Total Energy Services Inc.

Thank you. Good morning.

And sorry for the false start here. I promise I didn't touch any buttons.

Anyways, good morning, and welcome to Total's Second Quarter 2025 Conference Call. Present with me is Yuliya Gorbach, our VP Finance and CFO.

We will review with you Total's financial and operating highlights for the 3 months ended June 30, 2025, provide an outlook for our business and then 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 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 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 3 months ended June 30, 2025, represents record second quarter results, a substantial increase in Australian drilling and service rig activity, continued strong North American demand for compression and process equipment and improved performance from Canadian well servicing more than offset the substantial decline in the United States drilling and completion activities and a modest decline in drilling activity in Canada. On a year-over-year basis, consolidated second quarter revenue increased by 17% and EBITDA by 21%.

Improved EBITDA margins in all 4 business segments over 58 basis points year-over-year improvement in consolidated EBITDA margin. Geographically, 38% of second quarter revenue was generated in Canada, 38% in the United States and 24% in Australia, as compared to the second quarter of 2024, when 36% of consolidated revenue was generated in Canada, 46% in the United States and 18% in Australia.

By business segment, the Compression and Process Services segment contributed 53% of second quarter consolidated revenue followed by the CDS segment of 28%, Well Servicing at 12% and the RTS segment at 7%. In comparison, for the second quarter of 2024, the Compression Process Services segment generated 51% of second quarter consolidated revenue, followed by CDS at 32%, well servicing at 9% and RTS segment at 8%.

Second quarter 2025 consolidated gross margin was 23%, which was consistent with 2024. CDS and Well Servicing operating margins were more than offset by improved operating margins in the CDS segment as well as in Australian and Canadian CDS and Well Servicing businesses.

Second quarter CDS segment revenue increased 5% compared to 2024. The year-over-year decline in the second quarter North American operating days was more than offset by a 30% increase in Australian operating days and a 9% year-over-year increase in segment revenue for operating days, resulting primarily from rig upgrades in Australia and Canada.

Second quarter CDS segment EBITDA increased by 11% compared to 2024, driven by a higher Australian activity and improved operating margins in Australia and Canada. RTS segment revenue for the second quarter decreased 9% compared to 2024 due to a 17% decline in Canadian revenue that was partially offset by [ a 3% ] increase in U.S.

revenue following the acquisition of a fleet of rental equipment based in Oklahoma on June 10, 2025. Lower North American drilling and completion activity and a change in the mix of equipment operating contributed to an 8% year- over-year increase in the second quarter RTS segment EBITDA.

Second quarter revenue in total CPS segment was 22% higher compared to 2024. Increased fabrication sales and efficiencies arising from higher production levels offset lower rent of utilization in a 29% year-over-year increase in the second quarter CPS segment operating income and a 26% increase in segment EBITDA.

The fabrication sales backlog at June 30, 2025, increased by $38.5 million, or 15%, to $303.9 million compared to the $265.4 million backlog at March 31, 2025. In Well Servicing, an 8% increase in revenue per service hour combined with a 52% increase in operating hours resulted in a 64% year-over-year increase in the second quarter segment revenue.

Increased Australian and Canadian activity resulting from rig upgrades was partially offset by a substantial decline in U.S. activity.

Higher pricing received for upgraded Australian rigs and improved Canadian operating margins more than offset the substantially weaker U.S. performance and resulted in a 66% year-over-year increase in second quarter segment EBITDA as well as the realization of second quarter operating income as compared to an operating loss in Q2 of 2024.

From a consolidated perspective, Total Energy's financial position remains very strong. At June 30, 2025, Total Energy had $108.7 million of positive working capital, including $34.2 million of cash.

On April 29, 2025, Total Energy released $41.4 million of maturing mortgage debt, using cash on hand and its existing credit facility. Total Energy's main covenants consists of a senior debt to trailing 12-month bank EBITDA of 3x and a minimum bank-defined EBITDA to interest expense of 3x.

At June 30, 2025, company senior bank debt to bank EBITDA ratio was 0.2x and the bank interest coverage ratio was 32.53x.

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

Despite challenging industry conditions in the United States and a modest year-over-year decline in Canadian drilling activity the substantial investment made in growing our Australian business over the past year and continued momentum in our Compression and Process Services segment underpinned our record second quarter results. As highlighted during the past several quarterly conference calls, investment in North American energy infrastructure has been substantial, and the outlook for future investment remains strong at this time.

Demand for compression continues to be driven in part by the expansion of North American LNG export capacity, although the increasing use of natural gas for electricity generation is also contributing to such demand. Total's exposure to these opportunities is evidenced by the continued and substantial growth in the CPS segment sales backlog.

For the first time ever at June 30, 2025, the quarter end fabrication sales backlog exceeded $300 million and sales activity remains strong today. We believe there exists a solid opportunity to grow our U.S.

compression business in a capital-efficient manner. To support that growth, our Board has approved a $19.5 million increase to our 2025 capital expenditure budget.

This increase will fund construction of a new assembly plant in Weirton, West Virginia, which is expected to be completed by the first quarter of 2027. Once completed and fully staffed, this facility is expected to increase our U.S.

fabrication capacity by at least 75%. The increased capital budget will also fund the upgrade and reactivation of an idle service rig in Australia.

This rig is expected to commence operations by the end of the first quarter of 2026 under a minimum 12-month contract. From a cash flow perspective, most of the $19.5 million increase to our 2025 capital budget will be spent in 2026.

While we remain sensitive to current economic uncertainty, and the resultant impact on the industry activity levels, we also remain focused on generating sustainable shareholder value as measured on a fully diluted per share basis. As such, we will use our balance sheet strength to pursue investment opportunities that we believe will generate acceptable full-cycle returns.

Historically, some of the best opportunities to deploy capital have arisen during periods of uncertainty. On June 10, 2025, we announced the acquisition of 280 rental pieces located in Oklahoma for $9 million.

This acquisition increased our U.S. major rental fleet by 30% and more importantly, we brought on board experienced local personnel that supported the establishment of our fourth U.S.

Rentals and Transportation Services branch in El Reno, Oklahoma, and I'd like to take this opportunity to welcome Nate Powell, who is heading up our El Reno branch and his team to Total Energy. I would now like to open up the phone lines for any questions.

I just want to start off in the CPS segment. It's been 2 really strong quarters for backlog growth.

I wonder if you can talk a little bit about what you're seeing on the margins on the horizon and if you expect that momentum to continue and really maybe just expand a little bit on the end markets and the demand that you're servicing?

So first of all, Tim, obviously, with higher production levels, you tend to get efficiencies of scale and your overhead absorption is better. And so naturally, with higher production levels, you tend to get better margins, everything else being equal.

That said, we're seeing some cost inflation through things like steel tariffs and that. But for the most part, I believe the group has done a good job in managing those costs and passing them on to the extent we can.

I would note our rental utilization was down in the quarter. A lot of that reflects a bit of a shift in our U.S.

customer base over the past few quarters. It tends to be large pipeline and midstream operators, which are inclined to purchase, not rent.

That said, that business is also tends to come in waves. And I think you'll see an uptick, particularly in Canada in the third quarter.

For example, we'll have a number of our idle nomad rental units going out on a project where facilities being refurbished and to keep the facility going a number of nomads will be utilized on a short-term rental basis to keep the plant running. So those are -- that can be a bit lumpy.

But overall, I think the group in our CPS segment has done a good job executing production efficiencies with scale. And at this point, we see nothing material changing either way, barring any major tariff change.

In terms of bookings and, I guess, opportunity set? Are you seeing a lot of momentum continuing through the back half of the year, then a couple of strong quarters?

Yes, to date, it's early August, but quoting and booking activity remains strong.

And CPS fabrication capacity addition, can you talk a little bit about the rationale behind that? Are you running near capacity today?

And what gives you confidence that you'll need the extra 75% or more capacity?

So first of all, we see the U.S. as a huge market opportunity for us.

We believe there's a lot of room for us to grow both market share and into a growing market. So we believe the market for U.S.

compression over the next several years will grow bigger, and we also believe we can get a bigger share of that market. And yes, running near capacity when you -- these things take some time, as you can see, the physical construction takes till Q1 of '27.

Obviously, we'll have to staff up going into that. But I believe the incremental capital we've allocated is a pretty low-risk option on continuing to grow our U.S.

compression business.

Are there any changes in the design of that, I guess, the expansion, anything notable from an efficiency perspective or that might drive margins higher as you go forward? And that's -- that capacity is commissioned?

What I would generally say, and I don't want to give any competitive secrets away, but we're following the model we followed in Canada, which worked very well.

Okay. That's helpful.

Australia, record quarter in Australia. It seems like things are clicking there.

Can you talk a little bit about the outlook in Australia? And specifically, I'd be interested if you could just recap your expectations for rig additions through the back half of the year for rigs that are coming into the fleet of upgrades?

So first of all, we've invested a lot of capital in Australia over the past year. So we expect it to see a ramp-up, and it's going in the right direction.

We highlighted this quarter another service rig will come off the fence. By the end of Q1, early Q2, the -- we have a rig that's going to be going into service by Q4 here this year.

And I mentioned that we have a few idle rigs that we're working on, nothing to report yet. And we're always open to working with our customers in all geographies to look at upgrades and opportunities to work together to grow our active fleet and improve our existing fleet.

So at this point, we continue to execute on the projects we've announced and so far, so good.

The U.S. has been a bit of a challenging market.

Just in general, are you seeing any opportunities there to, I guess, reactivate equipment?

Yes, I think we're certainly interested in growing our U.S. presence.

The certain areas of the market are extremely competitive. We tend to back off, and we won't try and race to the bottom on price.

We'd rather stand on the sidelines, let things settle out within reason. We understand we have to be competitive, and so we do adjust.

But there are certain times where you're better to just let your equipment take a breather. The flip side is it's probably not a bad time to look at M&A opportunities.

And what we find is depending on the area, the type of equipment, vendor expectations are somewhat in line, but also there's expectations that are not in line with kind of public market valuations. So we continue to watch that market closely.

We will work with good customers to continue to operate. And we're -- we've historically stuck it out as opposed to fold up our tent, and we'll wait also for good opportunities to grow.

And I think that's kind of our perspective at this point. But it's a huge market.

It's been a challenging few years, but we're trying to build a company for the long run here.

You've done a pretty strong job of finding growth opportunities across your platform in 2025 with CapEx of over $100 million now. As you look to 2026 and you look at the suite of opportunities you expect -- like maybe you can just talk a little bit about what that opportunity set looks like going forward or do you continue to see places within the portfolio to invest capital?

Yes. I think, first of all, we're agnostic.

We don't -- we have 4 children. We love them equally, but they're all very different, and they all go through different phases in their growth.

And what I would say is we stick to our principles of insisting a return on our invested capital. Our seeds are whack over the life of the investment.

That will drive where we spend our attention and where we place our owners' capital. Competing with all of this is share buybacks, and we remain steady on that.

So nothing really is going to change. We're going to continue to be opportunistic.

We will go where opportunities take us. We don't fall in love with any particular piece of equipment.

And in the meantime, you need to operate your existing businesses efficiently and well. And that's a strong part of our culture and focus as well.

So I think in a current -- in an uncertain market, first of all, you have to have the balance sheet to be able to do things, which we do. And secondly, you have to have the intestinal fortitude to look beyond the near-term choppiness.

And again, that short-term uncertainty definitely impacts our modeling, but it doesn't prevent us from doing deals that make sense.

Okay. That's helpful.

And then last one for me. Can you just talk a little bit about how that tuck-in in Oklahoma in the rental fleet is working out in your expectations to be able to grow that business?

So first of all, the first month-or-so, a couple of months, their performance has exceeded our expectations. In part, we've been able to leverage the utilization of the assets in that market to pull some demand for other assets and trucks.

We picked up a group of people that had worked with the asset base. They're experienced, local, lots of energy.

We're committed to the market. We want to be in that business.

And I think they picked the right partner in terms of who they want to work with, and we want to grow our presence there. Oklahoma has, for whatever reason, seen a bit of a rig increase versus West Texas.

And so whether that's luck or whatever, we've got a bit of a tailwind behind us. But so far, we're pleased with how that's been performing, and we look to grow our presence in that market.

Congratulations on the great quarter. First to go into the compression business.

Are there any certain products that are in high demand? And what's the lead time somebody wants to put an order in?

Are they looking at a year delivery, 2 years delivery? Just -- you've got the big backlog, but I'm wondering if there's certain product lines that are in higher demand?

And is there a delay issues there in delivering.

Thanks. So what we're seeing is a lot of demand, Josef, for big horsepower compression.

Part of the business involves making working capital investments, notably in engines, compressors and coolers. What we're seeing on the engine side, and in particular, in the ultra-large Caterpillar engines is very long lead times.

The good news is we've used our balance sheet to keep a steady flow of engine inventory coming into our system. But you're looking at lead times out of Caterpillar in excess of 80 weeks on certain types of engines.

But that's why we also have $100 million of inventory on our balance sheet. We need to fund that, which this is becoming a big boy game, if you want to play in that market.

And so the challenge for us is when you have those sort of lead times, you're anticipating future demand now almost 2 years into the future. At some point, that's going to roll over.

But at this point, we don't see that happening anytime soon. But we've made inventory commitment purchases or purchase commitments that we believe will keep our operations running for the foreseeable future.

So if a new customer comes in tomorrow, what time line would you say to that for deliveries?

It really depends on the product they're looking for, the price they're willing to pay, how do you allocate a scarce resource. Certainly, if someone is willing to pay a high price, we can make it happen.

But ordinary course, you're looking at -- we'd measure it in months, not years. And again, a lot of these projects, Josef, are with large pipeline midstream companies that these are being built out over quarters.

And so there's a lot of coordination between the customer and our facilities for planning deliveries in that. So as opposed to small wellhead compression where we still do a lot of that.

To me, that's a bit of filler work. And again, if someone was in a panic, we can probably turn around pretty quickly.

But obviously, the price needs to reflect taking a scarce resource, which is floor space right now.

Yes. Another area to pursue, Australia, excellent results there.

Is there a new play there oil or natural gas that's causing demand, Permian, you said Oklahoma is picking up. Is there something going on specifically that's going to add significant production to the Australian oil and gas industry?

And is that the driver of this pickup in demand?

No, I would say, generally, market share gains is what we're seeing. And when we acquired Saxon, Saxon was for sale.

And when you're for sale, I don't mean this in a disrespectful way, but you tend not to focus on the business. We want to be in the drilling business.

We're keen to be in the drilling business. We're drillers.

And when we're focused on it and willing to invest in upgrades and recertifications and all that, and if you do a good job, you can gain market share. So I would say Australia is very stable from our perspective at a macro level and really the gains are seeing our market share increases.

You show utilization at 54% and a number of rigs at 17. How many rigs do you have idle that could be brought back to work under good contract?

That number is shrinking. So probably 2 perhaps 3 max.

Okay. And the Canadian U.S.

side, Canada was down. U.S., of course, we know what's going on there.

Some of the other players are showing Canada doing better this year versus last year. Is there any specific reason in terms of the areas you work, the client mix, where you're down versus other people showing up?

Well, I think client mix is one. We saw a couple of major acquisitions where our customer was on the sales side.

We continue to work with the buyer, but definitely that interrupted and delayed Q2 operations. The other piece to that would be a market share.

We've given up some market share, particularly in the mechanical double market, where we've seen extremely aggressive pricing. And to the point where it doesn't make a lot of sense to put your iron out for that.

And so we have to be competitive, but we also are sensitive to working our equipment into the ground. And we need to cover our depreciation expense.

If you don't, you'll find out over time that it's not a sustainable business. And again, we play in the long run here.

When we put a rig to work, we expect to deliver solid operations and back it up. If you're not covering your costs, that's difficult to do.

Yes. One more for me.

What is your mix of rigs in Canada between the singles, the tough doubles market and then the triples? And do you see customers looking for new equipment that you can either bring equipment in from the states or what do you need to justify a new build?

So we've got our triples AC doubles fully utilized, super single strong demand, although we saw a little bit of choppiness in Q2. Part of it was M&A, part of its spring breakup, pretty wet summer here.

So a lot of those areas where you're moving rigs regularly are tough with the rain. We have a second triple in Canada that's currently are double the triple upgrade.

That rig is in a lot of demand. That will go to work by Q4.

And I think when that goes out, we have other currently non-utilized mechanical doubles that we can upgrade at a price that's substantially less than new build. And the beauty of our design, which is patented, is this rig will drill like a triple, move like a double, but it also commands a higher day rate.

And so you're selling into a bit different market than our AC double market. But that's going to be an area that we are quite interested to see how it plays out.

And when that rig begins operating, and if it proves what we think it can do, I expect we'll be looking at more double to triple upgrades.

Sorry, just a quick follow-up. In the CPS segment, given that you're working close to capacity or you at least mentioned that more spaces, a scarce resource right now, do we view the Q2 revenue as sort of a capacity number?

I wouldn't say so. There's other levers we can pull, for example, increased night shifts, things like that.

Again, it kind of goes to if customers need things and are willing to pay for shorter delivery times, there's -- we can certainly accommodate that. We're also constantly looking at ways to increase our throughput.

And so I wouldn't suggest that -- I wouldn't suggest that we're at capacity yet. But part of the reason we're expanding is we're looking quarters ahead, not days ahead.

And our view is we believe we can increase materially our U.S. business and we're starting that process now so that we don't start it when we have hit capacity.

Okay. And then that AC, the double to triple conversion that you're doing, is that rig signed up now?

I don't want to comment on that, but I expect it will go to work in Q4. I'll leave it at that.

Thank you, everyone. Again, apologies for the delayed start, but look forward to speaking with you after our Q3, and have a great rest of your summer.