Total Energy Services Inc.

Daniel Halyk – President and Chief Executive Officer Yuliya Gorbach – Vice President, Finance and Chief Financial Officer

John Gibson – CIBC John Bereznicki – Canaccord Genuity Scott Treadwell – TD Securities

Thank you. Good morning, and welcome to Total's third quarter 2016 conference call.

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

Yuliya, please proceed.

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 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.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 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 September 30, 2016, reflects continued challenge in North American Energy Service industry condition. Consolidated revenues for the third quarter of 2016 were CAD 46.5 million, a 30% decrease from the third quarter of 2015.

Compression and process services contributed 70% of 2016 third quarter revenues. Rental and transportation services 23% and contract drilling services 7% as compared to relative contributions of 69%, 24%, and 7% in 2015.

Revenue per spud to release operating day in our contract drilling segment during the second quarter was CAD 13,700. A 14% decrease from the CAD 15,801 per day realized during Q3 of 2015.

This decrease was due to lower pricing. Segment EBITDA was CAD 0.5 million for the third quarter of 2016, compared to CAD 1.2 million for 2015 with EBITDA margins decreasing to 17.5% of revenue in Q2 of 2016 from 26.6% in Q3 of 2015.

During the third quarter of 2016, we undertook an extensive review of our depreciation estimate relating to our drilling rigs and related equipment. This review was triggered in part by our determination to decline in profitable work, which in turn was contributing to equipment idealness.

This review resulted in a perspective change to our estimate of depreciation effective July 1, 2016, that recognizes depreciation expense between periods of inactivity. As a result of this change of estimates, depreciation expense for the third quarter of 2016 increased by CAD 0.9 million.

Within the rental and transportation services segment, segment revenue per utilized piece of rental equipment for the third quarter of 2016, decreased 2% compared to Q2 of 2015 and increased 1% for the nine months of 2016 compared to the same period of 2015. Unlike contract drilling services segment, pricing in this segment relative to 2015 was relatively stable due in part to the fact that pricing decrease sooner and to a greater extent that what was experienced in contract drilling as well the mix of equipments utilized also contributed to relatively flat year-over-year revenue per rental piece for both three and nine months periods.

Segment EBITDA for the third quarter of 2016 was CAD 1.3 million or 12% of revenue compared to CAD 4.2 million or 27% of revenue in 2015. Segment EBITDA margins are negatively impacted during the periods of low activity by this segment's relatively high cost structure.

Third quarter revenue within our compression and process services segment decreased 29% in the third quarter of 2016 compared to the prior year comparable period. This segment generated CAD 3.9 million of EBITDA in Q2 2016 compared to CAD 7.4 million in Q2 2015.

This segment's third quarter EBITDA margin declined by 250 basis points, as compared to 2015 due to a 40% decrease in quarter end compression corresponding rent as well as competitive pricing. This segment exited the third quarter of 2016 with a backlog of fabrication sales orders to approximately CAD 62 million as compared to backlog of CAD 35.9 million at June 30, 2016 and CAD 51.1 million at September 30, 2015.

Consolidated gross margins for the third quarter of 2016 was 22% of revenue compared to 25% for the third quarter of 2015. The lower gross margin realized in 2016 compared to 2015 is due in part to price decline arising from competitive market conditions not being proportionately offset by cost reduction.

Further as CDS and RDS segments historically generate high gross margin percentage than CPS segment, the fact that these two segments contributed a lower proportion of consolidated revenue in 2016 as compared to 2015, particularly during the first half of 2016 also contributed to size decline in gross margin. Consolidated cash flow before changes in working capital item was CAD 6.1 million for the third quarter of 2016 as compared to negative CAD 0.6 million in 2015.

The primary reason for the significant increase in third quarter cash flow was income taxes, particularly the realization of CAD 1.3 million income tax recovery during Q3 of 2016 as compared to payment of CAD 10.2 million of income taxes during Q3 of 2015. Consolidated EBITDA for the third quarter of 2016 was CAD 4.8 million, a 57% decrease from 2015.

Lower activity levels and competitive pricing in all segments as well as inability to lower cost proportionately to decrease revenues due in part to company's determination to maintain co-operating capacity contributed to this decline in EBITDA. Total Energy realized consolidate loss -- net loss of CAD 1.9 million for the three months ended September 30, 2016 compared to net income of CAD 1.6 million for Q3 of 2015.

Contributing to the quarterly loss for 2016 was CAD 0.9 million increase to depreciation expense in our contract drilling services segment following our perspective changing depreciation estimate effective July 1, 2016. Total Energy's financial condition remains very strong with CAD 80.1 million of positive working capital, including CAD 13.6 million or CAD 0.44 share of cash and marketable securities and no net debt at September 30, 2016.

The company's CAD 65 million operating facility was recently renewed to February of 2019 and remains undrawn today.

Thank you, Yuliya. With the modest recovery in oil and gas prices over the course of 2016, industry settlement improved somewhat during the third quarter, contributing to this improved settlement was the normal seasonal pickup in Western Canadian activity levels albeit from historical it was experienced during the second quarter.

However, industry conditions remained very challenging during the quarter, and North American oil and natural gas drilling and completion activity was low relative to service industry capacity. This imbalance resulted in continued fierce price competition particularly within the contract drilling services marketplace.

Total Energy continued to be selective in putting equipment to work. Our strategy remains to prudently manage our business so as to have a competitive cost structure, but to decline on profitable work and thereby minimize the cost and effort required to put our equipment back in the service when industry conditions normalize.

When we do accept work, we strive to provide our customers with well maintained equipment and exceptional service. In particular, we remain diligent in ensuring our activities are carried out in a safe and responsible manner.

I am very proud of the exceptional safety performance of our people. For example, our consolidated 12 month TRIF or total recordable incident frequency is at an industry leading 1.9 as well our Alberta carrier risk factor for our heavy truck operations which is the score determined by consideration of [indiscernible] data over the past year, currently stands at 73% below the industry average.

These objective measures confirm our commitment to making the necessary investments to train our people and maintain our equipments regardless of the poor state of our industry. As such, our customers can take comfort that when they hire us to do a job; they are not hiring a problem.

While the current environment has not been financially rewarding, it has given rise to opportunities to add all these people and equipment, and position our company for an eventual recovery. Our 2016 capital expenditure budget was recently increased by CAD 8.3 million to CAD 25.5 million.

Such increase is being directed primarily towards the continued growth of our rental and transportation services segment in Canada and the United States with a particular focus on growing our food management business. As part of this investment, our rental and transportation services segment recently opened a branch in Saskatoon, Saskatchewan and hired several new positions at that location to not only support our existing food management operations but to expand our presence beyond the upstream oil and gas industry.

Finally, total energy beliefs up in North American Energy Services Industry must consolidate to achieve the efficiencies necessary to remain competitive on a global basis. And we have been busy identifying and evaluating numerous opportunities in that regard.

However we will remain focused and disciplined in the pursuit of consolidation opportunities particularly given the continued volatility and uncertainty of commodity prices and financial markets and we will certainly not put the financial stability of our company at undue risk. I would now like to open up the phone lines for any questions.

Hi, this is John Gibson calling from CIBC.

Good morning, John.

Good morning. Just again your compression backlog, if you remove the largest drilling award, is it fair to assume all the incremental words are from your traditional customers in Canada?

I would say North America, but certainly Canada is a big part of that, U.S. as well.

Okay, great. Also do you expect your throughput in compression facilities change meaningfully compared to historic levels, just kind of give me the uptake in your backlog?

I expect you will see the backlog roll through over the next couple of quarters and certainly Q3, your absorption rates weren't particularly high. So as we increase throughput definitely we will see better absorption rates on fixed overhead, but yes, we worked through that backlog, you will see some higher activity.

We also did contract our fabrication capacity during the third quarter by subletting one of our lease facilities for the balance of term. So that dropped our capacity roughly 10% within the whole segment, so we should see some cost efficiencies there over the next few quarters.

Okay, great. And last one from me, just on the rental side, could you guys give us a market shares to protect your margins that just given the [indiscernible] fairly low this quarter?

Yes, we are seeing I would say unsustainable pricing and a lot of fronts, within the rigs and the rentals there is some absolutely ridiculous pricing and particularly with equipment that has moving parts. We tend to sit on the sidelines, good example would be centrifuges, those are really expensive piece of equipment not only upfront capital but through maintenance costs and so we pretty much decided to sit on the sidelines as other groups are tending to work up prices that we believe won't be sustained for too long.

So we are definitely given up some market share but we are also, what we are seeing on the rental transportation side, John, is a lot of business failures and we expect those failures to continue over the next few quarters notwithstanding public market sentiment changing and we continue to be inundated with calls and approaches for direct and through receivers, banks, brokers. That industry is in significant distress right now and so part of what our strategy is, is to preserve our equipment, preserve our core operating capacity definitely our over head costs are higher than what we adjusted headcounts reflector and activity.

We are making investment and preserving our core people and our bet is over the next few quarters that will pay off.

Okay, great. Appreciate the color, and I will turn it back.

Thanks.

Hello, good morning everybody.

Good morning Mr. Bereznicki.

Just turning back to your compression business for a moment, I noticed that Q3 sequentially revenues were down, margin was up, is that a function of revenue mix in the quarter or is that reflective of the rationalization I guess you undertook I guess late in the quarter?

I would say more rationalization, John, our rental fleet continued to see albeit a slow decline in utilization, that's our highest margin business. So definitely revenue mix was actually negative towards margins but that group is done both on the compression and process side, an excellent job on matching costs and just operating as officially as possible.

So we are pleased with how they operated and again at the rental fleet utilization kick stop and we see increased throughput through the plants margin should go up, everything else being equal.

Great, appreciate the color. And then in terms of the backlog, how should we think about how quickly it takes you to work through that?

I mean will that be mostly gone by Q1 and just on that question also what does the backlog look like subsequently in the Q3? I have a few questions at you there.

We are seeing, first of all we are paying full for international work. Canada is tough, that said we are very pleased with how this segment is competing in the Canadian marketplace.

Their market share, I would suggest, is growing not shrinking and we are pleased with how they are competing in the Canadian marketplace despite intense competition and they are achieving margin gains through efficiencies, not racing to the bottom on price. But definitely international is a big piece of what we are doing, we anticipate that continuing going forward and we are working on opportunities to expand our international outside of Canada presence.

And I will save specific updates for the appropriate time, let me put it that way.

Great. Thanks again.

I think that's it for me, appreciate it.

Thanks, John.

Yes, this is Scott Treadwell from TD Securities. Good morning, everyone.

Good morning, Scott.

I just wanted to pick up on the rental side for a second, you talked about some failures and obviously you are talking to receivers and business owners, what have you seen in terms of the equipment quality, you referenced irrational pricing that's one of the consequences at least in my mind is not being able to keep the equipment in good nick. Have you seen that in business generally on the rental side?

Absolutely. We are turning down a lot of opportunities based on the quality of the equipment.

That said there are exceptions, when we updated our capital expenditure budget here a couple of weeks ago, in there, Scott, you would have noticed we picked up a fleet of eight heavy trucks of food trailers. Literally that fleet, the average kilometers on those trucks would have been 30,000 to 40,000 kilometers, 2015 to 2016 vintage and they have been part for many months and so you have a situation where an operator decided to park the fleet and those are transactions that will do interestingly what we're hearing and this is just to give you a bit of a sense of the stress in that sector.

We're hearing and we're concerned about it both as a consumer of some trucking services but we're hearing stories of truckers having their insurance pulled because of concerns by the underwriters as to their state of financial position which ultimate impact operating risk.

Okay, and I was going to…

That's some -- again I think that will definitely benefit stable companies. The customer base the last thing they want is a truck hauling their cargo rolling and having no insurance.

Right. I am just wondering if you've seen that operationally as well.

As an operator of contractor drilling rigs where you may not have your rental equipment on location.

Absolutely.

There has been operational hiccups due to quality?

Absolutely and it's a real problem and dumb. We see it on our rigs because we don't force speed our equipment on Chinook rigs.

I am almost to the point where I might start [indiscernible] just because it does cause issues. And you think you are saving money but you are buying a problem.

And again time will cure this and we're like I said we're patient people and so we're not going to try and compete with stupidity, you can't. You have to let it play out but ultimately I think this will increasingly demonstrate to the customer base that you get what you paid for.

And you are taking on frankly risk that you wouldn't even think about. Is your supplier insured those are pretty fundamental questions that a lot of producers don't think about until something happens.

Okay, perfect. The other one from me would be on the labor side.

You referred petty generally that the labor market is tightening some specific references to trucking in and around Grand Prairie and then kind filed hand a little more generally. I am wondering how that is looking for you guys.

Obvious rental is a little less labor intensive at least today. Just how you are looking at that across Chinook and rentals and potentially even at Bidell and Spectrum.

So first of all I guess immediate answer is just the eight new trucks we picked we've had no problem finding good drivers. Again I think that's the testament in part to the stability of our organization.

People in this industry are craving some stability and again part of our investment over the past two years has been. We have not touched our employee benefit plans including savings plans and again that costs us money.

2015 we spent north of CAD 4 million on our employee savings plan i.e. buying total stock in the market for our employees.

So similar to our dividend which we haven't cut, we haven't cut our employee benefits. Now our headcounts have gone down, variable wages have gone down with the market but we preserved our core health, dental savings all those plans.

And so I believe that stability gives us a leg up in a rising market to attract good people. And again you're always going to get the crowd that will move for a buck an hour but to be honest that's a crowd that you'll never keep happy and frankly we would rather attract people that want a steady career.

In terms of attracting labor for the rigs we'll buy it back if we need to. So far we haven't had issues.

I do believe the rigs will be the biggest challenge on labor. Again a lot of that labor force has migrated outside the sector, they've outside of Alberta and they've gone to lower per hour jobs but they are steady and how are you going to convince someone to come work for 40 days this winter.

A lot of cases they won't and I guess if you're going to try and do that you'll have to pay them more but we will buy labor back. Again our strategy on the rig side has an extremely competitive overhead cost structure and if I need to pay CAD 5 an hour more to get labor I will but we'll get it on the other side on overhead and I guess some thankful rigs are 5% of our revenue.

Right, okay.

So, we'll buy labor back, I am not worried about that and then we've been rotating our crews as best as we can. Our utilization has been at or below industry average largely because of our choice.

We've declined work on price and we don't apologize for that just like I wouldn't expect our customers to drill a well that don't make company sense. I expect they wouldn't.

It's pretty reasonable for us not to put our equipment out for a loss, why would you do that.

Wholly agree. I appreciate the color.

That's all I've got. Thanks, I'll turn it back now.

Thanks, Scott.

Great, thank you for participating in our conference call and look forward to speaking with you all when we have our year end call. Have a good day.