Total Energy Services Inc.

Thank you. Good morning, and welcome to Total Energy Services First Quarter 2021 Conference Call.

Present with me is Yuliya Gorbach, Total’s VP, Finance and CFO. We will review with you Total’s financial and operating highlights for the 3 months ended March 31, 2021, provide an outlook for our business and then open up the phone lines for 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 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 yesterday. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars.

Total Energy’s financial results for the 3 months ended March 31, 2021, reflect continued difficult industry conditions in North America and lower activity levels in Australia. Despite the challenging environment, Total continued to generate significant free cash flow during the quarter, generating $11.4 million of cash from operating activities after funding $3.7 million of net capital expenditures and $1.8 million of interest expense.

Total’s geographic diversification continues to be a stabilizing factor for our financial performance. Geographically, as activity levels in Australia declined due to several factors, activity levels in North America continued to improve from historic lows experienced during the second quarter of 2020.

This is evidenced by North America contributing 64% of consolidated revenue in the first quarter of 2021 as compared to 52% in the first quarter of 2020. Within North America, Canada continued to recover more quickly compared to United States, with the relative contribution from Canada to consolidated first quarter revenue increasing 12 percentage points compared to Q1 2020.

First quarter revenue contribution from the United States decreased by 3 percentage points on a year-over-year basis, with Australia’s first quarter 2021 revenue contribution decreasing 8 percentage points as compared to 2020 first quarter. By business segment, Compression and Process Services was the largest contributor to consolidated revenue, generating 37% of 2021 first quarter consolidated revenues, followed by Contract Drilling Services at 31%, Well Servicing at 24% and Rentals and Transportation Services contributing 8%.

This compares to Q1 2020 when CPS contributed 30% of consolidated revenue, Contract Drilling 32%, Well Servicing 25% and RGS segment 13%. With first quarter consolidated revenue declining 31% on a year-over-year basis, consolidated EBITDA, adjusted to exclude unrealized foreign exchange gains on translation of intercompany working capital balances, decreased by 32%, resulting in relatively flat adjusted quarterly EBITDA margin of 17% on a year-over-year basis.

Offsetting the negative impact on our consolidated EBITDA margin from the increased revenue contribution from the lower margin CPS segment in 2021 relative to 2020 was continued cost management efforts and the receipt of COVID-19 funds. The $5.9 million received under various COVID-19 relief programs during the first quarter of 2021 reduced cost of services by $5.3 million and SG&A by $0.6 million.

Consolidated gross margin percentage for the first quarter of 2021 was 24% as compared to 25% in Q1 of 2020. Excluding COVID-19 funds received in Q1 2021, the gross margin percentage for Q1 2021 was 18%.

This decrease was due to lower activity levels in all jurisdiction and competitive pricing, particularly in North America as well as the year-over-year change in the segment revenue mix. Selling, general and administration expenses for the first quarter of 2021 decreased by $4 million or 38% compared to Q1 of 2020.

Excluding COVID-19 relief funds, first quarter SG&A declined by 33% on a year-over-year basis. Within our CDS segment, despite a substantial year-over-year decline in activity in all geographies, this segment EBITDA margin increased by 16% or 300 basis points.

This increase in EBITDA margin was primarily due to cost control measures and receipt of COVID-19 funds. Effective April 1, 2020, the CDS segment revised its depreciation estimates for drilling equipment to reflect changing economic and industry conditions.

As a result, additional incremental depreciation expense of $2.9 million was recorded during the first quarter of 2021. This perspective change in depreciation estimate had no impact on EBITDA or cash flow.

The RTS segment similarly experienced a substantial year-over-year decline in the 2021 first quarter rental equipment utilization. While this resulted in a 54% year-over-year decline in revenue, first quarter segment EBITDA margin increased 9% compared to 2020 due to previous overhead rationalization in Canada, ongoing cost management and COVID-19 funds.

First quarter revenue for RTS segment was negatively impacted by at least $1 million with a delay of several major projects in Canada due to COVID-19 restrictions and other issues unrelated to RTS segment’s operations. Mobilization costs incurred during the quarter in respect of such delayed projects also had a material negative impact on segment’s EBITDA.

These projects are scheduled to resume as COVID restrictions are lifted and ground conditions permit. Despite a continued hesitancy of customers to award new equipment orders, our Compression and Process Services segment saw a second consecutive quarterly increase in its fabrication sales backlog as improving global economic and natural gas fundamentals began to stimulate capital investments.

Compared to December 31, 2020, the backlog increased 7% or $3.2 million to $47.7 million at March 31, 2021. Relatively strong natural gas prices in North America during the quarter also provided support for CPS parts and service and retrofit business line.

Quarterly utilization of the compression rental equipment fleet decreased in 2021 compared to 2020 due to declining Canadian utilization during 2020 and the return of 6,500 horsepower of compression rental units, following the bankruptcy of U.S. customer at the end of Q4 2020.

Compared to Q1 2020, first quarter 2021 service hours and revenue in our Well Servicing segment decreased 38% and 32%, respectively, as utilization in the United States and Australia was impacted by lower activity levels and prolonged wet weather conditions in Australia during their normal rainy season. Activity levels improved slightly in Canada due to the increased well abundant activity with fertilely funded abandonment work, representing approximately 13% of Canadian Well Servicing revenue.

Despite a 32% year-over-year decrease in revenue, this segment’s first quarter EBITDA margin remained stable on a year-over-year basis at 23% as a result of cost management efforts and receipt of COVID-19 funds. Total Energy financial and liquidity position continued to strengthen during the first quarter of 2021.

At March 31, 2021, the weighted average interest rate on our outstanding bank debt was 2.73% as compared to 4.29% at March 31, 2020. This lower interest rate, combined with lower outstanding debt balances, contributed to $1.6 million or 47% year-over-year decrease in the first quarter finance costs.

Total’s net debt position at March 31, 2021, is the lowest since we completed acquisition of Savanna in June of 2017, and we expect to continue to aggressively pay down our revolving credit facility. Total Energy’s bank covenants consist of maximum senior debt to trailing 12 months bank debt -- bank-defined EBITDA of 3x and the minimum bank-defined EBITDA to interest expense of 3x.

At March 31, 2021, the company’s senior bank debt to bank-defined EBITDA ratio was 2.48, and the bank interest coverage ratio was 9.87x.

Thank you, Yuliya. While the industry environment remained difficult during the first quarter, we continue to support our customers by maintaining continuous operations in all jurisdictions despite ongoing COVID-19 challenges and restrictions, particularly in Canada, where the delay of several major projects had a negative impact on our first quarter financial performance.

On a positive note, our health and safety procedures continue to be effective in mitigating the risk of COVID-19 throughout our global operations. And since the outbreak of the pandemic, we have not been required to cease any of our operations due to COVID-19.

As Yuliya mentioned, despite continued challenging macro industry conditions, we continue to generate significant free cash flow. We retired $10.6 million of bank debt during the first quarter, and we’ll continue to methodically pay down our revolving credit facility while maintaining a strong liquidity position.

With sustained higher oil prices and continued relatively strong natural gas prices, North American drilling and completion activity has improved from the lows experienced during the second quarter of 2020. Canadian drilling activity began to improve on a year-over-year basis in late March, and that trend continues.

Today, Total has 13 drilling rigs operating in North America compared to 1 at the same time last year. By the end of the day, on May 1, 2021, our U.S.

drilling operations generated more operating days than the entire month of May in 2020. In Australia, the recertification upgrade of the first of 2 drilling rigs was completed and such rig commenced drilling in late April.

The second rig is scheduled to be completed and commenced drilling in July, at which time 4 of 5 Australian rigs are expected to be active, which will be double the utilization of Q1 2021. Increased drilling rig activity has historically been a positive leading indicator for business activity in our other business segments.

Our Well Servicing segment experienced modestly higher Canadian activity levels during the first quarter due to increased well abandonment activity resulting from federal funding. We expect continued acceleration of well abandonment activity as we come out of spring breakup as well as increasing demand for oil production maintenance activities, both in Canada and the U.S.

Our Compression and Process Services segment continues to see a slow but steady recovery in its fabrication sales backlog. While the absolute sales backlog remains low by the historical comparison, quoting activity continues to pick up.

We also expect to see increasing redeployment of idle rental compression in North America over the course of the year should natural gas prices remain stable. Cost inflation, notably rising steel, fuel and other material costs, is something we are monitoring closely.

While competitive market conditions make the implementation of price increases a challenge, we expect to realize some modest price increases in certain segments of our business over the remainder of 2021 to help offset cost inflation, provided market conditions do not deteriorate materially. From an ESG perspective, our businesses continue to work with our customers and suppliers to develop innovative methods and technologies to reduce the environmental footprint of our collective business activities.

Some recent examples include the following: Bidell gas compressions patented NOMAD mobile high horsepower gas compression units have recently been utilized outside of the conventional oil and gas sector by a large U.S.-based consumer goods company for certain temporary compression requirements. Among many other benefits, the NOMAD significantly reduces site disturbance as compared to traditional skid compression.

Total oilfield rentals proprietary Odyssey line of high-capacity pumps have seen increasing applications as an alternative to transporting liquids by truck and trailer. Not only does the replacement of trucks result in significant cost savings to oil and gas producers, but it also improves the safety and environmental performance of the operation by reducing road traffic and lowering emissions.

OPSCO continues to work with a third-party to commercialize its proprietary small-scale LNG plant that could have many interesting potential applications. Savannah Drilling’s 2021 capital program includes the continued upgrade of our drilling rig fleet with biofuel and walking systems, which reduced the emissions intensity of our drilling operation, while at the same time, saving our customers’ money.

Our Well Servicing and RTS segments are becoming increasingly involved in the restoration of old oil and gas well sites to their pre-disturbance condition. Despite the challenging industry conditions, Total and its employees remain committed to conducting our operations in a safe and responsible manner.

Our consolidated rolling 12-month TRIF continued to improve during the first quarter and now stands at 1.56, a historic low for our company. I would like to thank all of our employees for their continued focus and commitment to safe operations.

As without their efforts, we would not be celebrating this achievement. Corporately, during the first quarter, Total was recognized by the Globe and Mail’s report on Business Women Lead Here program as one of 71 public Canadian companies with a significant number of female executives.

We also established a partnership with the Average Workers Association [ph] in order to increase the effectiveness of our indigenous recruiting efforts. Apart from dealing with potential future labor shortages, we strongly believe that increased engagement of indigenous persons in the energy industry is beneficial to all stakeholders.

I would encourage our owners to participate in our upcoming Annual Shareholders Meeting on May 18, 2021. Given recent COVID-19 restrictions that limit public gatherings, as noted in our May 7 news release, shareholders are encouraged to vote their shares online by telephone or by mail.

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

I must say this has been the easiest conference call in many years. So assuming there’s no further questions, we’ll carry on and wish everyone a good day, and look forward to speaking with you at our next quarterly conference call.

Thanks very much.