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Edited Transcript of SDY.TO earnings conference call or presentation 9-Nov-18 3:00pm GMT

Q3 2018 Strad Energy Services Ltd Earnings Call

CALGARY Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Strad Energy Services Ltd earnings conference call or presentation Friday, November 9, 2018 at 3:00:00pm 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

* Jason Tucker

Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services

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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 third 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 metric 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 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 such 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 ahead, Mr. Pernal.

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

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Thank you, operator, and good morning, everyone. Welcome to Strad's third 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 and our business. From there, I'll hand it over to Michael for a quick review of our third quarter financial highlights, after which I'll outline what we expect for the remainder of 2018 before opening the call to questions.

Macroeconomic conditions during the third quarter and into the fourth quarter of 2018 continue to be mixed. West Texas Intermediate pricing has ranged between USD 60 and USD 75 per barrel. Natural gas prices have been steady at Henry Hub. And positive U.S. tax changes have spurred a full investment environment in the United States.

In Canada, widening commodity price differentials have significantly hampered producer cash flow and investment. Lack of pipeline access to tidewater continues to plague the Canadian industry and the Canadian economy.

On a positive note, I am excited about Strad's outlook in large measure due to our recently created Industrial Matting division. While the division is new, we have been in this line of business for close to a decade.

The drivers of this business are positive. For instance, the building of large-scale infrastructure projects, such as LNG Canada, Coastal Gaslink pipeline and Enbridge's Line 3 will require extensive matting support. Moreover, there exists a deep pipeline of additional pending late-stage, large-scale projects and matting as utility extends well beyond the energy sector and geographically beyond our historical markets.

Revenue and EBITDA for Industrial Matting continues to trail 2017 due to the timing of major projects in 2018. Revenue in Canada for the 9 months of 2018 was $29.8 million compared to $39.8 million for the same period in the prior year. However, late in the third quarter, we began mobilizing a large matting project supporting the construction of TransCanada North Montney MainLine project, which will provide critical natural gas transmission infrastructure in British Columbia Peace River district. For Strad, this project will be positive for our earnings in the fourth quarter and into 2019.

In the United States, we continue to make inroads and grow our market share. For the first 9 months of 2018, U.S. Industrial Matting revenue has increased to $12.2 million from $5.2 million for the same period in 2017. To date, most U.S. matting opportunities have been driven by drilling activity. However, we continue to explore and are building matting opportunities outside of oil and gas in the United States.

The Equipment Rentals segment remains consistent with the prior year with $45.6 million in revenue for the first 9 months in 2018 compared to $45.1 million in revenue for the same period in 2017. In 2018, however, the U.S. has been the primary driver for the increase in equipment rentals activity, offsetting lower year-over-year results in Canada.

I'll now hand the call over to Michael to provide context to some of our financial information.

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

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Thank you, Andy, and good morning, everyone. This is our first quarter reporting with our financials segmented into 2 divisions, Industrial Matting and Equipment Rentals. As our Industrial Matting division has grown significantly and is providing more than half of our total revenue and the majority of our EBITDA, we thought it would be advantageous for our investors to have more transparency into these 2 divisions.

As Andy mentioned, 2018 is lagging 2017, and our total third quarter revenue decreased 8% to $31.2 million compared to $33.9 million. And EBITDA decreased 31% to $6.5 million compared to $9.4 million in the prior year.

On a segmented basis for the 3 months ended September 30, 2018, Industrial Matting revenue and EBITDA decreased 8% and 30% to $16.4 million and $5.5 million compared to the same period in 2017. Decreased revenue was primarily due to the timing of industrial matting projects in comparison to the same quarter of 2017. In Canada, there were fewer ongoing matting projects as compared to the same period in 2017, which resulted in lower utilization and pricing compared to Q3 2017. This was offset by an increase in U.S. matting revenue, which increased significantly through our growing presence in the regions in which we operate.

During the third quarter of 2018, Strad's matting fleet increased by 19% to 101,210 mats to meet the expected increase in customer demand during the remainder of 2018 and into 2019. Near the end of the quarter, Strad began deploying mats for a major project on North Montney MainLine in northeast B.C.

Turning to our Equipment Rentals segment for 3 months ended September 30, 2018. Revenue and EBITDA decreased 7% and 40% to $14.9 million and $1.6 million compared with the same period in 2017. Revenue decreased primarily due to lower Canadian activity, which was in large part the result of the discontinuance of the drill cuttings management service line that was still operating in the third quarter of 2017. The decrease was offset by higher revenue in the U.S., which was due to an increase in utilization to 43% from 38% and a 10% increase in average pricing when compared to the third quarter of 2017. U.S. utilization improved as a result of the increase in rig counts in the Bakken and Marcellus by 6% and 1%, respectively, which was offset by a 7% decrease in rig counts in the Rockies.

As of September 30, 2018, our balance sheet remained strong and we continue to focus on cost containment. With our available cash flow, we reduced our funded debt by 21% to $7.7 million, and as a result, our funded debt to covenant EBITDA ratio was 0.4:1 for the quarter. The strong financial position, combined with more than $41 million in unused credit facilities, provides a solid footing to grow our matting fleet organically and by acquisition.

On October 9, the company announced an increase to the 2018 capital program to $28.5 million from $15.5 million to meet the expected demand for matting in Canada and the U.S. for the balance of 2018 and into 2019. Capital expenditures in the third quarter totaled $10.1 million in Industrial Matting and $0.1 million in Equipment Rentals.

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

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

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Thanks, Michael. As I mentioned earlier, our board and management team are optimistic regarding the company's outlook. Demand today for our matting services continues to grow, and our pipeline of opportunities is deep in Canada and in the U.S. These opportunities will support announced pipeline construction, the recently announced LNG Canada project, the largest energy investment in Canadian history. LNG Canada and associated infrastructure and pipelines are expected to take 5 years to complete and will provide significant opportunity for our Industrial Matting and Equipment Rentals segments. Coastal Gaslink pipeline is expected to cost over 4.8 billion and take approximately 4 years to construct. We expect continued opportunities related to these and other projects to contribute meaningfully to our activity results in the Industrial Matting segment in future quarters.

Looking forward, we have an opportunity to organically double our matting fleet by 2021 and build on our foundation as a large and highly scalable matting provider in Canada and the U.S. That is why early in the fourth quarter and for the second time this year, we more than doubled the growth capital committed to matting as we focus on capitalizing on its potential.

With that, I'd like to hand the call back to the operator and we'd be now 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 couple of questions to ask, the first one is the North Montney MainLine project. You mentioned that, that would be commencing in Q4. Could you tell us how long that might run?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [3]

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Yes. In terms of project expectations, Elias, the project commenced in late Q3 and we believe will run substantially through Q4 and through Q1 2019.

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

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Thanks for that color. In the past, you had talked -- or you had given us some information before the new segmentation on revenues that came from the energy vertical versus infrastructure vertical. I was wondering, given some of the comment you made earlier about specifically Industrial Matting in the U.S. coming from mostly energy-related, if you have that data available for the current quarter or Q3?

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

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Sure, Elias, I can handle that one. Yes, as you mentioned, we used to refer to energy infrastructure for revenue. And we used to talk about that customer vertical, we'd indicated at the time that it was predominantly matting that was servicing that customer vertical, no different than today. So I think in terms of looking at what percentage of our revenue is non-oil and gas related really would focus on Industrial Matting and that percentage split just given the delay in projects that we've seen in Canada this year, it's about 45% non-oil and gas related for the quarter. in the U.S., we're still, as we had mentioned, heavily weighted towards the drilling and completion, so oil and gas side of the business.

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

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Was that 45% corporate overall or Canada?

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

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45% of Industrial Matting revenue.

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

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Okay, got it, with non-oil and gas.

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [9]

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Yes.

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

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One last question to help me and maybe the rest of the investment community. I'm trying to get my head around incremental EBITDA pickup, and this is something that you might not have offhand. But for every dollar of revenue, I consider the cost base probably is relatively fixed. So for every dollar of incremental revenue, what percentage of incremental EBITDA might we expect sort of on a pickup?

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

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Elias, it's Andy. Yes, I mean, it depends on the type of revenue, but certainly from a rental perspective, given the relatively fixed cost structure of our business -- or step fixed cost structure of our business, an incremental dollar of rental revenue falls disproportionately to the EBITDA line. Not quite all of it, but a high percentage. And from a service revenue perspective, it would be quite a bit less than that incrementally. But on a mix basis, you could say that 50% of that falls to the EBITDA line on an incremental revenue basis roughly rule of thumb.

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

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Okay. And that would be sort of across all product lines?

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

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Yes. For sure, that would be the case for Matting. And I think, generally speaking, in the Equipment Rentals side, it would be a similar kind of dynamic where incremental revenue -- rental revenue is -- disproportionately falls to the EBITDA line. The service-related components are less margins. So yes, you could use that rule of thumb, I think, across-the-board.

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Operator [14]

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(Operator Instructions) And our next question comes from Jason Tucker of Paradigm Capital.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [15]

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Just wondering maybe if you could give us a little bit more color in terms of looking out at LNG Canada and the Coastal Gaslink in terms of like timelines, maybe where you guys are in the process if there has been any bidding to date?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [16]

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We've had -- with respect to the Coastal Gaslink pipeline, as you know, there's different spreads. There's 4 different contractors involved. We have lots of discussions with various contractors along that line. We have not yet gone to bid specifically on that project but would anticipate doing that very shortly. So there's been a lot of scoping and preparation by TransCanada's contractors as well as kind of alignment with certain indigenous groups along the way. So we've been having a lot of preliminary discussions and look to go to -- respond to an RFP here probably in the next -- before the end of the year.

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Jason Tucker, Paradigm Capital Inc., Research Division - Analyst of Cdn. Energy Services [17]

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So it's not outside the realm then that there could be some impact from one of those projects from a 2019 perspective?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - CEO, President & Director [18]

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Correct. Yes, we would expect some impact in 2019 from those projects.

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Operator [19]

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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 [20]

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Thank you, operator. I'd like to thank everyone once again for joining us today. We look forward to speaking with you again next quarter and updating you on our progress. Have a great day, everyone.

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Operator [21]

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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.