Total Energy Services Inc.

Thank you. Good morning, and welcome to Total's Fourth Quarter 2024 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 three months ended December 31st, 2024, and then provide an outlook for our business and open up the phone lines for questions.

Yuliya, please go ahead.

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 activity in the oil and gas industry.

Actual events or results may differ materially, from those reflected in Total's forward-looking statements due to a number of risks, uncertainties and other factors affecting Total's business and the oil and gas service industry in general. These risks, uncertainties and other factors are described under the heading Risk Factors and elsewhere in Total's most recently filed annual information form and other documents filed with Canadian provincial securities authorities that are available to the public at www.sedarplus.ca.

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 31st, 2024, reflect relatively stable industry conditions in Canada and Australia and lower drilling and completion activity levels in the United States. Consolidated revenue for the fourth quarter of 2024 was 15% higher compared to Q4 2023 with the addition of Saxon offsetting lower U.S.

drilling and completion activity. Fourth quarter consolidated EBITDA was $4.7 million lower than in 2023 due to lower U.S.

activity, extended holiday shutdowns in Canada and wet weather conditions in Australia and the negative impact of foreign exchange translation differences, more than offsetting improved CPS and RTS segment margins. Excluding $4.1 million year-over-year negative impact due to foreign exchange inflation differences, fourth quarter EBITDA declined by 1% compared to 2023.

Geographically, 48% of fourth quarter revenue was generated in Canada, 33% in The United States and 19% in Australia, as compared to the fourth quarter of 2023, when 54% of consolidated revenue was generated in Canada, 37% in United States and 9% in Australia. By business segment, the CPS segment contributed 47% of fourth quarter consolidated revenue, followed by the Contract Drilling Services segment at 34%, Well Servicing at 11%, and the RTS segment at 8%.

In comparison, for the fourth quarter of 2023, the CPS segment generated 45% of fourth quarter consolidated revenue followed by the contract driven services at 35%, well servicing at 11% and rentals and transportation services contributing 9%. Fourth quarter gross margin was 23%, as compared to 27% for the prior year.

The primary reason for the decrease in the fourth quarter consolidated gross margin was a year-over-year decrease in operating margin in the CPS and Well Servicing segment, delays into pulling upgraded rigs and reduced activity in Australia due to bad weather conditions, lower U.S. activity levels and a $4.1 million negative impact on Canadian CPS segment operating income arising from foreign exchange translation differences, were primary reasons for such lower CPS and Well Servicing segment operating margin.

Partially offsetting the lower CPS and Well Servicing segment margins were improved operating margins in the CPS and RTS segments. As compared to 2023, the CPS segment saw consolidated fourth quarter revenue increase by 12%, a 17% increase in revenue per opening day more than offset a 4% decrease in operating day.

Canadian CPS revenue was 12% lower in Q4 2024, as compared to the same quarter of 2023, as a 1% increase in revenue per operating day was offset by 13% decrease in operating days. Canadian operating days were negatively impacted by extended holiday shutdowns in December.

In the United States, 17% increase in revenue for operating days was offset by 66% decrease in operating days resulting in a 60% decrease in the CPS revenue and the realization of an operating loss. In Australia, fourth quarter operating days increased by 110% following the acquisition of Saxon in March of 2024.

Higher day rates on Saxon's deeper drilling rig fleet and then newly constructed drilling rig that was deployed in the third quarter resulted in 173% year-over-year increase in Australian Q4 revenue, and a 30% increase in fourth quarter Australian CPS segment revenue per operating day. Cost to reactivate several upgraded rigs and the crude retention cost incurred during extended wet weather conditions resulted in a slight operating loss for the fourth quarter.

RTS segment revenue for the fourth quarter decreased compared to 2023, due to lower activity in the U.S. Effective cost management and change in the mix of equipment operating contributed to a 13% year-over-year increase in fourth quarter segment EBITDA and a 17% increase in EBITDA margin.

Fourth quarter revenue in the total CPS segment was 22% higher as compared to 2023. Increased rental and parts and service activity combined with improved fabrication sales margin, resulted in a 23% year-over-year increase in the fourth quarter CPS segment EBITDA.

The quarter-end fabrication sales backlog increased to $189 million, compared to $162.8 million backlog at December 31, 2023. Sequentially, the quarter-end sales backlog remained consistent with $189 million at September 30, 2024.

In Well Servicing, a 10% increase in revenue per operating hour combined with a 4% increase in operating hours resulted in a 15% year-over-year increase in the fourth quarter consolidated Well Servicing revenue. Increased Canadian and Australian service rig utilization was partially offset by substantial decline in U.S.

activity. Price increases in Canada and Australia, following the completion of rig upgrades more than offset weaker pricing in the United States, resulting in a 10% increase in the segment's revenue per annum.

Increased utilization and pricing in Canada contributed to 41% increase in Canadian Well Servicing operating income. This increase was offset by operating losses in the U.S.

and Australia. The U.S.

operating loss was due to substantially lower duty levels. In Australia, cost to reactivate several upgraded rigs and the crude retention cost incurred during extended wet weather conditions, resulted in the fourth quarter operating loss.

Overall, the Well Servicing segment experienced a 20% year-over-year decrease in the fourth quarter EBITDA and 29% decrease in segment's EBITDA margin. From a consolidated perspective, Total Energy's financial position remained very strong.

At December 31, 2024, Total Energy had $78.7 million of positive working capital included $38.4 million of cash. Working capital decreased from December 31, 2023, as $42 million of mortgage debt due in April of 2025 became current during the second quarter of 2024.

During the fourth quarter, Total management repaid $25.5 million of bank debt less cash was $72.5 million at December 31, 2024. Total Energy's bank covenants consist of a maximum senior debt to trailing 12 months bank-defined EBITDA of 3 times and a minimum bank defined EBITDA to interest expense of 3 times.

At December 31, 2024, the company's senior bank debt-to-bank defined EBITDA ratio was 0.25 times and the bank interest coverage ratio was 25.81 times.

Thank you, Yuliya. 2024 represented a record year for Total Energy.

Despite some challenges towards year-end, Total Energy was able to generate significant free cash flow during the fourth quarter that was directed towards a $25.5 million reduction of bank debt, and the return of $7.1 million to our shareholders through dividends and share buybacks. For 2024, a total of $35.2 million or $0.92 per share outstanding at year end was returned to our owners by way of dividends and share buybacks.

Relatively strong oil prices and improving natural gas prices due in part to increasing LNG export capacity are supportive of stable North American industry conditions. Strong Asian demand for LNG and a tight domestic natural gas market, provide tailwinds for the Australian market.

However, recent downward pressure on oil prices combined with continued global political and economic uncertainty and recent trade tensions give rise to caution. In such an environment, Total remains focused on operating in a safe and efficient manner and exercising discipline in the deployment of capital.

Total's preliminary 2025 capital budget of $61.9 million includes $27.6 million of maintenance capital that is required to sustain current operating levels. An additional $34.3 million is being directed towards equipment upgrades and other compelling growth opportunities, within our existing business segments.

The full impact of our growth investments are expected to be realized by the fourth quarter of 2025. Despite the ongoing tariff uncertainty, North American demand for compression and process equipment remains strong, and current bid activity is high, such that, visibility for our CPS segment is reasonably clear well into the back half of this year.

Notwithstanding current market uncertainty, Total's strong financial position allows us to continue to provide our owners with stable and industry-leading returns. In that regard, our Board of Directors approved an 11% increase to our dividend, commensurate with the declaration of our first quarter dividend, which is payable on April 15th, to shareholders of record on March 31st, 2025.

Finally, I'd like to welcome Gurmeet Bhatia to Total Energy. Ms.

Bhatia joined us in January as Corporate Controller following a successful twenty-year career at ATCO and replaced Ashley Ting, who left to pursue another opportunity. I would like to thank Ashley for her excellent service since she joined Total in 2017 with the acquisition of Savanna and wish her the very best in our new endeavor.

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

Hi, good morning. Curious, could you guys help me understand the quantum of reactivation costs and one-time costs that you saw in the Well Servicing and CPS segments in Q4?

We're hesitant to break those out. What I would say is, you'll begin to see Australia normalize in Q1.

I think partly we're having a pretty close look at how we're managing labor costs during these situations. Q4 was a bit unique in the sense that, in Australia, you have a fairly prescribed rig acceptance process, where up until the rig is accepted, you don't have any cost recovery.

And we had some delays in getting rigs out, in part because of wet weather conditions. And so, we were eating a lot of costs leading up to that.

And we're having a pretty good look at how to better manage that process. And so, for that reason, I don't want to suggest that, what happened in Q4 is a normal situation.

Quite frankly, we were disappointed with what happened there.

Do you think that, I guess, that one time-ish costs in Q4 were fully the factors that drove the margin degradation from where we saw it in Q3?

What I expect is, you're going to see much better margins coming out of Australia, in part due to better management of rig startups. And so, like I said, I don't want to start quantifying largely because I don't like making excuses.

And I expect that going forward, we'll be better managing the cost during these rig commissioning’s and start-ups. So, what I would say is, I would expect that Q4 is an aberration.

And we've got further rig start-ups in Q1. We're also seeing a lot of opportunity for additional rig reactivations.

But we're not going to start adding more until we know, what we're doing is being well managed.

Okay. So, you got two billing rigs in Australia being reactivated in the first half, one in Q1, one in Q2 and another service rig in Q1.

Is that correct?

Correct. And we have some other opportunities that we haven't pulled the trigger on yet, but part of that is just to make sure that, how we're managing these reactivations is efficient.

And in fairness, it's been extremely busy over there. We've reacted a lot of iron in the last couple of quarters.

Got it. Can you remind me just how many rigs were upgraded in Australia in '24 for both the service and well-servicing fleets?

Three service rigs.

Three service rigs.

Three service rigs and five drilling rigs, I believe. I'd have to go back and check.

Plus, we had some minor recertification like not major upgrades but recertification. So, it's been a busy, busy year there.

Okay. And how's weather in Australia playing out in Q1?

Have you seen that noise, or is it still pretty wet?

So now it's the -- Q1 is kind of their breakup quarter. It's been up and down a bit.

Currently, we have a few rigs shut down due to there's a typhoon or a cyclone or something off the West Coast. So that's kind of par for the course in Q1.

Definitely, Q4 was wetter than kind of normal, and hence that threw a bit of a wrench into our rig reactivations in particularly in December, but slowed things down a bit. But Q1 is kind of their breakup quarter.

But again, we're having a hard look at how we're managing these reactivations and helping to spread the risk out on cost.

Most of those deployments didn't happen in Q4 and it's just kind of concentrated there. By no means are you saying it's an excuse, but it's definitely going to be managed quite a bit more precise also?

Okay. That's helpful.

So how many do you expect activity in Australia generally to be higher or lower in Q1 versus Q4 just given Typhoon and other weather impacts?

We're into March. Generally, with the rigs that are being reactivated barring weather shutdowns, it's going to be higher.

But again, check the forecast out. And like I said, we've got, I believe, two drilling rigs right now shut down because of weather.

They have no shovel restriction.

Got it. And I guess in a more normalized scenario, once we get into Q2 and weather is better and you've got all the rigs that you're planning to reactivate it in the field.

How many drilling and service rigs do you think you'll have running?

We will have -- we've got the two drilling rigs coming on. So that would take us to 12, and another service rig, which would take us to 8.

So pretty significant increase year-over-year. Like I said, we need to do a better job with these start-ups, and we need to do a better job working with our customers to, how would you say, bear the cost of labor.

And again, part of this is the labor laws in Australia are not the same as North America. And so, it's much more of a fixed cost.

And so, like I said, we're digging into this pretty deep to make sure that going forward, we have a more efficient start-ups on some of these rigs.

Got it. I've got some more questions about maybe I should get back in the queue, unless there's other people waiting.

I would suggest you go ahead.

Okay. The capital program in Canada, a lot of capital allocated to upgrading rigs.

How should we think about that from a market share or a -- perspective? And can you talk a little bit about that, your expectations there and what those upgrades might look like?

So, we're doing some work in our service rig division. We've had a very good experience upgrading service rigs to really expand their capability, both for thermal operations and I would call it deep basin operations.

And so, we've taken a pretty steady approach to continuing to expand our fleet there. So that's part of it.

On the drilling rig side, the primary project this year, and we're somewhat tight hole on it, but we're doing a pretty significant upgrade to a existing mechanical double, that it will come out as a AC triple. And there's some intellectual property involved with that.

And so, I think our sales groups will begin marketing. Normally, I wouldn't say much, but we've given the go-ahead to start marketing that rig, which it won't be done until Q4.

But it's going to be a pretty special rig. And like I said, we've got some property protection in place for the design.

Okay. That's interesting.

So that's I guess on spec at this point?

It is, but I expect, I probably unleash the hounds right now. There's a lot of demand for this style of rig and in particular we believe this rig will be very sought after.

So, I'm not too worried about that. But yes, we did it on spec.

Interesting. And the economics in the market are high enough to do a mechanical double the AC triple conversion?

That would be one of the most expensive conversions I think in the market.

It's not cheap, but I can tell you, the cost relative to new build is substantially lower. You can't justify new build right now, but again part of the beauty of this is the patented design that we've got.

And like I said, it allows us to undertake this conversion at a substantial discount to new build price.

And I would imagine you have other rigs that could follow suit if this one is picked up?

Correct.

How long do you think the conversion takes?

Those are all idle mechanical doubles too. And we also like I said, we've got patent protection on this.

So, we'll be watching closely to ensure no one tries to copy our concept.

Sorry. And how long do you think the conversion takes?

Like I said, we expect the rig to be completed by Q4.

Interesting. Can you talk a little bit about CPS activity and your outlook there for the year?

They're doing very well. These tariff uncertainties definitely thankfully have no hair left to lose.

But what we've seen is very strong bid activity. And like I said, we'll give an update after Q1 in terms of backlog, but there's very strong demand for compression process equipment and it's part of this infrastructure build.

And so, the reality of the supply chains in that business is, there's so much cross border activity that it's just -- I think the temporary relief here announced yesterday, makes a lot of sense. We've got somewhat of a natural hedge in so far as we've got manufacturing capability on both sides of the border.

But the reality, a lot of the choice of where you fabricate based on where the end use is and also shop utilization and windows and that sort of thing. But what I can say is, that business is performing well and we expect that to continue.

Okay, great. And you mentioned tariffs.

Can you talk a little bit about your exposure, what you might be seeing from customers, if there's any hesitancy in your customer base for capital allocation, or if that's -- or do you see people for perhaps front-loading ahead of tariffs?

What I would say is, our order experience suggests not. But again, I think, there's a lot of uncertainty that probably has slowed order commitments down, but certainly they remain very strong.

From our perspective, orders are ex-works the factory in which they're built as well tariffs, whether U.S. or Canadian that drive up input costs are going to apply to everyone.

So again, I would hope that, we can get this sorted out. All it's going to do is drive up costs.

But I would say our experience thus far as, it certainly hasn't caused us to be concerned about shop loading over the next several months. I'll put it that way.

I got it.

Who knows, Tim? I'd ask you, do you know what's going to happen there?

But it's certainly the uncertainty is not helpful for anyone. But like I said, I think the industry as a whole is in the same boat.

And one benefit we have is having production on both sides of the border. But again, the supply chains are so integrated.

It's a North American market. It makes -- it adds complexity and confusion if tariffs are put in place.

Yes, understood. It's a very dynamic situation and nobody really seems to know where that's going.

In terms of capital allocation given to the dividend bump, can you talk a little bit about your expectations for NTIB activity and stocks like most stocks in the service space are down? And then also how does M&A fit into your strategy for 2025?

Our views haven't changed. We look at share buybacks the same as we would any capital investment including M&A.

And right now, our cost of equity is extremely high, and share buybacks are right at the top of the list for capital allocation and M&A has to compete with that.

That's all for me. Thanks so much for taking my laundry list of questions and I'll turn it back.

Hi, Dan. Thanks for taking question.

Good morning.

I have two questions and I apologize I joined the meeting a little late, so if you've already answered this. First question is on capital allocation, just like the gentleman who asked before on the buyback.

So, I understand what you mentioned, but can we expect the cadence to be similar to, let's say, last year knowing that, the cost of equity is high, the buybacks to be kind of similar to what it was last year?

I'm not one to try and predict the future nor do we give forecast, but current market conditions make our buybacks extremely compelling. And so, what that looks like in three, six months, time will tell, but and the other thing is relative to other opportunities.

But right now, we've been in blackout for a bit. Obviously, we don't buy during blackout, but NCIB share buybacks right now would be at the top of the list.

Got it. Thank you.

And then my other question is on just wanted to share the [indiscernible] EBITDA somewhere between 2 times and 3 times. Maybe would you be able to...

Sorry, you broke up there.

Give me a second. One second, apologies.

Is it better now?

Yes, that seems better.

Okay. Thank you.

I was just mentioning, in terms of where the shares trade now on an EV to EBITDA basis, EBITDA last year was about 4.3 times. We are trading somewhere around 2 times to 3 times.

Can you please comment on the long-term of the business, liability of the business and how you look at it like three, five to ten years and what opportunities maybe to look at in the future?

Again, I'm not one to kind of get into five-year plans or that seems quite soviet to me. I think what we do is we have core principles.

We're also flexible dynamic and obviously, when we make investments, we're doing that in the context of a macro view and I would say, our macro view of our industry is, first of all, demand for oil and natural gas will continue to go up. And I think you're seeing the pendulum swing back in terms of energy security and energy reality and affordable energy.

So, the macro background, I think, has and will continue to improve relative to the previous five years. Now again, you're going to have cycles.

It's a commodity business. But from a demand perspective, and a public policy perspective, I think the next five years will be better than the previous five.

As well, the underinvestment within not just the producer side, but the service side has been massive. The flip side is, there's definitely been technological improvements that allow us to do more with less.

But, all-in-all, you see various numbers that we're replacing a fraction of the reserves that we produce each year. And fundamentally that catches up with you at some point.

Probably more relevant to Total is the significant consolidation and contraction in energy service capacity. And again, comments earlier, there's no new build economics for drilling rigs today.

So, we're being creative and looking at opportunities to take existing assets, which we put as, there's some costs. So, we look at the incremental capital to put those assets back to work.

And in certain cases, we believe that, that provides reasonable and required returns. And so, we're going to continue to be nimble.

We'll continue to be opportunistic. What I would say, five years from now, we'll be larger and more international would be my guess.

And do I think we're going to run out of opportunities to achieve that? No.

What those opportunities will be? Time will tell.

Got it. Thank you.

Appreciate taking the time.

Does that help?

Yes, it does. Thank you so much.

Thank you.

Thank you everyone for joining us and look forward to speaking with you after we release our Q1 results. Have a pleasant weekend.