Have you seen a change in mindset yet or is it still a little bit early to see -- I don't know if you call it panic but certainly some change in the mindset on the seller side.

Well, first of all I want to say I am very happy with our leadership group within that division. We've done some rationalization, we have the A team in place, both in terms of field and Calgary sales and we are also getting as I have said in the last few months definitely more aggressive.

We are going into and we are already in an environment where there is going to be lot of business failures in this area. Both on the rentals and transportation side.

And I am getting a lot of opportunities presented to me. My sense right now is personally and within that division, we are focused -- things are still relatively busy for us and we are focused on getting through till non economic i.e.

weather spring break up and we are busy right now. And we are going to put our heads down and get through to spring break up.

I hear road bans are on, bans are on, just south of Grande Prairie today, so that's starting mid March, that's to be expected. I expect we will continue to see a lot of potential opportunities put in front of us and we are going to be selective but if this macro environment continues for any length of time, there is going to be a lot of opportunities on that front both above and below the 49 parallel.

Hello, hi, good afternoon, guys. Three quick ones here.

And first can you remind us what the contract status is of rig 18?

It is seasonally contracted as per our normal COD contracts.

Okay. But it is not take or pay contract.

No

Okay. And you mentioned rationalization in cost structure et cetera; can you quantify that at all for us in terms of what you guys are expecting to be able to cut out of the cost relative to your overall G&A?

No, we've never been once a kind of have public hangings, Mike. We are doing what we need to do.

All I would say is at the peak of our activity levels we were probably in the 1,400 range all in, we will below 1000 considerably, if not really considerably but we are doing what we need to do. The first thing as we are going to protect our core employees and we are going to be creative and how we do that.

And but we are also going to rationalize our cost structure. And that's not just its employees that's third party suppliers and we are asking to be more efficient, our customers are asking us to be more efficient for them, we are asking the same for our supplier so we've been around now 18 years have been through a few cycles and our people know what to do, obviously I know what's going on in detail but it's never been our style to have public hangs and we don't take pleasure in this but you got to do what you got to do.

Yes, absolutely, great.

Q1 come so you will see where we are at when Q2 comes out, you will see what we are at, the one thing I will say and we are proud of this, over 18 years on an annual basis we've always been profitable on a GAAP basis and IFRS basis after tax.

Right. And then last one maybe for Yuliya but just more of a housekeeping thing.

Debt level stayed about the same quarter-over-quarter but interest was much higher, more than doubled. Is there something else in there?

That was -- I can speak to that, we have a number investments, we put cash in and the market value some of those fluctuate so that's all non cash.

Okay, got you, okay, terrific. That's it.

Thanks, guys.

Returns are better though.

All right, that's great, thank you.

That's why if you look at our cash flow it is little bit higher in EBITDA, there is other reasons for that which I am straying in the territory, and I should let Yuliya answer. She will call me sooner if I continue.

No, it is okay.

Hi, guys, this is John Gibson for Dana here. I just had one quick question just regarding for your drilling utilization and pricing in Q1.

I know you talked a little bit about they are reflecting customer base but I was wondering if you could give us more color on sort of what you are seeing this quarter.

Right. Price seems horrible and at the end of the day we are seeing competitors work for prices that we simply can't get to.

And we are in a position where we are in business to make money that includes covering depreciation. We adjust our cost structures as best as we can and we've done that.

And there comes a point where you see park it, and we deliberately parked a bunch of equipment and we are keeping some core activity going to maintain employment for key people, but at the end of the day we are not going to work at a loss. And that's what it comes down to.

And at some point if your customers need a price that's lower than what you need to cover your depreciation or your other cost, someone else wants to work for that, I cannot control that. But we cannot operate on a sustainable basis in that way and we don't need to.

So we are not going to. But at the end of the day I got to be efficient, we get that.

And we run as efficient operation as any out there, but we've made a conscious decision to draw the line in the sand on where our costs are where we can get them, and that cost structures move during the last few months. And so we can -- and we are competitive we know that.

But there are situations that are just not rational and I am not going to comment beyond that but we are just not going to go there. And good customers get that.

At some point -- if it is a marginal in terms of the well economics, why you are drilling.

Got it, appreciate it. I guess it would be region specific and you said that you can drill north or if we see --

You know I think at the end of the John that you are going to see the most efficient rigs that are capable of doing the job prevail over the next several quarters. And you hear a lot about tier-one, tier-two, tier-three, at the end of the day our double fleet is a very good fleet.

We spent two months getting our cost structure adjusted from where we are in we know our costs are on a rig by rig basis. And when guy start drilling again we will be very competitive.

And I'll put it some of might later doubles up against heavier AC rigs and at the end of the day it is going to come down to who can drill the well most efficiently. And so we will see what the rig fleet does but like I said, we have to cover all of our cost including depreciation, the burdens on us to get our cost down which we are doing.

Once we’ve done that, rig stand possible, once the rig fleet starts going again coming out of breakup or whatever the ramp up starts, I want to be better positioned customer wise and cost wise and we were going into the short and sudden downturn. And when you have a major customer change your program over night that's a tough thing, when you are going into a declining market but you get on with it.

And that's what we are going to do.

Afternoon all. Dan, if a customer makes a material delay of call it 12 months or more within the compression and process division, are you pulling that out of the backlog or when would you ultimately look at --

I wouldn't know because we haven't had that.

Okay. So if you were to have a customer delay something more than a year, that would be something new to you and you would revaluate whether it is in backlog go forward?

Yes. The reality is your progress payments are tied to percentage of completion.

So your revenue recognition but we haven't -- that's a theoretical question that I wouldn't answer, that would no. We control -- I just --yes, that's a theoretical that I am not sure how to answer that.

Is it fair to say that you believe you will realize the majority of your backlog in the next 12 months?

We have no reason not believe that. In fact sometimes cancellation are better.

You can make more money but we prefer to finish job but our contracts are extensive detailed and very methodical. Like I said it is just fundamentally different business than say rigs.

But at the end of the day our backlogs are numbers that are backed by true take or pay contracts not ones that you renegotiate depending on the price of oil.

Can you give any more color on the size of the international orders that are actually in that backlog or talk about it where it going to?

Not going to do that. If international becomes over 10% of our consolidated revenue we will break it over.

Okay. Is customer inquiry for rentals, new rental contracts increased in the last three months relative to the way you would have seen over the past call it three or four quarters?

The rental business is pretty lumpy, it comes in big spurts and jolts and I wouldn’t, I think the general state of the market right now is one of people figuring now what they need to do. Generally speaking historically and I wouldn't suggest the next six months total but in a tighter market as people need incremental compression they tend to want a rent.

That said, if you are in a situation where people are shutting in production and have extra horsepower there who knows, flip side is our NOMAD fleet is very adaptable and you know that's how it has been a big driver for our rental business. And again makes it easy to shut wells into which are the beauties of NOMAD.

So I think the next six to nine months will tell on the gas production side, what the rental business is going to look like. It is really been an oil driven phenomenon over the last five six months, we will see how that plays out.

Would you be willing to build new rental assets for shorter-term contracts relatively what you would have expected over 18 months ago considering the market trend?

Our views on rentals haven't change. We've got a fairly defined approach to that.

And it hasn't changed.

Within Chinook, can you give any sense of how many rigs you are preparing to staff end market in the back half of 2015 at this stage? Or it is too early to tell?

We want all of them. We will see where it goes but like I said we are going to work to put them all to work, how many go to work remains to be seen.

I think frankly out of three divisions that are going to be the toughest one because you can only do thing with the drilling rig, drill a hole. But or we can have no rigs working for rest of year, no.

Within the rentals and transportation platform, can you give any sense of where pricing has gone over the last three months? I realized that you don't like to give a lot of comments but I am assuming it is fairly aggressive in service line, in certain service lines and is there anywhere you are really not trying to market in those businesses because they are near cash breakeven at this point?

Generally it is gone south. Again really depends on the area of geographically and the product line, but unlike the year ago or unlike six months ago in some parts for leading that, in some parts were not.

But we are getting aggressive on pricing on a very focus and strategic basis, not only to regain market share but also to establish our position in certain areas and welcome other people that are recent entrants to the rental business to the realities of running a rental business in the bottom half of the cycle.

Hey, good afternoon, everybody. I was wondering if you can compare customer demand for processing equipment right now versus compression.

You know process such a broad area I think generally you just get such a broader range of customer demand there. Our process group is very happy with what they are doing there.

Kelly Mantei, our general manager who we pulled out of Bidell, I don't know it has been probably three and half years now, is doing a fantastic job there. I don't comment on specific customers but he is got a real blue chip customer base there and these are long term players that have long term infrastructure needs.

And he is building harmonious group there, building good staff and we see reasonably steady demand there. And it is just such a broad range of some -- broad range of equipment.

Compression obviously we are very happy with how Sean and his group are running now, and we are becoming increasingly international and again our NOMAD is a unique product for us and we are pretty happy with how that business being run and again all these businesses we are in a tougher environment we get that. We got to manage our businesses efficiently and pass on efficiencies to our customers but we will do that.

Got it. Appreciate the color and then just a quick housekeeping question.

Was Q4 CapEx a little higher than you originally envisioned? It seems so at our end but maybe my math is bad.

No, our gross came in what 91.2, 94.2 or some

94 that including the capital --

Yes. We actually are carryover in 2015 less than what we projected in our January CapEx announcement.

So we are more of our new rig built on our balance sheet at year end, so that's probably John where we are different. But you will see our carry forward in 2015 unless more hit our balance sheet at the end of the year.

Got it. And what would that carry over be right now at this point?

So I think what it was $5.6 million that we said carried over some like that, you can drop that by $3 million to $3.5 million.

Got it, okay, that's great. All my mother questions have been answered.

Thanks for the color.

Thank you. If there are no more questions, I appreciate everyone participating in our conference call.

And we look forward to speaking with you after the release of our first quarter results. And I would also invite everyone that's interested to attend our Annual General Meeting of shareholders on May 21 in Calgary.

Thanks and have a good day.