Total Energy Services Inc.

Thank you. Good morning and welcome to Total Energy Services fourth quarter 2018 conference call.

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 months ended December 31, 2018, and then provide an outlook for our business, and open up the phone lines for any question.

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 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 and are available to the public at www.sedar.com.

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

Total Energy's financial results for the three months ended December 31, 2018 are comparable with Q4, 2017, and reflect a significant decline in drilling and completion activity in Canada offset by continued growth in the Compression and Process Services segment and relatively stable industry conditions in the United States and Australia. Consolidated revenue for the fourth quarter of 2018 were CAD 219.8 million compared to CAD 180.2 million in the fourth quarter of 2017.

Geographically, 48% of fourth quarter revenue was generated in Canada, 26% in United States, and 26% in Australia, as compared to 45% in Canada, 35% in United States, and 20% in Australia during the fourth quarter of 2017. By business segment, Compression and Process Services contributed 53% 2018 fourth quarter consolidated revenues, Contract Drilling Services 21%, Well Servicing 17%, and Rentals and Transportation Services 9%.

Fourth quarter revenue for the Contract Drilling Services segment was CAD 47.3 million or CAD 21,950 were spot during these offering days, excluding Canadian subsistence revenues that essentially flow through to employees and in which no margin is earned. Revenue per spud during these days for the fourth quarter was CAD 21,005, a 1% increase from Q4 2017.

Segment EBITDA was CAD 7 million or 15% of revenue in the fourth quarter of 2018, as compared to EBITDA of CAD 11.5 million or 22% of revenue in the fourth quarter of 2017. Contract Drilling Services segment recorded 2,152 operating days with 21% utilization during the fourth quarter of 2018, as compared to 2,476 days or 23% utilization in the fourth quarter of 2017.

The contract drilling generated CAD 1.1 million of operating loss in Q4 2018, compared to CAD 3.6 million of operating income in Q4 2017. The Q4 2018 Contract Drilling segment results were negatively impacted by a decline in North American drilling activity and the lower Australian dollar.

Underlying the decrease in Canadian drilling activity during the fourth quarter of 2018 was an approximate 40% decline in WTI oil price coupled with a substantial increase in the price discount for Western Canadian oil relative to WTI due to a lack of Canadian oil pipelines and other export capacity. In the United States, paid downtime and repair costs arising from damage to rigs during rig move operations contributed to increase year-over-year quarterly operating loss.

The damaged rig has been repaired and returned to service in 2019. Utilization in Australia increased due to an additional rig commencing operation as compared to the same period in 2017.

Effective day rates in Australia were lower in Q4 2018, as compared to Q4 2017 due to modestly lower pricing, a higher proportion of lower margin standby hours, and the mix of equipment operating. On an annual basis, the operating loss for Contract Drilling Services segment decreased from CAD 8.9 million dollars in 2017 to CAD 0.9 million in 2018.

Segment EBITDA for 2018 was CAD 31.8 million, an 84% increase from the CAD 17.4 million of EBITDA generated in 2017. This improvement was a result of realized operating synergies arising from the integration of the Savanna, following the acquisition that was effective April 5, 2017, improved discipline in declining non-profitable work, and ongoing cost management.

The revenue from Rentals and Transportation segment for the fourth quarter of 2018 was 8% higher than Q4 2017. Segment EBITDA for the fourth quarter of 2018 CAD 5.6 million, or 28% of revenue as compared to EBITDA of CAD 2.9 million or 16% of revenue in the fourth quarter of 2017.

The rental equipment fee decreased by 4% with the disposal of 400 pieces in Canada during 2018. Utilization for the fourth quarter of 2018 was 27% as compared to 24% in Q4 2017.

Contributing to increase the segment's EBITDA, we increased activity in the United States and a decrease in operating margin in Canada despite lower Canadian revenues. As a result of persistent weak industry conditions in Canada, beginning in late of Q3 2018, the RTS segment under [indiscernible] substantially lower the Canadian fix cost structure.

This included the closure of five branch litigation in the disposition of 400 pieces of rental equipment and 22 heavy trucks. The utilization of rental equipment in Canada during the fourth quarter of 2018 was 1% higher as compared with the fourth quarter of 2017.

On the rental fleet that increased by - that decreased by 550 pieces or 5%. Revenue per utilized piece of equipment in Canada increased 2% as compared to fourth quarter of 2017.

This was primarily due to the change in the mix of the equipment operating during the quarter. Unlike Canada, the RTS segment in the United States continue to grow in the fourth quarter of 2018 compared to the fourth quarter of 2017 utilization in the United States increased 38% and revenue per utilized piece increased by 25%.

Additionally, the rental fleet increased by 150 pieces or 30% to 650 pieces at December 31, 2018 compared to December 31, 2017 with the relocation of underutilized equipment from Canada and targeted new equipment addition. On an annual basis, the operating loss for RTS segment decreased from CAD 4.7 million in 2017 to CAD 3 million in 2018.

Segment EBITDA for 2018 was CAD 15.4 million and 9% increase from CAD 14.2 million of EBITDA generated in 2017. This improvement was the result of improving business conditions in the United States in infrastructure and equipment fleet rationalization measures taken in Canada beginning in late Q3 2018.

Within our Compression and Process Services segment, fourth quarter revenue for 2018 increased 58% compared to the same period in 2017. Such increased were due primarily to higher sales activity in all markets, particularly in the United States.

This segment exited fourth quarter of 2018 with a fabrication sales backlog of CAD 222.9 million as compared to CAD 167.9 million at December 31, 2017 and CAD 236.7 million at September 30, 2018. Utilization of the compression rental fleet continued to increase during the fourth quarter with approximately 34,800 horsepower on rent at December 31, 2018.

This compares to 22,800 horsepower on rent at December 31, 2017 and 31,500 horsepower on rent at September 30, 2018. Segment EBITDA increased 52% to CAD 12.6 million or 11% of revenue for the fourth quarter of 2018 compared to CAD 8.3 million or 11% of revenue in Q4 2017.

Negatively impacting EBITDA margins on a year-over-year basis, the cost associated with a continued ramp up of production at our Weirton, West Virginia plant and cost associated with commissioning additional lease fabrication space in Canada where production activity commenced near the end of 2018. On an annual basis, operating income for CPS segment increased from CAD 20.7 million in 2017 to CAD 40.5 million in 2018.

Segment EBITDA for 2018 was CAD 47.1 million a 67% increase from the CAD 28.2 million of EBITDA generated in 2017. This improvement was a result of increased business in all markets particularly the United States.

Fourth quarter revenue for our Well Servicing segment was CAD 37.1 million and EBITDA was CAD 9.2 million or 25% of revenue, as compared to revenue of CAD 37.2 million and EBITDA of CAD 12.4 million or 33% of revenue during the fourth quarter of 2017. Negatively impacting EBITDA in Well Servicing segment in Q4 2018 relative to the comparable period in 2018 was lower activity in United States as a result of labor shortages and cold weather conditions.

Depreciation of the Australian dollar and the high proportion of lower rates again by hours due to an extended holding period in Australia. Activity levels in Australia returned to pre-holiday levels in early January.

Total service hours for the fourth quarter were 42,382 of which 46% were in Canada -- 46% in Australia and 40 -- and 8% in the United States. This compares to 39,905 service hours during the fourth quarter of 2017 of which 44% were in Canada, 44% in Australia and 12% in the United States.

On an annual basis, operating income for Well Servicing segment increased from CAD 13 million in 2017 to CAD 19 million in 2018. Segment EBITDA for 2018 was CAD 39.2 million, a 36% increase from CAD 28.7 million from EBITDA generated in 2017.

This improvement was a result of additional the Well Servicing segment with the acquisition of Savanna improve discipline in declining unprofitable work and ongoing cost management. Consolidated gross margins for the fourth quarter of 2018 was CAD 43.9 million or 20% of revenue as compared to CAD 42.4 million or 24% of revenue in fourth quarter of 2017.

The marginal decrease in margin percentage was due to the higher relative contribution of the CPS segment to consolidated revenue. Consolidated cash flow before changes in non-cash working capital items was CAD 23.1 million for the fourth quarter of 2018 as compared to CAD 27.8 million in the fourth quarter of 2017.

This decrease was due primarily to decreased activity from the levels in the Contract Drilling segment. Cash provided by operating activities for the fourth quarter of 2018 was CAD 13.7 million, a 54% increase from CAD 19.9 million of cash generated in Q4 2017.

Consolidated EBITDA for the fourth quarter of 2018 was CAD 29.2 million, a slight decrease from CAD 29.7 million with [indiscernible] realized in Q4 2017. Total Energy generated fourth quarter net income attributable to shareholders of CAD 8.6 million or CAD 0.19 per share on a diluted basis as compared to CAD 6.2 million or CAD 0.13 per share on a diluted basis in the fourth quarter of 2017.

Total Energy financial conditions remained strong with CAD 125 million of positive working capital including CAD 31.2 million of cash and marketable securities at December 31, 2018. After applying CAD 11 million -- after paying CAD 11 million of dividends and repurchasing CAD 4.2 million of common shares, shareholders' equity increased by CAD 14 million during 2019 as a result of our return to substantial profitability.

Total debt was CAD 285.8 million at December 31, 2018 a CAD 41.9 million reduction from December 31, 2017. In addition to regular monthly principal payments on CAD 50.6 of mortgage debt, during 2018 Total Energy repaid CAD 39.2 million of bank debt assumed with acquisition of Savanna.

At December 31, 2018, CAD 227 million was drawn on CAD 295 million of available revolving bank credit facilities. Our bank covenants consist of maximum senior debt to trailing 12 months, bank-defined EBITDA of 3 times and the minimum bank defined EBITDA to interest expense of 3 times.

At December 31, the company's senior bank debt to bank EBITDA ratio was 1.95 and the bank interest coverage ratio was 6.79 times.

Thank you, Yuliya. 2018 was a tumultuous year for the global energy industry.

With the exception of Canada, at the beginning of the year industry participants were generally optimistic that the recovery in oil and natural gas drilling and completion activity that began in 2017 would gain momentum through 2018. This was the case until oil prices declined significantly in the fourth quarter of 2018 and expectations were hampered.

In Canada, political and legal impediments to investment and pipelines and other energy projects continue to weigh negatively on investor and the industry sentiment throughout the year. In such environment total energy continue to focus on growing its business outside of Canada and we are pleased with our diversification efforts to-date.

In 2018, just over 50% of our revenue came from international markets primarily the United States and Australia compared to approximately 20% in 2016. The acquisition of Savanna Energy Services that was completed in mid-2017 was part of our strategy that geographically diversified Total Energy's revenue base.

It also gave rise to the opportunity to realize approximately CAD 17 million of cost savings during 2018 with the successful integration of Savanna. As a result 2018 saw a return to profitability after losses in 2016 and 2017, the only years in which total energy did not achieve annual profitability since commencing operations in 1997.

Government policies and regulations have consequences for investment and jobs. In the case of total energy the poor investment climate in Canada not only directed our CAD 30 million of 2018 growth capital outside of Canada, it also forced us to rationalize Canadian operations.

Such rationalization included the relocation of equipment and personnel to the United States, the disposition of underutilized or decommission equipment and the discontinuance of operations in geographic regions where the prospects for future activity are dim. The benefits of our rationalization efforts the Canadian RTS segment began to be realized in the fourth quarter.

Like our competitors, total determines of strategy for its various businesses in regards the equipment pricing and utilization. While there is no perfect answer to the pricing versus utilization mix generally we are underweight utilization if the required pricing is below what we determined is needed to be profitable and sustained the business beyond the near-term.

There are numerous factors beyond operating gross margin that we consider in determining what pricing is required for particular situation such as mobilization and demobilization costs and credit risks. Our competitors have different strategies based on different circumstances and corporate philosophies.

Our strategy not equipment functionality or obsolescence is what drives our current relative Canadian drilling rig utilization. As evidence, we simply look to the utilization of the various Canadian drilling contractors and note that several of the Canadian industry leaders in drilling rig utilization up fleet that consists entirely or almost entirely of mechanical double drilling rig.

Our Canadian fleet consists not only of modern mechanical doubles with high capacity pumps pop drives and walking systems, but also of ultra-heavy AC doubles and highly efficient TDF singles which give us the capability to drill virtually any onshore well anywhere in Canada. I would also note that the steady exit as of drilling rigs from Canada to the United States consists entirely of the beat capacity rigs which reinforce - forces our view that current pricing for heavier rigs in Canada is not sustainable.

During 2018, we continue to focus on preserving totals financial strength and liquidity. We refinanced CAD 67.5 million of unsecured notes previously issued by Savannah at a significantly lower interest rate and repaid CAD 41.9 million of debt.

At year-end, we had CAD 125 million of positive working capital including CAD 31.2 million of cash and marketable securities. Accordingly, over the course of 2018, our net debt decreased by 20% to CAD 161.4 million.

We also maintained our quarterly dividend which has never been cut since we implemented a quarterly dividend of CAD 0.3 per share in 2009. With oil prices having recovered much of their late 2018 losses thus far in 2019, international industry conditions have stabilized and oilfield activity levels are relatively strong.

Canada remains the exception with first quarter drilling in the completion activity levels approaching the lows experience in 2016. As such, until the prospects for Canada improved, our focus for 2019 will remain similar to 2018.

That being continued international growth rationalization of Canadian operations, the relocation, or disposal of underutilized equipment and capital discipline. Our current capital budget for 2019 is CAD 40.5 million which includes CAD 23.3 million of equipment maintenance and upgrade and CAD 17.2 million for targeted growth opportunities.

Again substantially all of our growth capital continues to be allocated to international opportunities including the continued expansion of the CPS segment in the United States. Total Energy's flexible capital budget and strong liquidity position allow us to respond any material -- liquidity position allow us to respond to any material changes in industry conditions positive or negative and to continue to pursue attractive investment opportunities despite very challenging equity markets for Canadian energy services companies.

Such opportunities include the continued repurchase of our common shares under our normal course issuer bid. I would like to take this opportunity to invite all shareholders and other interested persons to our annual shareholders meeting that will commence at 10:00 AM on May 15 at the Calgary Petroleum Club.

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

Good morning all.

Good morning, Daine.

Good morning.

So, what are your expectations surrounding pricing trends for your contract drilling business over the first-half of the year, looking at both Canada and the U.S.?

Canada is relatively stable I would describe the pricing environment. U.S., we expect our pricing to improve as a bunch of legacy contracts have -- are expiring.

Okay. I guess maybe not so much on pricing then, but maybe just thinking on like a softer activity outlook, do you anticipate any further reductions in your marketed fleet in either country?

We're continually evaluating our equipment. We did have some disposals in 2018 both within our contract drilling wells servicing and rental equipment fleets.

We'll continue to look at opportunities to either monetize or relocate underutilized equipment. So, we'll provide quarterly updates in that regard.

Okay. And then just on the improved profitability and utilization within your U.S.

rental and transportation platform was there anything specific that drove that large such as large job win, and is there any reason we would see that level ease in the first quarter?

I would say it was driven just by improved general activity levels in the areas that we compete in, and so, there was no specific project or job that drove that. It was an across the board increase in general oilfield activity.

I would also comment that what we tend to find is the quality of our asset base in Canada is very high, and what we find is when we relocate that equipment to the U.S., we have a fairly easy time displacing competitor equipment just based on quality. And so, I would describe the flow of equipment is accelerating not decelerating, and a lot of it is displacement of third-party competitive equipment.

Okay. Got you, that's very helpful.

Thanks a lot. And then looking at compression was the margin decline in the quarter on the back of lower embedded margins within revenue?

I think we've got a lot of balls in the air in that division. Now we're pretty pleased with the direction.

The margins -- plus or minus basis points on a quarter-over-quarter basis are things that I'm not overly fixated on. The ball is up in the air, as we're continuing to ramp up materially our production in the United States, and there is a lot of cost of training and expanding your workforce.

And to achieve the efficiencies, ultimately that we believe we can get and want to get there to continue to grow and improve the bottom line. The other significant event in Q4 was the -- we took possession of a lease facility.

We also vacated a smaller lease facility. And so, there's cost associated with the vacation of the old facility, and the outfitting, and commencement of production in the new.

And again, those expenses are all expense not capitalized, and obviously those are -- I would describe them as somewhat non-recurring cost.

Got you. So, okay, so fair to think of that as just kind of along the lines of some noise in ramping and then noise kind of quarter-to-quarter oscillations and not indicative of the future backlog margin?

There was nothing in the quarter that concerned me from an ongoing go-forward operational perspective.

Okay, got you. Appreciate the color there.

And then just last one for me and then I'll turn it back. Broadly speaking on capital allocation for next year, would you say your priorities are shifting to include a higher level of share buybacks, or is the priority similar to last year, in that the lion's share of free cash flow will likely be directed towards the balance sheet?

I like to -- we like to buy assets that give us a good return. I don't set absolutes.

Everything is relative. We were -- clearly paid a lot of debt back.

We continue to do that this year. We've generated a lot of free cash flow at pretty low equipment utilization levels which gives us a lot of comfort about our ability to generate cash.

My comments on equipment utilization versus pricing, we can change those variables if we wish and materially improve utilization. There would obviously be some increase in cash flow.

Our judgment is the negatives in the medium to long-term outweigh the positives in the short-term, but being is our ability to generate significant free cash flow in a pretty challenging marketplace is self-evident. In terms of share buybacks, we don't buy the market.

We like to buy when other people are selling and we'll provide regular updates through insider trading reports as to what our activity is there. Again, we've been blacked out for two months now.

So -- but stay tuned for what we do going forward.

Got you. That's good color.

Well, thank you guys. I'll turn the call back.

Yes. Thanks.

Good morning everyone.

Good morning, John.

Hey, John.

Hey, just starting with CPS, obviously, the fab backlog took a modest step back in the quarter, I guess, for the first time in long time. I'm guessing as more just a function of workflow rather than reflection of the underlying markets in front of you.

Is that a fair comment?

So a couple of comments, John, first of all, that's one day one point in time. Things can change positively or negatively the day before and the day after.

So, I wouldn't -- one point in time does not make. What I would say, obviously the fact that we chose to increase our Canadian productive capacity by 30% tells you probably what our thoughts are on future activity.

If we thought it was going to contract materially, we wouldn't be taking possession in Q4 of 30% adding 30% your capacity. In some cases, when you're running at full tilt you also lose work, because of delivery time.

So, I think I remind everyone it's one day out of 90 days in the quarter. And also there's a reason why we took on more fabrication space.

Fair enough, Dan. And that leads me to my next question is with the Calgary expansion.

When do you start to see it a meaningful impact in the business both top line and margin wise going forward?

So, we literally started production in the last towards the end of the year and in the last month. And so, we're going to wrap that up.

These are as you can appreciate having visited our facilities they are large facility that take time to get properly staffed them and everything working at the highest efficiency properly. But we measure that in months and quarters not years.

And so, look to see that play out over the course of this year.

Got it, good color. Shifting gears to RTS, obviously a start contrast and profitability between Canada and the U.S.

could you maybe comment on what we're seeing in Canada among some of your private smaller competitors in that type of environment?

Well, first of all, we're pretty pleased with Canada. If you look on a year-over-year basis in Q4, a less revenue and a significant drop in operating loss and operating loss is especially pre-tax, pre-interest losses.

So you can see we realized we have to address our infrastructure which ultimately compromises the service network we have. But the reality is the current market doesn't support the infrastructure that was built to service the much higher level of activity.

What we're seeing on the competitive side is this is temporarily activity. In most cases, that a lot of cases that not by voluntary design, the exit is people and equipment continues and a lot of that is auction sale based and a lot of it is relocation and a lot of it is simply retirement and lined up.

And so, the ability to Canadian service sector to support and respond to materially higher activity levels is being compromised with every quarter that goes by and we'll only see that when we get a return to substantially higher activity levels, but the supply chain is being hit pretty hard, John.

Got it. And then just lastly on, on the drilling segment, obviously it look like some kind of non-recurring margin challenges in the U.S.

just wondering if you can give us a little color and maybe a sense of when you see some more normalized got to that operation going forward?

So, what happened is one of our triples the Derek was damaged during the [indiscernible] and moving and that rig was out over two month, those are relatively high margin those are relatively high margin rigs in the U.S. And so we lost over two months to revenue plus expenses in the range of CAD 800,000 to repair that.

We chose not to make an insurance claim. It comes down to your cost benefit on those types of things.

And you end up paying more insurance premiums for the next five years relative to the cost. So those are I guess part of the issues that arise during a rig moving operations, so with that triple back working hopefully we don't have any more damage to Dereks [ph].

Fair enough. As always appreciate the color.

I'll turn it back over. Thank you.

Thanks, John.

Good morning everyone.

Good morning, Ian.

Are you seeing enough demand ex North America to perhaps out another compression facility in an international market at this point in time or can you service most of that from Canada?

Our focus on productive capacity additions would be I would say North America largely your input supplies and labor force that are required to build compression is pretty North American centric. And so I think between the U.S.

and Canada we have a pretty good footprint to satisfy compression demand anywhere in the world, I think could be a question of increasing that capacity as we did in Q4 with our Canadian capacity as opposed to looking to locate fabrication outside of North America. You never say, never, but I think our focus would be on North American expansion on the production side.

All of your major components are sourced out of the U.S. So and then labor is a huge issue in that business, it's high skilled, pretty specific knowledge that frankly doesn't exist in a lot of countries where we sell compression process what men do.

Okay. If I work under the assumption, which may be incorrect in most of the U.S.

rentals equipment is focused in the northern part of the U.S. Are you seeing any opportunities to leverage some of your activity on the drilling rig side in the Permian to perhaps start offering some rentals equipment there as well or just curious?

The answer to that is, yes.

And so I mean with that and I guess with that in mind I mean how do you then I guess what's the strategy go about supplying that equipment or is are already in that basin?

Our footprint in the U.S. continues to grow steadily and stay tuned.

We don't open branches until we know there's a sustainable minimum level of work in the area, but we have operations extending down into Texas currently.

Okay. And then on the Canadian drilling side I mean you didn't retire any rig in the year-end and despite continued weak utilization I mean has there been much consideration to retiring some rigs at this point in time just given go forward outlook?

we've got a list of rigs that literally every rig that we have in our market, marketed fleet can go to work tomorrow. It's not a question of obsolescence or capacity.

It's a question of price. And we don't retire rigs that are capable of working, and that said, there're opportunities from time to time to relocate or dispose of underutilized equipment.

We will consider those opportunities. We did sell some in the U.S.

last year. There's a time to buy.

There's a time to sell. But we do have two joint venture rigs in Canada that will be sold later this year, that you'll see that rig count come off.

That's part of a strategy, though to continue to, I would say rationalize our cost structure particularly with some of the legacy aboriginal partnerships that Savanna had that simply given the industry activity levels, will become fairly dormant and there's a lot of cost of keeping those partnerships going without a lot of revenue coming by to the partners. So some of that's cleanup of some specific situations as opposed to the underlying rigs not being capable to drill.

Okay.

But we'll provide updates quarterly as we always do, this is what our marketed fleet is.

Right. And in Australia are you able to talk about what, I guess, broader bid activity may look like in terms of adding capacity there.

Because obviously I mean that was part of the seasonality in Q4 that business performed quite well in 2018.

Yes. I think Australia is a pretty balanced market.

It's a healthy market. With this, the oil plunge in Q4, definitely I don't know, but I suspect that was probably part of the reason why you saw extended holiday downtime basically half of December was holidays, a lot of it [indiscernible] there is rules on permitting for rig transportation and depending where your rigs are located, you get a holiday situation that basically shuts your rig moves down for two and a half weeks.

So, some of its kind of idiosyncratic to that marketplace, but Australia is a balanced market. My sense is it's neither too hot or too cold.

I think it's a very balanced healthy market. And we continue to be a major player in that market all through our drilling and well servicing as well as our compression present.

So, we'd be one of the larger service providers to that market. It's the core market to us.

And we'll continue to grow with the market as it grows, but we're not going to force anything.

Okay. Thank you very much.

I'll turn the call back over.

Thanks.

Hi, Dan.

Good morning, Orin. I hope it's cold in New York.

Yes, the colder the better.

Yes. You bet.

Yes. Yes.

I pray for it. What can you say about Well Servicing revenues and profitability currently and going forward?

And, is there anything special you can do to improve it, or is this just a follow along with the CDS?

So, the well servicing in Canada was profitable for 2018 or -- and I understand this is the first time for Savanna that business has been profitable in many, many years. Certainly, it's the first time it's been profitable under our watch, but I'm told by people who've been here for quite a few years, it's the first time that that segment in Canada has been profitable.

I'm talking pre-tax profit. So, we're very happy with the progress we made there.

It's a combination of being disciplined on the work you take as well as managing your cost and obviously the price you pay for the asset. I'm very comfortable that we will continue to run a prudent business there in Canada.

And I'm pleased with the performance to date and with any recovery in the Canadian activity levels, you know, that business stands to benefit materially. In the meantime though, being profitable in this current environment is obviously we're pretty pleased.

In the United States, we need to grow the business. Last year, our focus are on was integrating Savanna and you'd obviously start with the big areas.

U.S. well servicing is a very well-run, but very small business.

And what we saw in Q4 exemplified the reason why we need to grow it is when you have some cold weather and you lose a few crews going from eight rigs or nine rigs down to six rigs or seven rigs makes a material impact, because you've got some basic overheads. So, our focus going forward on U.S.

well servicing is to grow the business and we've got a very good core business there that operates very well has minimal management time because it is well operated, but we need to grow it. And so that will be one of our goal for it focuses now that some of our other bigger areas of focus have been addressed.

In Australia, again we're one of the larger providers, it's a pretty balanced market and we're pleased with how they operate there and I expect again the market's pretty stable so barring any material changes in that it will be business as usual and will continue to grow with the market, but we're not going to force growth either.

Would you say your comment on RTS that your equipment is superior to what you're finding in the U.S. and you're picking up business from competition?

Is that theme also true in well servicing or do you expect it to be true?

Yes. Pretty comfortable with the asset base that we acquired with Savanna on the well servicing side in all segments.

We've looked at a number of acquisitions in the well servicing side on both sides of the border and most of them have been turned down on the quality of the asset base. We kind of look at it and go why would we buy that when we've got 30 rigs sitting that are way better condition?

So I would rather -- I'm not going to buy market share, but I'm also -- our goal since we acquired Savanna was first of all to understand that business. We never had service rigs.

The management team both in Canada and the U.S. and Australia are all solid.

And basically by giving it a little more focus and kind of realigning interest a bit, we've seen a pretty dramatic improvement in the financial performance and success breeds success and we're going to play off that. So I believe consolidation would help all business lines, but we're also not going to pay to take on someone else's problem unless the risk reward looks good to us.

And so, we will look to relocate assets down to the U.S. as well as if it makes sense and we have competent people to run the assets.

So, one of the big challenges in the U.S. right now is labor, now because it is busy and so we see that in all business segments.

We have relocated Canadians down there to help support growth and we also are aggressively looking to add. We prefer local in all our markets.

And so we're aggressively looking for confident people to help us grow our business including the service rig side in the U.S.

Good. Thank you.

I thought results looked pretty good considering everything.

Yes. Canada is a grind, but the comfort we take place is we can generate a lot of free cash flow running our asset base at 15%.

Okay. Thanks a lot.

We could get that to 30% tomorrow by cutting the price a bit.

Hey, good morning everyone.

Good morning, Tim.

Good morning.

A few questions for you here, in the CPS segment you spoke about international demand. I'm wondering if you can give any color on which end markets you're seeing that demand in.

We're pretty tight hold for competitive reasons but international we define as everything but Canada, although U.S. is increasingly becoming a large, a very large market for us with the U.S.

production now it's certainly becoming a core market to us.

Okay. Can you say, can to outside of North America perhaps, what percentage that would be?

Southeast Asia is a strong market for us. We'll go pretty much anywhere.

But the markets that would be material, consistent markets for us would be Canada, U.S., and Australia and that obviously there're projects here and there.

Okay. That's helpful.

In terms of moving equipment from Canada to U.S. seems like there's been a pretty consistent flow especially in the rental segment.

Do you have any targets for 2019 or things or a level of equipment transfers that you think you can do in 2019.

First of all, we expense all the costs related to those equipment relocations. And so when you look at our financial performance for whatever division whether it's rigs or rentals, all of the cost of relocating equipments and advancing that have obviously of any recoveries we get from the customer.

We don't set targets. We don't move equipment on back either.

So, equipment that's relocated is relocated, specifically to go straight to work. What we've seen is an acceleration not a deceleration of that trend though.

Okay. That's helpful as well.

And then in terms of though…

Let me interpret big load so, what to move 100, 150 piece of equipment that's a lot of truckload.

Yes. I understood.

You're not throwing 5 to 10 pieces on a truckload let me put it that way.

Well, that's fair. Okay.

Appreciate it.

-- are lots of loads going.

In terms of the legal expenses that you see in the quarter, what do you expect the pace of those expenses to be over the next few quarters?

So, first of all, our confidence in all those cases is going up not down. We take them serious, which is why we have spent some money on it.

The flip side is the expenses tend to go up and down depending on file activity and so, Q4 was a little bit easier with some file activity. We generally don't like to make excuses or comment.

But when you have a material SG&A item that is targeted to a specific thing that's non-operational will generally highlight that. But again we've taken zero provisions for those claims, because we don't see them as having, we believe we'll -- will win and we're going to spend the resources necessary to bring those successful conclusion.

Okay. So, fair to say, it will be variable over the next few quarters?

Yes. It depends on the file.

So like I said, it depends on how much time the lawyers spend that quarter and that depends on what part of the process they're in.

Okay, all right. Thank you very much.

I don't…

Thank you very much.

-- know process still -- I don't know. Okay.

Yes. Thanks a lot.

No problem.

Well, thank you for your participation this morning and I hope everyone has a nice weekend, and we will speak to after our first quarter. Thanks and have a good day.