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Edited Transcript of SDY.TO earnings conference call or presentation 10-Aug-18 2:00pm GMT

Q2 2018 Strad Energy Services Ltd Earnings Call

CALGARY Aug 29, 2018 (Thomson StreetEvents) -- Edited Transcript of Strad Energy Services Ltd earnings conference call or presentation Friday, August 10, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Robert C. Pernal

Strad Energy Services Ltd. - CEO, President & Director

* Michael R. Donovan

Strad Energy Services Ltd. - CFO

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Conference Call Participants

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* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Strad Energy Services Second Quarter Results Conference Call.

Certain statements that will be discussed in this conference call will constitute forward-looking statements. The forward-looking information and statements included in this discussion are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements will be based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information and statements. These factors include, but are not limited to, such things as the impact of general industry conditions, fluctuations of commodity prices, industry competition, availability of qualified personnel and management, stock market volatility, and timely and cost-effective access to sufficient capital from internal and external sources.

The risks just outlined should not be constructed (sic) [construed] as exhaustive. Although management of the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations will prove to have been correct. Accordingly, listeners should not place undue reliance upon any of the forward-looking information discussed in this call.

I would now like to turn the call over to Andy Pernal, President and CEO of Strad Energy Services. Please go head, Mr. Pernal.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [2]

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Thank you very much, operator, and good morning, ladies and gentlemen. Thank you for joining Strad's Second Quarter Results Conference Call. With me today is Michael Donovan, our Chief Financial Officer.

For today's call, I'll start out with some high-level commentary on the quarter. From there, I will hand it over to Mike while he review our second quarter financial highlights. In a closing, I will provide an outlook for what we expect looking ahead to the remainder of 2018.

A few financial and operational highlights from the second quarter include increased U.S. revenue by 71% to $10.8 million compared with $6.3 million in Q2 2017. Total revenue decreased 2% to $28 million compared to $28.5 million, and EBITDA decreased 17% to $4.8 million compared to $5.8 million in the prior year.

During the second quarter, economic and market conditions remained relatively strong as the North American energy sector continues to recover from the downturn experienced in recent years. Robust West Taxes Intermediate prices and a pro-investment environment have led to a resurgence of the oil and gas market in the United States. We expect this sentiment to continue through 2018 and into 2019.

While the Permian basin has attracted the most investment, drilling activity increased around other basins where Strad has operations. Our U.S. business has recovered nicely from mid-2016, and we expect that to continue for the balance of 2018.

In Canada, regulatory and political uncertainty continues to hamper any progress on commodity takeaway capacity issues. This uncertainty sentiment has led to muted capital expenditures from customers and concerns over the outlook of the industry. However, there has been renewed optimism in the industry with the commitment by the Canadian Federal Government to purchase and complete the Trans Mountain pipeline project. This commitment provides greater certainty that the project will be completed, albeit uncertainty still exists regarding the timing of construction.

In addition, a positive final investment decision for the LNG Canada project and, in turn, the Coastal Gaslink pipeline project will generate considerable opportunities for Strad.

I'll now hand over the call to Michael to speak to our financial results.

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [3]

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Thank you, Andy, and good morning, everyone. Before I get into the results, just a reminder for all on the call, that as highlighted in the press release and MD&A, Strad implemented changes to this quarter to its method of calculating EBITDA and discontinued product sales as a reportable segment.

During the second quarter, consolidated revenue and EBITDA decreased 2% and 17% to $28 million and $4.8 million compared to $28.5 million and $5.8 million for the same period in 2017. Revenue and EBITDA decreased due to lower drilling activity in our Canadian operations and timing of energy infrastructure projects, which was offset by a significant improvement in our U.S. operations year-over-year. Geographic diversification between the United States and Canada continues to benefit our business, as our U.S. operations contributed revenue of $10.8 million and EBITDA of $2.4 million for the quarter, an increase of 71% and 256% compared to $6.3 million and $0.7 million in the prior year. The increase in revenue and EBITDA was due to a combined 13% increase in rig counts in our 3 operating regions, which resulted in improved matting and surface equipment utilization to 32% and 51% compared to 29% and 25% in the prior year.

Revenue was further impacted by improved customer pricing year-over-year. Revenue and EBITDA generated from the company's Canadian operations during the second quarter was $17.3 million and $3.3 million compared to $22.2 million and $6.3 million in 2017. The decline in revenue and EBITDA year-over-year was due to a 9% decline in Western Canadian rig counts, which resulted in a drop in surface equipment utilization to 23% from 28% in the prior year. Our matting utilization also declined during the second quarter to 29% compared to 63% in the prior year due to the timing of energy infrastructure projects and lower drilling activity. Lower utilization levels were partially offset by year-over-year improvements in customer pricing for both surface equipment and matting. In addition, second quarter 2017 Canadian operations EBITDA included $1 million generated from the sale of used matting compared to $0.1 million in the second quarter this year. Sales of used matting was previously included in the product sales segment in 2017.

Revenue generated from Canadian energy infrastructure customers during the quarter accounted for $7.8 million or 45% of total Canadian operations revenue compared to $10 million or 45% of total revenue in the prior year. The timing of energy infrastructure projects can vary from year-to-year depending on many factors, such as weather and permitting approvals.

The company has increased the 2018 capital budget from $8 million to $13 million to meet the expected demand for matting in Canada and the U.S. during the remainder of the year. Capital expenditures in the second quarter totaled $3.9 million in Canada and $2 million in the U.S., consisting primarily of matting purchases. Corporate capital expenditures of $0.4 million in the second quarter were related to technology enhancement initiatives. Capital expenditures for 2018 to date totaled $11 million compared to our increased capital budget of $13 million. We will continue to assess the size of our capital program and make adjustments from time to time based on opportunities that arise and meet our minimum required metrics.

Turning to the balance sheet. As at June 30, our funded debt decreased to $6.2 million from $9.8 million at December 31, 2017. The reduction of funded debt during the second quarter was due to our continued focus on working capital management.

As at June 30, our funded debt to EBITDA ratio decreased to 0.3:1 compared to 0.4:1 at December 31, 2017.

During the second quarter, we used a portion of our free cash flow to purchase and cancel 1.5 million shares, bringing the total number of shares purchased under our normal course issuer bid to 2.7 million. Subsequent to the quarter, we received approval from the Toronto Stock Exchange to amend our normal course issuer bid to increase the maximum number of common shares that may be purchased thereunder to a maximum of 4.9 million shares.

That concludes my comments for this morning. I will now turn the call back over to Andy to speak to our outlook ahead.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [4]

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Thanks, Michael. Looking ahead for the remainder of 2018 and into 2019, Strad will continue to focus on opportunities to expand our high-growth, high-return matting business. We recognize equipment rentals today are more upstream oil- and gas-focused and provide limited growth opportunities and lower investment returns at current activity and pricing levels, particularly in Canada. Strad is now growing into the second largest matting provider in Canada and is making inroads in the U.S. market, as such, we see 2 distinct businesses that have emerged, namely: one, industrial matting; and two, equipment rentals. Matting provides temporary access and ground protection to a variety of applications, and as mentioned, is a high-growth, high-return business. Industrial matting has emerged from a niche product 10 years ago to a mainstream business today as a result of heightened environmental sensitivity, indigenous community involvement and enhanced safety standards.

A positive final investment decision on the LNG Canada project and/or commencement of the Trans Mountain expansion project are 2 major pipeline projects that would provide significant opportunities for matting, rental and related services. This is on top of the growing list of industry pipeline projects relating to mainline distribution and integrity work. This well-powered transmission and facility construction and maintenance projects are further opportunities for the matting business.

A go decision on LNG Canada in turn would begin construction on the Trans Canada Coastal Gaslink pipeline project across 670 kilometers from Dawson Creek to Kitimat, B.C. Given the environmental sensitivity, construction complexity and indigenous community presence along the Coastal Gaslink ride away, there'll be significant matting opportunities for Strad. The Trans Mountain expansion project would similarly yield significant matting opportunities for Strad along the 1,150 kilometer construction ride away.

Accordingly, looking ahead to the balance of 2018 and into 2019, we see significant opportunities for industrial matting. This is where we will invest our free cash flow from operations and look to utilize our almost debt-free balance sheet to maximize opportunities in front of us.

Operator, that concludes our prepared remarks for this morning, and we'd now be pleased to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Elias Foscolos of Industrial Alliance Securities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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I've got a question to start off with the discontinued product segment. Was there any revenue associated with that discontinued segment that flowed into Canadian operations during the quarter? And would there be anything else that would flow through on sort of the revenue line, that's kind of inventory or something like that?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [3]

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Elias, it's Michael here. I can take that one. So as you recall, product sales that we reported in the previous year, that was for reportable segment, consisted of 3 revenue streams: we had our in-house manufactured products; we had third-party flips; and then we also had sales of our used fleet assets flowing through product sales. And with the discontinuance of the in-house manufactured product segment, we looked at the reportable segment and decided to just collapse it into Canadian ops and U.S. ops. So going forward, revenue associated with used fleet sales will still -- will now flow through the Canadian operations and U.S. operations segment. So, for example, if we sell some used mats in the future, that will flow through each of those segments. And then in particular, for the quarter, there was really next to no revenue associated with used fleet sales in the quarter that flowed through. Very little impact from an EBITDA perspective that I highlighted in the comments, $0.1 million in Canada versus $1 million last year. And that would've flowed there from an EBITDA perspective. So then, yes, anything going forward will just flow through Canadian operations and U.S. operations.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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Okay. So in-house manufacturing is gone, so third-party sales continue? Or is that going to be discontinued?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [5]

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That would continue. We don't tend to see those on a regular basis. They're very one-off, but those would continue, yes. There's an opportunity for that.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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So with in-house gone, will -- theoretically, should we see a difference in margin going forward from the 2 reportable segments that continue, all things being equal?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [7]

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Yes. There might be a small impact to margins, small improvement to margins, that in-house manufactured products did have a lower margin going through that segment. So there could be a small impact to margins going forward, yes.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [8]

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Okay. Looking towards the U.S. operations, what I saw, if I strip out the amount of revenue that could have come from matting, I'd call it surface rentals, I think we would've seen about a 60% increase in revenue from the rental stream, big increase in utilization that's highlighted going from 25% to 51%, given that rig counts are up only 5% to 24% depending on the region. Can you add a little bit of color on the big step increase?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [9]

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Yes. It's Andy, Elias. I mean -- you look at the U.S. business, I mean, the momentum has continued to build there, and since the bottom out in the summer of 2016, rig counts have increased pretty materially. So we're just seeing the compounding effect of that. And as pricing increases and as utilization increases, we're going to see that continue to translate into our results, and as mentioned on the call, we would expect continued improvements throughout the 2018 based on that.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [10]

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And would it be fair to say that given that utilization has increased quite dramatically, you're in a position where you have some pricing power where you wouldn't have before, or is it still too low for that to occur?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [11]

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Our pricing has definitely improved and steadily improved. And certainly, we find -- with certain types of products in certain regions, we're seeing pricing -- more pricing power, far more pricing power than we had a year ago or definitely 2 years ago. So, for example, we're doing a lot of completions work in the Marcellus region, so a lot of fluid storage and related services. And certainly, there is more demand for that product, and we find the same with the Rocky's or the primitive activity in the Rocky's region. That's enabling us to push pricing on certain products.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [12]

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Okay. And one last question focusing on Canada and focusing on matting. Utilization dropped pretty dramatically, not nearly as much as revenue on the matting side. Two questions to follow up on that, do you have any kind of contracts that might be sort of take-or-pay in nature within that segment? Because revenue seems to have not tailed off or maybe before you had some pricing power. I'm trying to reconcile the -- how it stayed so resilient, relatively speaking, given the drop in utilization?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [13]

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Yes. I mean the drop in utilization was certainly offset by increased pricing year-over-year. We saw in Q2 of last year, our quoting activity starting to definitely return to, what I would call, 2014 pricing and beyond. So if you think of the pricing index of a 100 being 2014, kind of at the "peak". And then dropping, obviously, after that to a low in mid-2016. I mean, we've seen that pricing return to beyond a 100 or 100 and beyond. So where pricing certainly was much more robust and offset some of the drop in utilization. You mentioned -- you asked about take-or-pay, no, Elias, it's all project work. So typically, they're not take-or-pay-type arrangements, but effectively, there is a pretty significant commitment once mats are on the ground for a certain period of time. The mobilization and demobilization of that matting is a significant cost for the operator. So typically, if it's a 6-month project, it's a 6-month project, and we have a practically a fairly significant or firm commitment around that time frame based on the duration of the project, but not necessarily take-or-pay-type terms.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [14]

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Okay. And one last question, and it does regard the outlook. I guess, I'll phrase this carefully. Matting utilization was a low in Q2, and you decided to increase your capital budget and spend more on matting going forward. You must feel relatively confident about Q3, Q4 and beyond to be sort of putting the pedal down given the quarterly results. Would that be a fair statement?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [15]

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Yes. Couple of responses to that. One is that definitely matting, or as we've phrased it, kind of, industrial matting, giving -- given the diverse application of the matting product, not just for oil and gas leases, but most of our matting is actually used for other applications, a lot of pipeline construction as I noted in the comments. So certainly, from a directional perspective, particularly for a pipeline project and I highlighted Trans Mountain and TMX -- sorry, Trans Mountain and Coastal Gaslink. Certainly, directionally, we see more and more activity. Those are 2 very large projects that if they go, would be definitely a significant opportunities for us, but also, as I mentioned, I mean, there's a lot of other mainline work, distribution work and integrity work across Canada and U.S. that we feel we'll be able to take advantage of as the months and quarters unfold, and it's not just the 2018. I'll look at -- it's certainly into 2019. So I think in terms of -- I mean, I wouldn't really describe it as putting a pedal in a metal quite yet. We're definitely aware of potential projects around the corner that could definitely create a significant demand. So I think, just, we're trying to be prepared for that and be aware of that and make sure we're in a position to take advantage of opportunities when they come.

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Operator [16]

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(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Pernal for any closing remarks.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [17]

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Thanks very much, operator. I would like to thank everyone once again for joining us today, and that we look forward to speaking to everybody next quarter and updating you on our progress. Have a great day.

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Operator [18]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.