Total Energy Services Inc. Announces Q1 2020 Results

Source Company Press Release
Company Total Energy Services Inc.
Tags Corporate: Corporate Results, Guidance, Overview/Strategy, Country: Australia, Canada, United States, Financial - Costs & Metrics: Capital Expenditures
Date May 06, 2020

Total Energy Services Inc. (“Total Energy” or the “Company”) (TSX:TOT) announces its consolidated financial results for the three months ended March 31, 2020.

Financial Highlights
($000’s except per share data)

  Three Months Ended March 31 
   
  2020  2019  Change 
Revenue    134,268    221,990  (40  %) 
Operating Income    10,529    8,437  25 
EBITDA (1)    30,903    29,415 
Cashflow    21,911    28,453  (23  %) 
Net Income    4,724    4,759  (1  %) 
Attributable to Shareholders    4,672    4,760  (2  %) 
       
Per Share Data (Diluted)       
EBITDA (1)    0.69  0.64 
Cashflow    0.49  0.62  (21  %) 
Net Income Attributable to Shareholders    0.10    0.10   
       
  March 31,
2020 
December 31,
2019 
 Change 
Financial Position       
Total Assets     999,229  997,161   
Long-Term Debt and Lease Liabilities (excluding current portion)    252,035    248,448 
Working Capital (2)    124,010    103,234  20 
Net Debt (3)    128,025    145,214  (12  %) 
Shareholders’ Equity    552,995    543,142 
       
Common Shares (000’s)(4)       
Basic and Diluted    45,087    45,829  (1  %) 

Notes 1 through 4 please refer to the Notes to the Financial Highlights set forth at the end of this release.

Total Energy’s results for the three months ended March 31, 2020 reflect continued challenging industry conditions in Canada, a deterioration of industry conditions in the United States and reduced production activity in the Compression and Process Services (“CPS”) segment. This was somewhat offset by relatively stable industry activity levels in Australia.  Included in the financial results for the three months ended March 31, 2020 was $7.9 million of income relating to unrealized foreign exchange gains from translation of working capital balances of foreign subsidiaries as compared to unrealized losses of $1.2 million in the same period in 2019.  Negatively impacting first quarter results for 2020 was a $0.4 million increase to the Company’s allowance for doubtful accounts receivable and $0.4 million of expenses to relocate rental equipment from Canada to the United States.

Total Energy’s Contract Drilling Services (“CDS”) segment achieved 22% utilization during the first quarter of 2020, recording 2,166 operating days (spud to rig release) with a fleet of 107 drilling rigs, compared to 2,021 operating days, or 20% utilization, during first quarter of 2019 with a fleet of 114 drilling rigs.  Revenue per operating day was $19,864 in the first quarter of 2020, a 12% decrease from the comparable period in 2019.  This decrease was due primarily to the mix of equipment operating in North America, notably a significant year over year decrease in the utilization of triples with the expiration of contracts and the determination not to work at depressed spot market rates.  During the first quarter of 2020, the CDS segment had 1,457 operating days in Canada with a fleet of 82 rigs (20% utilization), 327 days in the United States with a fleet of 20 rigs (18% utilization) and 382 days (including paid standby days) in Australia with a fleet of 5 rigs (84% utilization).

The Rentals and Transportation Services (“RTS”) segment achieved a utilization rate on major rental equipment of 15% during the first quarter of 2020 compared to 23% utilization during the first quarter of 2019.  Segment revenue per utilized rental piece in the first quarter of 2020 was 41% higher than revenue per utilized piece in the first quarter of 2019 due primarily to improved pricing for assets relocated to the United States and the mix of equipment operating during the quarter.  This segment exited the first quarter of 2020 with approximately 10,610 pieces of major rental equipment (excluding access matting) and 87 heavy trucks as compared to 10,660 rental pieces and 91 heavy trucks at March 31, 2019.

Revenue in the CPS segment decreased 66% to $40.7 million for the three months ended March 31, 2020 compared to $121.1 million for the same period in 2019.  This decrease was primarily due to lower fabrication sales activity.  This segment exited the first quarter of 2020 with a $44.5 million backlog of fabrication sales orders as compared to $159.8 million at March 31, 2019 and $48.6 million at December 31, 2019. At March 31, 2020, there was 50,400 horsepower in the compression rental fleet, of which approximately 33,900 horsepower was on rent as compared to 30,600 horsepower on rent at March 31, 2019.  The gas compression rental fleet operated at an average utilization rate of 68% during the first quarter of both 2020 and 2019.

Total Energy’s Well Servicing (“WS”) segment generated $33.7 million of revenue during the first quarter of 2020 on 41,530 service hours, or $811 per service hour, with a fleet of 83 service rigs that were located in Canada (57 rigs), the United States (14 rigs) and Australia (12 rigs).  This compares to $36.8 million of revenue during the first quarter of 2019 on 42,649 service hours, or $863 per service hour.  Service rig utilization for the three months ended March 31, 2020 was 32% in Canada, 44% in the United States and 74% in Australia. 

During the first quarter of 2020 Total Energy repurchased 68,700 common shares at an average price (including commissions) of $6.21 per share pursuant to its normal course issuer bid.  The previously declared 2019 fourth quarter dividend of $0.06 per share was paid on January 31, 2020.  The Company previously announced its determination to suspend payment of a dividend beginning in the first quarter of 2020 until such time as industry conditions stabilize and visibility improves.

Outlook

On March 11, 2020 the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic.  Around the same time, a battle for market share in global oil markets ensued.  The dual shocks of the COVID-19 pandemic and collapse in oil prices have contributed to unprecedented challenges and uncertainty for the global energy industry.  The Canadian energy industry was particularly vulnerable to these unanticipated events given the ongoing lack of oil pipeline capacity and consequential inability to access eastern Canadian and world oil markets.

Total Energy’s foremost concern is the health and safety of its employees and other stakeholders as well as the public at large.  Protocols have been implemented throughout the Company’s global operations to mitigate the spread of the COVID-19 virus and Total Energy is pleased that there have been no reported cases of infection in any of its business segments to date.

With the collapse in oil prices, North American producers have and are expected to continue to significantly reduce near term capital spending.  This has resulted in a substantial decrease in North American industry activity levels.  A notable exception is the expected increase in Canadian oil and natural gas well abandonment and reclamation activity following the recent announcement of the Canadian federal government to provide $1.7 billion to accelerate such activity.  Total Energy expects to benefit from such increased activity within its WS and RTS segments.

While the full magnitude and duration of the current downturn is uncertain, Total Energy has taken immediate and substantial steps to reduce cash outflows and protect its balance sheet and financial liquidity, including the following:

  • suspended its dividend ($10.8 million of annual cash savings);
  • reduced its 2020 capital expenditure budget by $13.0 million to $10.0 million;
  • reduced its North American employee head count to levels below those immediately prior to the Company’s acquisition of Savanna Energy Services in June 2017;
  • reduced director and officer compensation by 10% to 15%;
  • reduced North American employee compensation by a minimum of 10% through salary and wage rollbacks, reduced hours of service and job sharing;
  • reduced and eliminated discretionary North American employee benefit plans;
  • further RTS segment branch closures in Canada and temporary withdrawal from service of a substantial portion of the North American heavy truck fleet;
  • suspended all non-essential travel and discretionary spending; and
  • applied for all available government assistance programs intended to protect jobs.

Activity levels have remained relatively stable in Australia to date and therefore no significant adjustments have yet been made to Australian operations.  However, the Company is monitoring industry conditions closely and will promptly make such adjustments as conditions warrant.

Despite the current market conditions, on April 29, 2020 Total Energy completed the refinancing of $40.2 million of term debt that matured with a $50 million five-year term loan bearing interest at an annual fixed rate of 3.10%.  Such loan is amortized over 20 years with blended monthly principal and interest payments.  The additional proceeds from such loan will be used to reduce indebtedness under the Company’s revolving syndicated bank credit facility. 

Total Energy has demonstrated over its 24-year history the ability to generate free cash flow during previous industry downturns.  While the current downturn is unlike any before, the measures taken by the Company to reduce cash costs are also unprecedented.  These measures, combined with Total Energy’s geographic and business diversification, position the Company not only to survive this downturn but to also increase market share and capitalize on other opportunities that will arise as the energy industry goes through a process of rationalization and consolidation.  While such process is difficult and negatively impacts many stakeholders, it is also necessary to ensure the future sustainability and economic viability of the North American energy service industry.  

Conference Call

At 9:00 a.m. (Mountain Time) on May 7, 2020 Total Energy will conduct a conference call and webcast to discuss its first quarter financial results.  Daniel Halyk, President & Chief Executive Officer, will host the conference call.  A live webcast of the conference call will be accessible on Total Energy’s website at totalenergy.ca by selecting “Webcasts”.  Persons wishing to participate in the conference call may do so by calling (800) 319-4610 or (416) 915-3239.  Those who are unable to listen to the call live may listen to a recording of it on Total Energy’s website.  A recording of the conference call will also be available until June 7, 2020 by dialing (855) 669-9658 (passcode 4360).

Annual Meeting of Shareholders

Shareholders are reminded that Total Energy’s annual meeting of Shareholders will take place on Wednesday, May 13, 2020 at 10:00 a.m. (Mountain Time).  Due to public health measures implemented in response to the COVID-19 pandemic, attendance at such meeting will be strictly limited as detailed in the Company’s news release issued on April 27, 2020.  The Meeting will be broadcast live via audio-only webcast and can be accessed through Total Energy’s website at totalenergy.ca.

Selected Financial Information

Selected financial information relating to the three months ended March 31, 2020 and 2019 is attached to this news release.  This information should be read in conjunction with the condensed interim consolidated financial statements of Total Energy and the notes thereto as well as management’s discussion and analysis to be issued in due course and the Company’s 2019 Annual report.

Consolidated Statements of Financial Position
(in thousands of Canadian dollars)

  March 31    December 31 
  2020    2019 
  (unaudited)     (audited) 
Assets       
Current assets:       
Cash and cash equivalents    29,946      19,873   
Accounts receivable    107,325        113,934   
Inventory    113,071        105,672   
Prepaid expenses and deposits    9,291        10,878   
Income taxes receivable    3,508        4,403   
Current portion of finance lease asset    581        664   
    263,722        255,424   
       
Property, plant and equipment    724,292        730,435   
Income taxes receivable    7,070        7,070   
Lease asset    92        179   
Goodwill    4,053        4,053   
    999,229      997,161   
       
Liabilities & Shareholders' Equity       
Current liabilities:       
Accounts payable and accrued liabilities    83,188      95,742   
Deferred revenue    6,836        3,883   
Dividends payable          2,710   
Current portion of lease liabilities    8,628        8,270   
Current portion of long-term debt    41,060        41,585   
    139,712        152,190   
       
Long-term debt    241,108        236,278   
       
Lease liabilities    10,927        12,170   
       
Deferred tax liability    54,487        53,381   
       
Shareholders' equity:       
Share capital    284,077        284,510   
Contributed surplus    7,809        7,528   
Accumulated other comprehensive loss    (11,571      (16,722 
Non-controlling interest    (184      (236 
Retained earnings    272,864        268,062   
    552,995        543,142   
       
    999,229        997,161   

Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars except per share amounts)

      Three months ended
March 31 
         2020     2019   
        (unaudited)  (unaudited)  
           
Revenue          134,268        221,990   
           
Cost of services          100,683       179,978   
Selling, general and administration          10,585       12,762   
Other expense (income)          (7,928     1,161   
Share-based compensation          405       368   
Depreciation          19,994       19,284   
Operating income          10,529       8,437   
           
Gain on sale of property, plant and equipment          380      1,694   
Finance costs          (3,439    (3,245 
Net income before income taxes          7,470      6,886   
           
Current income tax expense          1,336      700   
Deferred income tax expense          1,410      1,427   
Total income tax expense          2,746      2,127   
           
Net income for the period          4,724    4,759   
           
Net income (loss) attributable to:           
Shareholders of the Company          4,672    4,760   
Non-controlling interest          52      (1 
           
Income per share           
Basic and diluted          0.10    0.10   
           

Consolidated Statements of Comprehensive Income

  Three months ended
March 31 
  2020  2019 
     
Net income for the period    4,724    4,759   
     
Foreign currency translation adjustment    4,847    (3,670 
Deferred tax effect    304    (390 
     
Total other comprehensive income (loss) for the period    5,151    (4,060 
     
Total comprehensive income    9,875  699   
     
Total comprehensive income (loss) attributable to:     
     
Shareholders of the Company    9,823  700   
Non-controlling interest    52    (1 

Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)

  Three months ended
March 31 
   2020     2019   
     
Cash provided by (used in):     
     
Operations:     
Net income for the period   $    4,724      4,759   
Add (deduct) items not affecting cash:     
Depreciation    19,994      19,284   
Share-based compensation    405      368   
Gain on sale of property, plant and equipment    (380    (1,694 
Finance costs    3,439      3,224   
Unrealized loss (gain) on foreign currencies translation    (8,576    399   
Current income tax expense    1,336      700   
Deferred income tax expense    1,410      1,427   
Income taxes paid    (441    (14 
Cashflow    21,911      28,453   
Changes in non-cash working capital items:     
Accounts receivable    5,613      7,440   
Inventory    (7,399    (10,976 
Prepaid expenses and deposits    3,502      4,364   
Accounts payable and accrued liabilities    (10,237    12,727   
Onerous leases        1,297   
Deferred revenue    2,953      6,882   
 Cash provided by operating activities    16,343      50,187   
Investing:     
Purchase of property, plant and equipment    (2,246    (14,700 
Proceeds on sale of other assets        20   
Proceeds on disposal of property, plant and equipment    1,705      2,670   
Changes in non-cash working capital items    (1,308    2,229   
 Cash used in investing activities    (1,849    (9,781 
Financing:     
Advances on long-term debt    20,000       
Repayment of long-term debt    (15,695    (10,851 
Repayment of lease liabilities    (2,059    (2,081 
Dividends to shareholders    (2,710    (2,752 
Repurchase of common shares    (427    (842 
Interest paid    (3,530    (4,770 
     
 Cash used in financing activities    (4,421    (21,296 
     
Change in cash and cash equivalents    10,073      19,110   
     
Cash and cash equivalents, beginning of period    19,873      30,640   
     
Cash and cash equivalents, end of period    29,946      49,750   
     

Segmented Information

The Company provides a variety of products and services in the oil and natural gas industry through five reporting segments, which operate substantially in three geographic segments.  These reporting segments are Contract Drilling Services, which includes the contracting of drilling equipment and the provision of labour required to operate the equipment, Rentals and Transportation Services, which includes the rental and transportation of equipment used in drilling, completion and production operations, Compression and Process Services, which includes the fabrication, sale, rental and servicing of natural gas compression and oil and natural gas process equipment and Well Servicing, which includes the contracting of service rigs and the provision of labour required to operate the equipment.  Corporate includes activities related to the Company’s corporate and public issuer affairs.

As at and for the three months ended March 31, 2020 (unaudited, in thousands of Canadian dollars)

  Contract  Rentals and  Compression  Well  Corporate  Total 
  Drilling  Transportation  and Process  Servicing    (1)     
  Services  Services  Services       
             
Revenue    43,025       16,833       40,744      33,666       -        134,268   
             
Cost of services     32,457       10,617       33,411       24,198       -         100,683   
Selling, general and administration     2,441       2,503       2,216       1,727       1,698       10,585   
Other income     -         -         -         -         (7,928     (7,928 
Share-based compensation     -         -         -         -         405       405   
Depreciation (2)     7,836       6,151       2,293       3,530       184       19,994   
Operating income (loss)     291       (2,438     2,824       4,211       5,641       10,529   
             
Gain on sale of property, plant and equipment     91       153       113       10       13       380   
Finance costs     (42     (23     (98     (9     (3,267     (3,439 
             
Net income (loss) before income taxes     340       (2,308     2,839       4,212       2,387       7,470   
             
Goodwill     -         2,514       1,539           -         4,053   
Total assets     394,120       232,602       235,487       111,510       25,510       999,229   
Total liabilities     77,709       23,473       45,000       7,517       292,535       446,234   
Capital expenditures    861      523      56      802      4      2,246   
  Canada  United States  Australia  Other  Total 
           
Revenue    69,475    31,411    33,040    342    134,268 
Non-current assets (3)      476,630      187,699      64,108      -       728,437 

As at and for the three months ended March 31, 2019 (unaudited, in thousands of Canadian dollars)

  Contract  Rentals and  Compression  Well  Corporate  Total 
  Drilling  Transportation  and Process  Servicing    (1)     
  Services  Services  Services       
             
Revenue  45,704    18,407    121,075    36,804      221,990   
             
Cost of services    37,921      11,858      103,320      26,879          179,978   
Selling, general and administration    2,199      3,660      3,648      1,760      1,495      12,762   
Other expense                    1,161      1,161   
Share-based compensation                    368      368   
Depreciation    8,194      4,521      2,334      4,201      34      19,284   
Operating income (loss)    (2,610    (1,632    11,773      3,964      (3,058    8,437   
             
Gain on sale of property, plant and equipment    74      129      1,404          87      1,694   
Finance costs    (102    (22    (105    (6    (3,010    (3,245 
             
Net income (loss) before income taxes    (2,638    (1,525    13,072      3,958      (5,981    6,886   
             
Goodwill        2,514      1,539              4,053   
Total assets    423,227      255,728      255,808      137,447      28,817      1,101,027   
Total liabilities    77,260      41,239      128,558      8,587      287,329      542,973   
Capital expenditures  2,795    7,567    2,405    1,682    251    14,700   
  Canada  United States  Australia  Other  Total 
           
Revenue  95,455  74,548  51,939  48  221,990 
Non-current assets (3)    525,904    172,167    79,159      777,230 
(1)  Corporate includes the Company’s corporate activities and obligations pursuant to long-term credit facilities.  
(2)  Effective July 1, 2019 the Company changed certain estimates relating to the useful life and residual value of equipment in the Rentals and Transportation Services segment. See note 9 to the Annual Consolidated Financial Statements as at and for the year ended December 31, 2019 for further details. 
(3)  Includes property, plant and equipment, leased assets and goodwill. 
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