Total Energy Services Inc.

Daniel Halyk - President & CEO Yuliya Gorbach - Vice-President Finance and CFO

Michael Lee - Hypotenuse Capital Ian Gillies - FirstEnergy Jon Morrison - CIBC World Markets

Thank you. Good afternoon, everyone and welcome to our first quarter conference call.

Present with me this afternoon 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 March 31, 2016, and then provide an outlook for our business and open up the phone lines any questions.

Please go ahead, Yuliya.

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 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 businesses 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.sedar.com.

Our discussions during this conference call are qualified with reference to the notes to the financial highlights contained in the new releases issued earlier today. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars.

Total's financial results for the three months ended March 31, 2016 reflects a very challenging operating environment. Consolidated revenues for the first quarter of 2016 were $50 million, a 46% decrease from the first quarter of 2015.

Compression and process services contributed 71% of 2016 first quarter revenues. Rentals and transportation services 22% and contract drilling services 7%, as compared to relative contributions of 62%, 32% and 6% in 2015.

Revenue per spud to release operating day in our contract drilling division during the first quarter was $16,260, an 18% decrease from the $19,888 per day realized during 2015. Decreased day-rate pricing was the primary reason for the decrease.

Divisional EBITDA was $0.8 million or 25% of revenue for the first quarter of 2016, compared to $1.7 million or 32% of revenue for Q1 of 2015. Within the rental and transportation services division, severe price competition resulted in significant declines in equipment utilization and divisional revenue.

First quarter rental equipment utilization decreased 61% to 15% in 2016 compared to 38% in 2015. Divisional revenue per utilized piece of rental equipment for the first quarter of 2016 decreased 5% compared to the same period in '15.

Divisional EBITDA for the first quarter of 2016 was $1.4 million or 13% of revenue, compared to $10.5 million or 35% of revenue in 2015. Despite ongoing effort to reduce operating cost, a significant fixed cost structure of this division contributed to the fact that for the first time ever this division was not profitable during the first quarter, which is typically its busiest quarter.

First quarter revenue within our compression and process services division decreased 38% in the first quarter of 2016 compared to 2015. This division generated $2.2 million of EBITDA in the first quarter of 2016 compared to $10.7 million in 2015.

Divisional first quarter EBITDA margins declined by 940 basis points, as compared to on 2015 due to 71% decrease in quarter end compression horsepower on rent, as well as competitive pricing. This division exited the first quarter of 2016 with $49.4 million backlog of fabrication sales orders, as compared to $86.6 million at March 31, 2015 and $48.9 million at December 31, 2015.

Included in the March 31, 2016 and December 31, 2015 backlog is $8.1 million order purported to be cancelled without payment of the prescribed cancellation fee and no revenue has or will be recorded in respect of such order until resolution. Consolidated gross margins for the first quarter of 2016 was 21% of revenue, compared to 32% for 2015.

The lower gross margin realized in 2016, compared to 2015 is a result of the contract drilling services and rental and transportation services division contributing a lower portion of consolidated revenue in 2016, as compared to 2015, as both divisions historically generate a higher gross margin rate in compression and process services division. Lower pricing in all three divisions during 2016 as compared to 2015 also contributed to lower realized gross margin.

Consolidated cash flow before changes in non-cash working capital item was $5 million for the first quarter of 2016, as compared to $7.5 million in 2015. The decrease in cash flow was due primarily to decreased operating earnings, which was partially offset by reduced income tax payment.

Consolidated EBITDA for the first quarter of 2016 was $4.3 million, an 80% decrease from 2015. Lower activity levels and result in lower EBITDA margins in all divisions contributed to the decrease.

Consolidated net loss for the three months ended March 31, 2016 was $2.1 million. Despite a continued focus on managing credit risk, the company recorded $0.2 million of provision for bad debt during the first quarter of 2016.

We continue to monitor good stability of accounts receivable and we will continue to do so to minimize bad debt provision going forward. Also impacting 2016 first quarter financial results was the net unrealized foreign exchange loss of $0.8 million arising from foreign currency translation.

This non-cash unrealized expense relates primarily to translation of working capital balances related to company's foreign [ph] operation. Total Energy’s financial condition remains very strong with $87.7 million of positive working capital at March 31, 2016.

Including company's working capital balance is $18 million or $0.58 per share of cash and marketable securities, which is sufficient to fund the company's $10.8 million of annualized dividend and debt payment well Q2, 2017. At March 31, 2016, the company had no net debt.

Total's bank debt at March 31, 2016 consists of a $48.3 million of term loan, that is secured by approximately 60% of our owned real estate. This debt is amortized over 20 years, bears interest at a fixed annual rate of 3.06% and requires monthly principal and interest payment of $278,800.

At the end of five year term in May of 2020 approximately $40.2 million of principal will be outstanding. With the exception of the real estate that secures this term loan, all of Total’s capital assets are available to support future borrowings as might be required.

Total’s $65 million operating line of credit was undrawn at March 31, 2016 and that remains the case today. Such operating line is secured by company’s working capital.

Total’s bank covenants consist of debt to equity ratio of not greater than 2.5 to 1, and the current ratio at least 1.3 to 1. At March 31, 2016 Total’s debt to equity ratio was 0.1 to 1 and its current ratio was 4.05 to 1.

Thank you, Yuliya. Our first quarter results reflect what is arguably the most difficult industry environment faced by Total Energy since we commenced our operations in 1997.

The decline in North American oil and natural gas, drilling and completion activity that began in 2014 accelerated during the first three months of 2016, define the Canadian seasonal upswing in oil field activity that typically occurs during the winter months. This difficult environment is led to what we have characterized as a dysfunctional market in certain of Total's business lines.

Evidence supporting our characterization includes unsustainable pricing, cannibalization of equipment and willingness to take excessive counterparty credit risks, which in turn is leading to business failures. With no clear and substantial improvement industry conditions in near sight, we fully expect business failures in our industry to accelerate over the next few months.

In such circumstances, Total Energy has elected to remain disciplined, so as to preserve its equipment base, minimize operating losses and protect its financial strength and flexibility. Simply put, Total will not pursue unprofitable work, cannibalize its equipment fleet, recklessly extend trade credit or procure its goods and services from insolvent suppliers hoping to get a cheaper price without getting caught up in a receivership situation, simply to enhance near term equipment utilization or generate headline EBITDA numbers to appease near sighted expectations.

Thankful as there are many well run companies in our industry that share this perspective, including many of our customers and suppliers. While these challenging industry conditions have made for a difficult operating environment, they have also given rise to numerous acquisition opportunities.

We completed a small US acquisition earlier this year and continued to work on several opportunities with new opportunities being presented almost on a daily basis. Total was focused on opportunities to grow our existing business lines, with a particular focus on the United States where we have just scratched the surface in our and in rental and transportation services and compression and process services divisions.

While we will remain disciplined in our pursuit of acquisition opportunities, I would be surprised and disappointed if we are not able to complete any further acquisitions during the remainder of this year. I would like to take this opportunity to thank all of our employees for their continued perseverance and effort, while this downturn has been brutal and at times it maybe tempting to give up, our employees are not quitters and I am very proud of their continued effort to do their best, to provide our customers with quality equipment and exceptional service.

Finally, I'd like to encourage all of our shareholders and other stakeholder to attend Total Energy's annual meeting of shareholders on Thursday, May 19 at the Calgary Petroleum Club. I would now like to open up the phones lines for any question.

Hey, Dan. Hey, Yuliya.

Hi, Michael.

So I am just curious about the pace of acquisitions here and clearly it sounds like there are plenty of opportunities being presented to you and you seem a little bit frustrated about not having completed more. I am just curious is the lack of consummation transaction a result of valuations – valuation expectations being too high from the sellers or is there too much bid activity from other buyers or are your expectations in terms of the assets you are looking for just not being that?

First of all our expectations are reasonable Michael. Actually, I hope I didn’t come across as frustrated.

We're extremely busy right now and the deal flow is never been higher. We are screening a lot of opportunities.

We've been extremely busy doing that. Obviously we got to run our business too.

Where we're – there is some valuation differences, in a lot of cases the underlying asset based quality is not great. And so when we look at something, we look at the quality of the asset base, what the expectations are and how much money we have to put into it to bring that equipment to our standards.

And if the money we have to pay, plus, bring it up to our standards, capital doesn’t make sense, we won't do it. In some cases frankly, we're seeing competitors work their stuff hard and we'd rather compete against it than own it and typically that stuff ends up at Ritchie Brothers.

I would be surprised if we don’t get another deal done. We're working hard and there are I would say expectations have come off.

I think the good shape down like this reinforces our views on capital discipline and it’s probably caused a lot of investors in the sector that [indiscernible] perhaps been a discipline to reevaluate how they look at valuation because now we're experiencing the bottom half of the cycle. And so we've always invested for the full cycle in mind.

And I think this type of environment facilitate some - a bit more of that perspective. So again, we're not frustrated like I said, I'd be surprised if we don’t get a few things done here and we're working hard to do that.

Okay. Thanks, Dan.

Morning, all. Perhaps you…

Hi, Ian.

I want to talk a bit about the compression and process services division, I mean, revenue was recently flat quarter-over-quarter, but we saw some I guess, margin compression there. I mean, can you give a bit of an update of what's happening in that business and why we may have seen that quarter-over-quarter?

Sure. Look at the rental fleet, you know the utilization is come off.

Clearly that’s you know, your highest margin business within that division. And what we're seeing with low gas price is, people not – they are not producing as much and so rental fleet utilization is down.

The beauty of all of this though, a good portion of our compression rental fleet is nomad [ph] and its tough as it is to watch fleet utilization suffer in a tough market. This is the best sales and marketing opportunity that division could ever have the nomad.

Because - and particularly for nomad rentals, now lot of those go out on term contracts, they go month-to-month thereafter and they are so easy to return and cheap and there is no strings attached. So my expectation is with the recovery in the gas markets, including with our expansion geographically, there is going to be good demand, particularly for nomads because this market is shown the customers, that its probably willing to pay a little bit more for a nomad rental because when you need to shut it down, you can and you can do it cheap an fast.

In terms of overall, we're seeing on the parts and service side definitely groups differing maintenance and overhauls and listen, price competition is fierce, but similar to all of our businesses, we've got to be competitive, but in certain cases, and I would say more on the lower end of the field, parts and service, the service side, oil changes and that, there is just simply groups out there that work through for cheap and you just kind of pass on that stuff. But you know, we maintain an extensive parts inventory and extensive network and a lot of the mom and pop simply can't compete with that and so there is always room for a group like ourselves.

But I am pleased with how that division has managed its cost. Its again, you know, every division is different, our rigs are the lowest fixed cost, our rentals are the highest, compression post us some where in the middle they are all working to be as competitive they can and not do too much damage here.

Okay. Thanks, that…

Does that help?

Yes. That’s very helpful and actually it makes a lot of sense.

And the other thing you mentioned is looking at compression and process in the US, is there a specific area whether it be fabrication or rentals or that you would prefer to be in the US…

We're being reasonably tight hold there. We're there already and we're there with parts and service, and we hope to be larger down there within - a year from now I hope to have a larger presence down there.

Okay. That’s helpful.

I'll leave it there…

I don’t want to speculate too much, but we're working pretty hard on different things, so…

Okay. And on of the constant things we've heard through Q1, is that the bid activity has picked up quite a bit on the drilling side, is this something you would agree with?

Certainly, let me put it this way, we haven’t fired any of our sales guys and hopefully they are getting busier, as they got off easy in Q1 and I am hoping Q2 they will have to work a little harder.

Okay. I'll turn the call back over.

Thanks very much for your time.

Afternoon, all.

Hi, Jon.

Specific to the rentals platform, was the pricing pressure in Q1 meaningfully different than it was Q4? And as you think about pricing coming down in that market, has it been the customer making haste for more concessions at this point or is just been straight competition as everyone is trying hit as much as they can?

I think its some, I would say it’s flat, I doubt a little bit. The good news Jon is there is a lot of groups go and broken that business, both sides of the border and you're seeing Ritchie Brothers full of trucks, rental equipment and that’s going to continue.

The other thing we're seeing and it’s probably a little more coming out of the queue. First of all, listen it was a slow quarter, so you got a lot of equipment chasing down lot of work.

The other thing we're seeing is with the dry conditions, it’s holding up some completion work due to shortage of water. The flip side is what we're seeing, particularly with larger, I'd call it, perhaps more sophisticated customers as they are clearly shrinking their supply chain and that is benefiting companies like Total.

Now again it’s not like there is 600 rigs going, but we are definitely seeing increased demand from typically larger sophisticated companies asking us to go into areas that we haven’t really done a whole bunch before in addition to what our core business is. And my sense is that a few of them have probably got caught up in receiverships and aren’t too happy about that and do not want to have that happen again.

And in fact, I do know that one more bidding projects in all divisions we're increasing being asked to provide comfort on the financial side. Now, a lot of these groups don’t know kind of what the corporate parent is and so in some cases divisions have been asked for performance bonds and we turnaround and show my public company statements and that’s sufficed in that couple cases on fabrication we provided corporate guarantees, thus performance bonds are free and that’s suffice.

But the fact that they are asking those questions, to me that’s a positive.

Does pursuing those opportunities that you mentioned that you haven’t been in the past require incremental CapEx from your perspective?

We spend a little bit of money here.

Okay. Have you been active at auctions in the last, call it six weeks?

Yes.

Of material scale or science, or you prefer not to say?

We don’t disclose, but we picked up some nice equipment for reasonable price.

Okay. Going over to the compression and process side of the business, specifically on the product support, have your door rates meaningfully changed in the last six months, given the fall off in activity for basic maintenance work?

Door rates, so you are talking?

Service rates on an hourly basis or service call rates?

Yes. We're - depending on the job, your book rates or your book rates on larger projects you are bidding it and so lot of the big stuff you are bidding it and more sharpening our pencils.

But again, consistent with all divisions, we have certain lines and we won't cross.

Have you seen competitors go away in that side of the business on the mom and pop side or seems like most of those gas will make it through trough?

Yes, we seen just mom and pop, we've seen big ones, particularly in the process side.

On the fabrication side, are you seeing any material cancellations out of the backlog above what you referenced in the release or in the release about the one customer?

No.

What about renegotiations to deferrals, are you seeing guys ultimately say, can we differ by three to six months and therefore we should be thinking about it taking you longer to share through your backlog than is normal?

No. If anything we're the ones managing to keep labor load level on the labor front, but no, we're not.

The good thing in this market is you have those frank discussions before they order.

Okay.

And so, when a customer is placing an order in this market, you know, if they need it.

Is it fair to assume then the embedded margins that you guys have booked in your backlog on astronomically different than what you realized over the couple of quarters?

We're not going comment that will come out in due course. But again I am happy with how these guys are running their business.

Okay. Last one just from me, just on the small $200,000 provision you guys took in the quarter, was that based on just DSOs getting over certain limit that you didn’t feel comfortable carrying it or ultimately you perceived there to be an insolvency from that customer, I am just wondering what drives you take a realized charge like that?

I can tell you we spend a lot of time divisionally, and corporately, A, upfront managing credit, extension and B, monitoring AR collections. And if we have reasonable doubts about collectability, we will provision.

Okay. All right, I appreciate the color.

I'll turn it back.

Thanks, Jon.

Thank you. I appreciate your participating in our conference call and I hope to see a few at our annual meeting next Thursday.

Thanks. And have a good afternoon.

Operator Thank you. The conference has now ended.

Please disconnect your lines at this time. Thank you for your participation.