Total Energy Services Inc.

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

Jon Morrison - CIBC World Markets Inc. John Bereznicki - Canaccord Genuity Ian Gillies - GMP Securities James Mahony - Daily Oil Bulletin

Thank you. Good morning, and my apologies for the slight delay.

As we understand, there were some technical issues with our conference call provider. Present with me this morning is Yuliya Gorbach, Total's VP Finance and CFO.

We will review with you Total's financial and operating highlights for the three and six months ended June 30, 2017. We will then provide an outlook for our business and 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 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 those 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.

During the second quarter, Total Energy completed the acquisition of Savanna Energy Services Corp. Total Energy financial results for the three months ended June 30, 2017 include the financial results of Savanna from April 5, 2017 when the Company acquired control of Savanna.

Proceeding to Company's [tickle a bit] for Savanna made in December 2016 and the subsequent corporate amount commission transaction that was completed on June 20, 2017, Total issued an aggregate of 15.2 million common shares to Savanna shareholders. Cash consideration of $23.3 million was also paid to these shareholders and an additional $3.1 million was spent by Total to acquire Savanna shares in the open market.

The fair value of Savanna's property, plant and equipment on April 5, 2017 was estimated by Total to be $464.2 million, which is approximately 32% or $218.1 million lower than the $682.3 million net book value of such assets as recorded on Savanna's March 31, 2017 balance sheet. As part of acquisition, the Company assumed Savanna's $281.3 million of long-term debt, which had an approximate weighted average effective interest rate of 8.1% at the time of acquisition.

On June 19, 2017, Company entered into three-year $225 million revolving syndicated credit facility with the option to increase such facility by $75 million, subject to certain terms and conditions. The credit facility includes CAD 14 million operating line and AUD 6 million operating line and a CAD 205 million revolving facility.

Pricing is determined by a pricing grid and the availability is subject to various conditions and financial ratios that are detailed in the Company's second quarter financial statements. At June 30, 2017, the applicable interest rate on the amount [indiscernible] credit facility was 3.45% and the standby rate was 0.44%.

In addition, $5 million revolving line of credit was established for Savanna, which facility was undrawn at June 30, 2017. Immediately following completion of the Savanna acquisition, the credit facility was utilized to finance approximately $205.9 million of Savanna's debt, thereby, reducing weighted average effective interest rate in Company's debt to approximately 4.2%.

At June 30, 2017 and today, the Company is in compliance with all bank covenants and have full access to its credit facilities. Moving onto Total's financial performance.

Second quarter results for 2017 reflect improving North American industry activity levels from the historic lows experienced during the prior year. Despite high activity, operating margins remained under pressure, particularly within Contract Drilling Services and Rental and Transportation Services, where pricing continued to suffer from competitive market conditions.

Also negatively impacting the Company's financial results for the second quarter of 2017 was approximately $4 million of non-recurring expenses that relate to completion of Savanna's acquisition and subsequent integration and rationalization activity, and a $4.5 million unrealized foreign exchange loss included in cost of services related primarily to intercompany working capital balances. Excluding these expenses, EBITDA for the second quarter of 2017 was $15.1 million.

Finance cost for the second quarter of 2017 included $2.9 million of non-recurring costs, notably $1.6 million of penalty interest paid on Savanna's debt, following the change of control; $0.5 million of non-recurring fees associated with the establishment of Total Energy credit facility; and $0.8 million unrealized loss on marketable securities. Consolidated revenues for the second quarter of 2017 were $154.9 million, a 253% increase from the second quarter of 2016.

Included in second quarter consolidated revenue is $74.9 million, contributed by Savanna from April 5, 2017 to June 30, 2017. Compression and Process Services contributed 42% of 2017 second quarter consolidated revenue; Contract Drilling Services, 27%; Well Servicing, 22%; and Rentals and Transportation Services, 9% as compared to contributions of 85% by Compression and Process Services; 14% by Rentals and Transportation Services; and 1% by Contract Drilling Services in the second quarter of 2016.

The acquisition of Savanna can result in substantial increase to Total drilling rig fleet and the addition of the Well Servicing segment is the primary reason for the significant change in the year-over-year segmental revenue. Geographically, during the second quarter of 2017, 58% of consolidated revenue was generated in Canada, 23% in the United States and 19% in Australia.

With the acquisition of 101 rigs from Savanna, the Company drilling rig fleet consist of 119 rigs. Given the substantial increase in the size and geographical scope of the Company's Contract Drilling operations, year-over-year comparison are not particularly relevant.

Second quarter revenue for Contract Drilling Services segment was $41.3 million, or $20,437 per spud to release operating day. Segment EBITDA was negative $3.1 million as the legacy pricing and cost structures weighed on segmental margins.

The revenue reported from the Rental and Transportation segment increased by 120% to $13.4 million for the second quarter of 2017 as compared to $6.1 million over the same period in 2016. The revenue increase was due primarily to increased equipment utilization and addition of 1,700 pieces of major rental equipment through the acquisition of Savanna.

Second quarter rental equipment utilization increased to 18% in 2017 as compared to 10% in 2016. Divisional revenue per utilized piece of rental equipment for the second quarter of 2017 increased 12% compared to the same period in 2016.

The increase in revenue per utilized piece was due to a modest increase in pricing and changes in the mix of equipment utilized during the quarter. Segment EBITDA for the second quarter of 2017 increased to $1.3 million, or 10% of revenue compared to negative EBITDA of $0.9 million for the second quarter of 2016.

Given the segment's relatively high fixed cost structure, it has significant leverage to high activity levels and improved pricing. Second quarter revenue within our Compression and Process Services segment increased 76% in the second quarter of 2017 compared to the same period in 2016.

This increase was due primarily to high sales activity, particularly within certain international markets, including the United States and Australia. This segment exited the second quarter of 2016 with $149.3 million backlog of fabrication sales orders as compared to $35.9 million at June 30, 2016 and $75.2 million at March 31, 2017.

As of June 30, 2017, the Total horsepower compressors on rent was approximately 19,000 as compared to 12,000 at June 30, 2016 and 16,500 at March 31, 2017. Segment EBITDA increased 58% to $6.2 million during the second quarter of 2017 compared to $3.9 million in Q2 2016.

Total's Well Servicing segment was established with the acquisition of Savanna. Second quarter revenue for this segment was $34.9 million and EBITDA was $7.5 million, or 21% of revenue.

Total operating hours for the second quarter was 31,494, of which 42% were in Canada, 40% in Australia and 18% in the United States. Consolidated gross margin for the second quarter of 2017 was 14% of revenue as compared to 15% for the second quarter of 2016.

The lower year-over-year gross margin is due to competitive market conditions, not permitting the Company to increase pricing to the extent necessary to offset high cost of services as well as $4.5 million of unrealized foreign exchange losses, including the cost of services that's related primarily to intercompany working capital balances. Consolidated cash flow before changes in non-cash working capital item was $10.9 million for the second quarter of 2017 as compared to $1.8 million in 2016.

Second quarter cash provided by operating activities was $45.3 million for 2017 compared to $6.7 million for 2016 as the normal seasonal monetization of accounts receivable generated during the prior winter drilling season unfolded. Adjusting for non-recurring costs and unrealized intercompany foreign exchange losses, consolidated EBITDA for the second quarter of 2017 was $15.1 million, an almost tenfold increase from 2016.

High industry activity levels and the addition of Savanna operations were the primary drivers of such increase. Consolidated net loss for the three months ended June 30, 2017 was $13.1 million as compared to a net loss of $4.2 million for the second quarter of 2016.

Negatively impacting the Company's bottom line results for the second quarter were $4 million of non-recurring costs related to acquisition and subsequent reorganization and rationalization of Savanna; $4.5 million unrealized foreign exchange losses, and $2.9 million of non-recurring finance expenses as mentioned previously. Total Energy financial condition remains solid, with $21.3 million of positive working capital, including $20.1 million of cash and marketable securities at June 30, 2017.

Shareholders' equity increased by $183.1 million during the first half of 2017 with the issuance of common shares by the Company in connection with the acquisition of Savanna shares that was partially offset by realization of net loss and continued payment of dividend to shareholders. As of June 30, 2017, Total Energy debt was $326.3 million, of which $71.9 million was current.

Included in the current portion of debt is $67.1 million of Savanna's 7% notes that are due in May of 2018. Total's bank covenants consists of a senior debt to trailing 12 months EBITDA of five times, and the minimum bank EBITDA to bank interest expense of two times.

At June 30, 2017, the Company's senior bank debt to trailing 12 months bank EBITDA ratio was 2.18, and the bank's interest coverage ratio was 4.37 times.

Thank you, Yuliya. The second quarter of 2017 was transformational for Total Energy.

As Yuliya described, the addition of Savanna substantially increased the scope and scale of Total Energy's operations. After a lengthy and at times, contentious six-month process, we completed the acquisition of Savanna on June 20 and immediately proceeded to refinance over $200 million of Savanna's debt.

Going forward, significant interest expense savings are expected, given the effective interest rate on Savanna's debt was reduced by over 50%. With the acquisition and debt refinancing behind us, management's focus shifted to the finalization and implementation of our integration plan.

Such plan contemplates at least $10 million of annualized operating and SG&A's cost savings, which is consistent with the initial estimates we provided at the commencement of our bid for Savanna. We are now confident that such cost savings can be achieved by the end of 2017 and therefore, be fully realized in 2018.

Such savings are based in part on our determination to decentralize Savanna's operations, including executive and support functions into segmental standalone business units. This corporate structure is consistent with how Total's other business segments have operated, and we believe will result in substantially improved operational and financial performance.

As management work to finalize our integration plan, we determined that sufficient internal management capability existed for both our drilling and well service segments. With this capability in mind, and given our objective to decentralize operations, we concluded that the need for a Corporate President of Savanna was not a permanent one.

As such, Lyle Whitmarsh concluded his service as President of Savanna last month, and we are grateful to Lyle for his contributions on the Savanna transitional Board of Directors as well as during the integration planning stage. Our North American Drilling and Well Servicing managers now report directly to Bill Kosich, our Vice President of Drilling Services.

Thus far, Bill has done an excellent job leading this Group and is making significant progress in the implementation of our integration plan. The head of our Australian operations reports directly to myself.

Our Contract Drilling Services segment is now the second-largest contract driller in Canada, which scale provide significant opportunities for operating and marketing efficiencies. Savanna's presence in the United States and Australia also provides us with a platform for future growth in two key international markets.

That said, improving the financial performance of the Contract Drilling segment is our immediate priority. Synergies between our now much larger Contract Drilling segment and our other businesses have been identified and are being acted upon.

Economies and efficiencies of scale have also been identified and are being pursued. And we expect our efforts will bear fruit in the very near future.

Total's Contract Drilling Services segment will operate under the Savanna name and Chinook Drilling will be integrated in Savanna's Canadian operations. Full integration has been deferred pending completion of the implementation of an enterprise resource planning system by Savanna, which implementation was commenced by Savanna on April 1, 2017, just days prior to Total Energy acquiring control of Savanna.

While implementation of this ERP system has been challenging and costly, significant modifications have and are being made in order to streamline processes, simplify the system and improve functionality. We expect implementation to be substantially complete by the end of September.

The acquisition of Savanna represents Total's entry into the Well Servicing business, and we are pleased with what we have purchased. Improving segmental financial performance and the implementation of the Savanna ERP system are the primary near-term objectives for this business segment.

And with capable management in place, we are optimistic about achieving these goals. Integration of Savanna's Rental business into Total Energy's Rental and Transportation Services segment, Total Oilfield Rentals, is substantially complete.

The addition of D&D Rentals increased this segment's rental fleet by approximately 17% and its heavy trucks fleet by 3% and added three full service branch locations in Fort MacKay, Lloydminster and Swift Current. Most importantly, we are fortunate to have some quality employees join our team.

Corporately, significant cost savings will be realized through the elimination of duplicate public Company costs and economies of scale. While there will be some personnel additions to our corporate group, these additions will be modest and consistent with Total Energy's philosophy of decentralized operations management.

Operationally, North American oil and natural gas drilling and completion activity continued to recover from the historical lows experienced during 2016. Despite this increased activity, operating margins remained under pressure, particularly within our Contract Drilling Services and Rental and Transportation Services segment, where competitive market conditions have constrained pricing gains.

As such, our focus remains on cost management and significant gains have already been achieved in the short while since completing the Savanna acquisition, particularly in our United States Contract Drilling operations, where we initially focused our attention. Demand for service rigs is currently strong, although North American industry capacity to supply is being constrained by labor availability.

We are engaging with our customers to come up with creative options to attract and retain competent personnel. Our Compression and Process segment continues to perform well.

This segment exited the second quarter of 2017 with $149.3 million sales backlog, a 99% increase from the previous quarter end and a record backlog since we entered this business 20 years ago. A significant majority of this backlog consist of international orders.

And subsequent to quarter-end, the Company received its first direct order through its Weirton, West Virginia fabrication facility. As such, visibility for this segment is good into the first quarter of 2018.

On behalf of the Board of Directors at Total Energy, I would like to thank the many employees of Savanna and Total, who have logged countless hours and demonstrated a can-do positive attitude as we work together to integrate our operations and improve our financial performance. I would also like to welcome George Chow to the Board of Directors of Total Energy.

As one of the founders of Savanna, George brings a unique perspective to our board table, and I look forward to working with George and the rest of our board to build sustainable shareholder value. I would now like to open up the phone lines for any questions.

Good morning, all.

Good morning, Jon.

Can you give any more color on the manner in which you guys reported day rates in Q2 within the Contract Drilling segment, and whether that differs from how Savanna traditionally disclosed them?

Yes. We record revenue on a net of third-party basis as opposed to gross.

Savanna, I believe, historically, reported gross revenue, whereas, we net out third-party charges.

So is it fair to assume that, that changes the average revenue per day by a couple thousand dollars?

We haven't disclosed that amount, but certainly, it would be a lower number than what Savanna would report.

Okay. Would there also be any rentals that would traditionally be included in the Contract Drilling that will now go over to your Rentals and Transportation segment?

I think generally, there was probably more bundling occurring at Savanna than what we do at Total. And so going forward, we will look to segregate the Rental business into our RTS segment as opposed to combining it both with Contract Drilling and Well Servicing, which tended to be the case with Savanna.

On the Well Servicing side, Canadian utilization was really strong, but it came at the expense of hourly rates. And I would say that, that's part of how the historical business had performed over the last 12 to 18 months.

Is it fair to assume that your priority of utilization falls off pretty quickly and you're likely to become more of a price leader in that market in the back half of the year?

Certainly, our focus right now is improving profitability in the bottom line, and I think that's a combination of pricing and costs. So I'm pleased with the group that's heading up operationally and from a sales and marketing perspective – our Well Servicing group, but I know we're aligned in terms of what we need to do to improve the bottom line.

So that will play out over the next several quarters.

Dan, I realize that you're always sensitive around how much information to disclose, but how do you think about disclosing regional profitability as time goes on and you grow outside of Canada?

First of all, Jon, we report in accordance with our requirements under IFRS, and we are sensitive for competitive reasons, on going beyond that. And so what we will do is continue to report in a manner that's consistent with our obligations.

And if you look at our MD&A, I think we provide pretty good detail on a geographic basis, segmental operating performance, in particular operating losses. So I'd refer you to our MD&A, which is reasonably detailed, certainly more detailed than it has been historically.

Yes, for sure. No, I was just thinking about in reference to some of how Savanna historically segmented its business.

That was all.

Yes, we're Total and every company is different. Going forward, we're going to report in a manner that's fulsome, but sensitive to competitive conditions.

Can you give any more color on the Compression bookings in the quarter? They were obviously incredibly strong, and I appreciated the comments you made around non-Canadian wins, but can you give any idea of split geographically in the backlog as it fits today?

As I mentioned, a substantial majority of that backlog is outside of Canada. And we are very pleased with – how the startup of Weirton has gone and as you probably inferred from the timing of our first order, coming out of Weirton post-June 30, the June 30 backlog does not reflect Weirton contributions.

So we're optimistic the U.S. is a big market for us.

I believe our timing of the Weirton expansion is good. And we look forward to growing our presence in the U.S.

and outside of the U.S. as well.

Can you share whether that order that you got in the U.S. was in relation to the Northeastern U.S.

or you don't want to give that detail at this point?

No, I'm not going to comment. We're very pleased with the quality of our initial customer.

It's a major, major entity. And we'll let them decide whether they want us to discuss who they give their work to, but we're very pleased with the quality of the customer.

Okay. How do you think about equipment deliveries coming out of Bidell, just given the sheer size of the backlog where it sits today?

And would it signal that the delivery schedule is going to be a little bit more extended than would be traditional in your business or is that just where West Virginia picks up and allows things to deliver as per a normal schedule?

I think your delivery schedules are fairly normal. As I commented in my remarks, our current backlog at June 30 gives us good visibility into Q1 of next year, which I think would be a fairly consistent rollout based on historical timing.

One of the significant issues facing the gas compression market particularly is lead time on drivers, in particular larger Caterpillar drivers. And so our group has done a very good job of being proactive in addressing those shortages and positioning our Company to benefit from some strategic inventory purchases.

But going forward, drivers will limit delivery times for customers that haven't been proactive in working with us to secure inventory.

Can you give any more color on rentals demand in Canada right now, and whether – I mean, you saw a good uplift in Q2 over Q1 for demand. Is it fair to assume that, that's continuing to progress in the back half the year?

So far, yes.

Okay. Just on Lyle's departure, I fully recognize that sometimes personalities don't jive and people in organizations find that they're not a perfect match for each other in hindsight.

But naturally, it raises some questions in the market around the success or smoothness of Savanna's integration. So I was just wondering if you can give any color, any more color around: one, his departure.

Two, a refresh on integration and whether there's been any other real personnel changes within Savanna. And thirdly, just talk about the leadership that you have in place to ensure that you can leverage the investment that you made in line with what you've done in the past generated solid returns on those acquisitions?

Well, first of all, Jon, I don't accept the premise of your question that there's personality conflicts. What I will say is Total does not pay for things it doesn't need.

And there was a joint determination by Lyle and myself that a Corporate President was not required given the bench strength we have operationally. We don't need two public CEOs and so to suggest it was personality conflict or otherwise is not appropriate.

I've got a lot of respect for Lyle, and I believe the feeling is mutual. But you don't have people around just to have people around.

That said, Lyle's contribution on the Board of Savanna during the interim process was invaluable. His perspective was valued and his contributions to the formulation of our integration strategy were solid, and we're now executing on that strategy and that process.

And Lyle was wise enough to know that when you're executing something and you don't need a role, you don't just hang around to hang around. So we wish Lyle the best and Lyle will be fine.

He's an experienced person in this industry. In terms of execution of the process, it's well underway.

Bill Kosich is leading that. Bill was obviously involved before and Lyle reported to Bill.

And Bill is a very experienced person. Again – below Bill was a group, both from the Savanna side and the Total, notably the Chinook side, very competent managers.

And we basically reallocated responsibilities. I'm not going to get into specific personnel changes.

There have been some departures. That's part of the process, and we're going to continue to execute on our integration process and get $10 million of savings.

And we're very confident those savings will be achieved by the end of this year and fully realizable next year.

Appreciate all of that color. Just one last one for me, what's your early thoughts on Australia, as you spend some time in that market?

It's a region where a lot of Canadian service companies have struggled to make true economic returns despite some of the Blue Sky opportunities that are out there. Do you think that you can make a decent return on that market as you spend more time looking at it?

Well, first of all, Australia is a very different market from North America for a number of reasons, some of which are reasons I'm not going to discuss publicly. It's a competitive perspective.

That said, I'm very happy with the group we have in Australia, both Canadian expats and local. Savanna has been an established player in Australia for several years now.

I believe, like anything, they learned as they went along and have a fairly good grasp and handle on the Australian marketplace. We did experience some de-entry and growth of Australia through our Compression and Process group.

So it wasn't a foreign market to us and certainly having that background has been of assistance to the corporate group, particularly myself, as we work with our Australian group to manage and grow, pardon me, the business. I see excellent upside in Australia.

We have a very good customer base that's increasingly being diversified. And we're looking at other opportunities in that geographical area.

And I expect that we will get an acceptable return on our investment in that marketplace.

Appreciate the color. Congrats on a continued integration.

Thanks Jon.

Hi, good morning everyone.

Good morning, John.

Hi, John.

Most of my questions have been answered, but just on your CapEx program, digging a little bit more deeply, obviously a lot of money being spent in the Contract Drilling industry on upgrades. Kind of wondering what your philosophy is on that going forward, Dan?

We're in business to get – make money and get a return on our investment. I believe our industry generally has done a very poor job of doing that.

The last two years, we haven't done a great job for our shareholders in that regard. We look at incremental capital investments as opportunities to deploy capital with our hurdle rates in mind and Contract Drilling is no different than any of our other business segments.

We assumed a Savanna board approved capital budget, included in that was $7 million related to their ERP system, which was incurred up to kind of June 30 there. We're generally expensing any future costs that relate to the ERP system and we've written off the system to zero as of June 30.

So I would rather, going forward, put money into revenue generating opportunities that provide a return on capital as opposed to things that don't. We are looking very hard at opportunities to do that and the benefit of having four business segments is capital goes to the highest return.

It's similar to our customers that look at various countries. They put their capital in the jurisdiction that gives them the best returns.

Our four segments – well, in essence, five because we treat our shareholders as a segment, represent five opportunities to deploy capital as well our focus going forward will be to aggressively repay the debt that we acquired with Savanna, and we're confident that we're going to attack that diligently here in the next several quarters.

Great color, Dan. Appreciate it.

And then just secondly, looking across the business pro forma, getting the sense that maybe U.S. Contract Drilling is still the one area where there's still some work to be done, is that a fair comment and kind of what your thoughts on that part of the business right now?

Well, first of all, Savanna's first quarter in the U.S. was very challenging.

The results there were negative cash flow in a significant way. We assigned Bill Kosich to work with that group to improve the performance, bottom line performance of the group.

And I must say the results that we've seen over the last several weeks have been very, very positive. And I expect that to continue to play out in Q3 here going into Q4, but we've had, I would suggest, a fairly material improvement in bottom line performance there.

Just through some attention to detail and focusing everyone on the same things that need to be focused on. We need to also improve our Canadian operations, and we're working to do that.

We have a very good group of managers, both from the Savanna and Total side. We've assigned key leadership roles and a lot of that is centered around improving bottom line performance.

As well there was some legacy pricing arrangements that we're working through and a legacy cost structure that we're addressing. And I am confident as we go forward, as we work both on the top line, and the bottom line, you will see better results.

Great color, Dan. Appreciate it.

That’s it for me and again congrats on getting that.

Thanks John.

Good morning, everyone.

Good morning, Ian.

Good morning.

Can you help reconcile the comments around incremental cost savings and decentralizing the business? I mean, as I think about decentralization of a business, I would think higher cost just given more administrative costs right across the business.

So any help there would be appreciated.

Decentralization to me is letting people in operations do their job and not having a bureaucracy on top of those people to duplicate those efforts.

So maybe perhaps would you be willing to provide some color around, I mean maybe if you want to use corporate and administrative headcount for Savanna, are you able to provide any, I guess detail around what a reduction has been to-date or what it may look like at some point, given the integration efforts so far?

Out of respect to people, I'm not going to comment on specifics. I think what I would say, Ian, is simply, we have a very high degree of confidence that we can strip $10 million of cost out of this combined entity.

And that's savings on both personnel, economies of scale, obviously, public company duplication. If you want some quick guidance on how to get to the first $2.5 million to $3 million, just go to Savanna's proxy circular from last year's meeting.

Yes.

With respect to the U.S. operations, as you look at it.

I mean, it was – what I would describe, is somewhat scattered previously, given the contracts in place for some of the larger rigs in the Marcellus and the Rockies. I mean, would your preference be to have them all operating out of one geographic location at some point over the next 12 to 18 months or do you think you could...?

That's not necessary. A good example where I think there was a lot of skepticism in terms of the ability to get operating synergies because we didn't have U.S.

drilling operations. One specific concrete example is Savanna's Marcellus drilling operations are currently based out of a leased facility in Pennsylvania.

That lease is up end of this year. We will be relocating those operations to our facility in Weirton.

There's excess capacity there in terms of yard space and we can facilitate some shop space for them. And so we'll operate both operations from the same location, and we do that all the time, and that's just one concrete example of how we're going to drive cost out of the system.

Okay. And then with respect to the balance sheet, I mean, leverage ratios are obviously a bit higher than they have been historically.

As you think about free cash flow generation and potential there for incremental CapEx, I mean how do you balance properly, I mean, deleveraging versus investing in the asset fleet?

Well, I think you have to look, first of all, at the nature of our debt. And our only debt coming into this transaction was a mortgage, which we could eliminate yesterday if we want to do a sale-leaseback on a portion of our property.

That wouldn't make sense from an operating cost perspective. As well, our real estate historically has been a good source of low-cost financing for us.

We did assume a roughly $17 million – just under $17 million mortgage that Savanna had. It's a 25-year mortgage on their Leduc property.

So $60 million to $65 million of our debt is mortgage debt that could be eliminated yesterday just through simple sale-leasebacks, but that wouldn't make operating sense. So when you back that out, the remainder of the debt relative to the earnings power of this asset base is pretty insignificant.

I think both in terms of looking at the ability to generate cash with this asset base, combined with improving the bottom line performance, combined with effectively reducing Savanna's borrowing cost by 50% or more, we will be able to attack this debt very aggressively on a go-forward basis. And certainly our philosophy has always been to use our balance sheet during tough times and build it up during good times, and that's exactly what we did.

When we modeled the Savanna acquisition and decided to pursue this way back, our analysis was if 2016 continued for three years, are we putting our Company at risk? And our conclusion was and remains, no.

And so definitely, debt repayment will be a priority for us. The reality is for the last several years.

Our return on invested capital was hampered by carrying significant cash values or balances. So in an ironic way, putting a bit of leverage on our balance sheet now will probably, everything else being equal, enhance our returns to shareholders going forward.

But we are – we have taken some debt on, like I said, when you break it down and exclude the mortgage debt, which is the case for our bank covenants and pricing. It's extremely manageable and we're very comfortable dealing with it.

And it will not restrict our capital investment decisions. Those decisions will be made regardless of where our debt is right now.

And frankly, what will limit those decisions is our assessment of return as opposed to being constrained financially.

Okay, that’s helpful. Thanks very much.

That’s all for me.

Okay, thanks Ian.

Good morning. I'm just wondering, in your second quarter report, you mentioned you would be reviewing capital spending for the remainder of 2017.

Do you have a sense – if that will be going up or down?

No comment at this point, Jim. I think if there's any material changes to the $44.8 million that is kind out that there right now, we will advise the market.

But at this point, there has been no definitive amendments to that.

Okay. And I guess my second one would be, is there any thought of selling off some of the Savanna assets with the view to paying down debt?

As part of our rationalization process, we're going through our various branch infrastructures. And in fact, we have a conditional sale on a piece of property that's redundant, both Savanna and Total owns some real estate in a particular area that made one redundant, and there's some other examples of that.

But in terms of selling any of our core segments, there's no interest in that. We're also doing a hard look at the rig fleet, both within the Contract Drilling and Well Servicing side, and there will be some of fleet rationalization.

There's definitely some rigs that are pretty tired that we assigned nominal value to, and we will look to decommission and either, liquidate or cannibalize for spare parts for our remaining fleet. Again, I'm not going to comment on numbers there.

We're in the process of evaluating that as we speak. And that will unfold over the next several months.

Great, thank you. That’s it for my question.

Thanks Jim. End of Q&A

Thank you for participating in our conference call, and again our apologies for the slight delay. And we look forward to speaking with you after our third quarter results.

Have a good afternoon.