Total Energy Services Inc.

Thank you. Good morning and welcome to Total's first quarter 2025 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 March 31, 2025, 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-information concerning total 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 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 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 financial results for three months ended March 31, 2025 reflect relatively stable industry conditions in Canada and Australia and continued softer US drilling and completion activity. Consolidated first quarter revenue was 23% higher compared to Q1 of 2024.

The acquisition of Saxon and the upgrade and reactivation of several drilling rigs and services in Australia, combined with increased activity in the CPS segment, more than offset lower US drilling and completion of duty and weaker North American CDS and Well Servicing operating margins. As a result, first quarter consolidated EBITDA was CAD 7.2 million or 17% higher than in 2024.

Geographically, 47% of the first quarter revenue was generated in Canada, 31% in the United States, and 21% in Australia, as compared to the first quarter of 2024, when 50% of the consolidated revenue was generated in Canada, 39% in the United States, and 11% in Australia. By business segment, the Compression and Process Services segment contributed 42% of the first quarter consolidated revenue, followed by the CDS segment at 36%, Well Servicing at 13%, and RTS segment at 9%.

In comparison, for the first quarter of 2024, the Contract Drilling Services segment generated 40% of the first quarter consolidated revenue, followed by CPS at 38%, Well Servicing at 11%, and RTS contributing 11%. First quarter of 2025 consolidated gross margin was 25% as compared to 28% for the prior year quarter.

The primary reasons for this decrease were the year-over-year increase in CPS segment revenue contribution to consolidated revenue, a change in revenue mix in the RTS segment, and lower North American contract drilling and well service operating margins. As compared to 2024, CDS segment saw first quarter revenue increase by 12%, a 14% increase in revenue per operating day more than offset 2% decrease in operating day.

Canadian CDS revenue was 6% lower in Q1 2025 as compared to Q1 2024 due primarily to a 3% year-over-year decrease in utilization resulting from lower utilization of the mechanical double rig fleet due to competitive market conditions for that class of the rig. Lower rig utilization and an inability to increase rates to offset operating cost inflation resulted in a 32% year-over-year decrease in the first quarter Canadian CDS segment operating income.

In the United States, 6% increase in revenue per operating day was offset by 60% decrease in operating days, resulting in a 58% decrease in revenue and realization of an operating loss. Australian first quarter operating days increased by 70% following the acquisition of Saxon in March of 2024.

Higher day rates on Saxon's deeper drilling rig, a new drilling rig, and several upgraded rigs that were deployed in the second half of 2024 contributed to a 124% year-over-year increase in first quarter Australian revenue and a 15-fold increase in operating income. RTS segment revenue for the first quarter increased modestly compared to 2024.

A change in the mix of equipment, operating expenses incurred to deploy new and upgraded equipment contributed to a year-over-year decrease in the first quarter segment operating income margin. First quarter revenue in total CPS segment was 37% higher compared to 2024.

Increased fabrication sales and efficiencies arising from higher production levels resulted in a 51% year-over-year increase in first quarter CPS segment operating income and a 9% increase in segment operating income margin. The fabrication sales backlog at March 31, 2025 increased by CAD 76.4 million, or 40%, to CAD 265 million, compared to CAD 189 million backlog at December 31, 2024.

In Well Servicing, a 13% increase in revenue per operating hour combined with an 18% increase in operating hours resulted in a 34% year-over-year increase in first quarter Well Servicing segment revenue. Stable industry activity in Canada and increased Australian service rig utilization following the deployment of several upgraded rigs was partially offset by substantial decline in unit activity.

Higher pricing received for upgraded rigs and increased utilization in Australia more than offset weaker North American margins and drove a 34% year-over-year increase in segment first quarter operating income. Competitive industry conditions in Canada contributed to a modest decrease in both hours and revenue per service hour.

These decreases combined with general cost inflation and labor retention costs contributed to a 32% year-over-year decrease in the first quarter Canadian Well Servicing operating income. Increased revenue per service hour in the US was more than looked at by a substantial decrease in the fleet utilization resulting in the first quarter operating loss.

The upgrade and reactivation of several rigs in Australia resulted in a 109% year-over-year increase in first quarter service hours. The increase in service hours combined with increased pricing for upgraded equipment resulted in the realization of the first quarter Australian operating income as compared to operating loss in 2024.

From a consolidated perspective, Total Energy financial position remained very strong. At March 31, 2025, Total Energy had CAD 78.9 million of positive working capital, including CAD 65.1 million of cash.

On April 29, 2025, Total Energy repaid CAD 41.4 million of maturing mortgage debt using cash on hand in its existing credit facility. Total Energy bank covenants consist of a maximum senior debt to trailing 12-month bank-defined EBITDA of 3 times and the minimum bank-defined EBITDA to interest expense of 3 times.

At March 31, 2025, the company's senior debt bank debt to bank defined ratio was 0.09 times and the bank interest coverage ratio was 26.82 times.

Thank you, Yuliya. We are generally pleased with Total's first quarter results.

While certain geographies and business segments face challenges, strong North American demand for Compression and Process Services and improved Australian results drove a significant year-over-year improvement in our first quarter financial results. Amplifying this improvement was the continued repurchase and cancellation of shares under the company's normal course issuer bid.

Despite such improved results, we are cognizant of increasing global economic uncertainty and commodity price volatility. Trade and tariff disputes and recently announced oil production increases by OPEC have put pressure on oil prices.

Notwithstanding these headwinds, industry conditions in all geographies in which Total operates have remained relatively stable, at least thus far. In North America capital discipline by oil and natural gas producers over the past several years has mitigated the volatility of the industry cycle.

Producers have moved towards more stable capital programs that focus on maintaining production and generating free cash flow that has been returned to shareholders through dividends and share buybacks. While this discipline has limited activity during periods of high commodity prices, it has also mitigated activity declines during periods of price weakness.

An area of strength in North America has been the continued investment in energy infrastructure, including the expansion of LNG export capacity. Total's exposure to this investment is evidenced by the substantial growth in the CPS segment sales backlog during the first quarter.

The CPS sales backlog at March 31 was the highest in Total's history and provides good visibility as to fabrication activity for the remainder of the year. In Australia, a relatively strong natural gas market underpinned by domestic demand and LNG export commitments continues to drive stable industry conditions and steady demand for quality equipment and service providers.

Significant consolidation and rationalization in the energy services industry over the past several years has rebalanced the supply/demand equation in a positive way for many areas of the energy services market. While oversupply continues to exist in certain geographies and business lines, uncertain industry conditions will ensure the rebalancing process continues.

While sensitive to the current macro industry environment, Total Energy remains focused on generating sustainable shareholder value as measured on a fully diluted per share basis. This includes using our balance sheet to pursue investment opportunities that will generate acceptable full cycle returns.

Historically, some of the best opportunities to deploy capital have arisen during periods of uncertainty and stress. As disclosed in our Q1 news release, we have increased our 2025 capital budget by CAD 12 million to pursue several growth opportunities.

These include the upgrade and reactivation of an idle Australian drilling rig, which will commence operations in the fourth quarter under a long-term contract, the upgrade of a Canadian drilling rig that recently commenced operations, and the purchase of CAD 3.9 million of new rental equipment for the RTS segment for deployment by the fourth quarter. Total intends to fund its remaining CAD 56 million of capital commitments with cash on hand and cash flow.

Finally, I would like to thank Greg Melchin for his service as the Director of Total since 2009. Greg will be retiring following our AGM next week and has been a steady hand in the boardroom table over the past 16 years.

And his guidance and sage advice has helped navigate Total through some exciting and challenging times. I would invite our shareholders and other interested persons to attend our AGM next Tuesday, May 13th, at the Calgary Petroleum Club to meet with Greg, as well as Tim McMillan, who has been nominated to replace Greg.

Following the formal business of the meeting, management will be providing a corporate update. I would now like to open up the phone lines for any questions.

First question, pretty impressive build in the CPS backlog. Can you provide any details around sort of what geographies those opportunities are in?

Is that midstream or E&P's compression processing? How should we thinking about that?

So North America, both Canada and the US, a good mix of E&P and infrastructure. I would say primarily infrastructure, but some good E&P in there as well.

The infrastructure build, is that related to sort of LNG end markets?

Yeah, I would say a lot of it is the gathering systems, bringing gas from the wellhead to ultimately the final destination. So, certainly, in the US, a lot of it is LNG export-related.

Canada tends to be more producer-focused, tying into gathering systems from wellhead.

Are you seeing opportunities improve in US dry gas basins at all?

What I would say is quoting activity remains very strong. I think what we saw in Q1 with the Liberation Day was definitely a pause in pulling the trigger.

That seems to have subsided and certainly as the market becomes more comfortable with how the whole tariff thing is playing out, as that concern abates, we definitely see a resumption of order execution. So I would say bidding activity and demand remains relatively strong.

In Australia, it was encouraging to see the results, first of all. Rates were very strong, especially in the drilling segment.

I don't know if you can speak at all to the stability of those rates going forward or if that was a mixed thing, just given the seasonality. Maybe we'll start there.

I think we expressed in our Q4 call that we had some startup costs and issues, but we expected that to begin normalizing in Q1, which it did. Australia is a very high cost basin, and so your nominal rates there reflect a higher cost place to operate.

Those rates are required to generate margins that you need to generate to run a sustainable operation. Those are all long-term contracted rates, and so we expect those to hold.

Unlike North America, particularly Canada, where you tend to have shorter-term contracts and more of a volatile pricing environment.

Like in Canada, during Q2, for instance, you would see a high grading of the fleet just in terms of mix, like the larger rigs tend to operate through Q2. Do you see any similar dynamics in Q1 in Australia?

Q1 in Australia, there was definitely a lot of wet weather. That's the rainy season in Australia.

I think you can throw in a cyclone or something came through. So, definitely, you see the operating days hit by that, but once the rigs have been accepted and commenced operations, you receive standby with crew as opposed to nothing.

And so, what hurt us in Q4 was getting nothing while we paying crews waiting to deploy rigs. In Q1, the rigs had been accepted and deployed.

And so, you get some revenue coming in, which definitely helped the margins. So, as we get out of the rainy season and you have more steady drilling operations, you're going to get more full rate days.

How many rigs are running in Australia today?

Twelve. Twelve drilling rigs, yeah.

How many well-servicing rigs?

Seven, which we expect that to go up to eight here in the next while.

The rig that is coming and being upgraded for Q4 commencement, is that a similar spec to the heavier side of the fleet or the lighter side of the fleet?

I'd say it's in the middle of the range. It was an idle Saxon rig, but we're investing a fair amount of capital into upgrade/recertify.

It'd be kind of middle of the range.

And how many more rigs like that do you think you have opportunities to upgrade?

What do we have in total there? There would be probably two more realistically.

Are you using those currently?

We update those as we contract them. Well, I hope our sales guys are out selling.

I'm just curious of the rationale for paying back the mortgage. I would imagine that's probably one of the cheapest pieces of capital that you have in the stack.

That had a five term fixed rate of 3.1%. The reality was it was done with HSBC.

And so, if we were to renew it, we'd have to redo all the paperwork. And at this point, frankly, Tim, we don't need the money.

So, we paid it off. We'll discharge the security.

Certainly, we're sitting on a lot of real estate that's now free and clear, and that's certainly an asset we can utilize to bring on some permanent debt in the future if and when we need it. But at this point, we're not going to just borrow money to borrow money.

We don't need the capital.

I was just thinking in terms of like offsets to tax, you becoming more cash taxable over the next couple of years.

That's a good problem. I'd rather buy someone that's struggled and has lots of pools.

Tim, it has quite a bit of possibility for our debt management and potential opportunities coming our ways if we look at every day. First of all, we had to pay it because it was up.

Renewing it, it wouldn't guarantee us the same rate in current conditions, and we have our options quite a bit open.

It's cheap debt. But, again, we don't borrow just to borrow.

And I hear what you're saying, but certainly, I think the way we think about it, it's a significant asset that's free and clear and we can utilize it if and when we need capital. And that would be obviously one of our first go-tos because, on a relative basis, it would be very cheap, both on a pre-tax and after-tax basis.

So I hear what you're saying, it's timing issue and a need issue. We're generating a lot of free cash flow.

We're going to continue to shrink our share count. Our preference is to grow.

So we definitely working hard to identify opportunities to grow the company. If we go into a tougher period, that's generally when we do our better work.

And now, we've got a nice free and clear real estate asset base that we can utilize to provide some quite inexpensive financing.

I guess maybe go down that path a little bit. What kind of things are most attractive to you in terms of M&A?

I think, obviously, our cost to equity continues to be extremely high. So we've been steady buyers under our normal course.

We've been blocked out. But we are seeing some deal flow, and we're going to stay focused, disciplined, and it's got to work for us full cycle.

Obviously, we announced some upgrade/newbuild opportunities. I would describe those as rifle shots, particularly within the rental business.

We're not going to comment on specifics for competitive reasons, but we're definitely seeing a severe lack of reinvestment within the North American energy services area and there are certain lines of equipment that, again, we believe that it's better to buy new than used, in large part due to condition of equipment. And there's been some technical improvements over the years in some of the equipment we're looking at.

But we also continue to evaluate acquisition opportunities, and there's definitely those out there. And we start with value and then asset quality.

And if the two work for us, we'll pull the trigger.

Thank you, everyone, for joining us and hopefully we'll see a few of you at our AGM next Tuesday. Have a pleasant weekend.