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Edited Transcript of SDY.TO earnings conference call or presentation 10-May-19 2:00pm GMT

Q1 2019 Strad Energy Services Ltd Earnings Call

CALGARY May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Strad Energy Services Ltd earnings conference call or presentation Friday, May 10, 2019 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. - President, CEO & 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

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services 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 Ltd.'s first 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 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. - President, CEO & Director [2]

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Thank you, operator, and good morning, everyone. Welcome to Strad's First Quarter 2019 Financial Results Conference Call. With me today, as usual, is Michael Donovan, our CFO.

For today's call, I'll start off 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 first quarter results and financial highlights, after which I'll outline what we expect for the balance of 2019 before turning it over to any questions.

2019 will mark our first full year with our primary focus on the high-growth Industrial Matting segment. At our AGM this year, we will propose to change our name to Strad Inc. to better reflect the broad range of sectors we participate in across North America. These sectors include large-scale infrastructure projects for pipeline construction and maintenance, power transmission, renewable energy projects, mining and, of course, oil and gas.

In 2018, we set a goal to double our matting fleet to 180,000 units by 2021 by dedicating our entire capital growth program of $30 million in 2019 to this division, knowing Industrial Matting can drive growth and profitability.

The fundamentals for Industrial Matting remained strong in Canada and the U.S., as evidenced by the momentum of our large-scale matting project for the construction of the North Montney MainLine in Northeast B.C. that started in late 2018 and continued through the first quarter of 2019. This project helped drive our Industrial Matting segment to a first quarter revenue of $17 million, a 70% increase over the same period in 2018.

In the United States, we continue to make inroads and grow our Industrial Matting presence. For the first quarter, our revenue of $4.4 million was a 46% increase when compared to the prior year, and we expect this momentum to continue. With increasing environmental best practices and regulation throughout North America, we expect the overall matting market to increase from what we have estimated as $2 billion per year.

The Equipment Rentals market in Canada continues to be negatively affected by macroeconomic conditions for the energy sector. In Canada, we continue to see challenging times ahead. First quarter rig counts were down approximately 32% year-over-year in Canada, and the forecast for the remainder of the year is marginally ahead of the historic lows experienced in 2016.

As a result, the Equipment Rentals segment had revenue of $13 million, down 27% for the quarter compared with prior year. However, this decrease was despite an 8% increase in revenue from our U.S. business during the first quarter.

We began moving equipment from Canada to regions in the U.S. experiencing higher demands. Year-to-date, we have moved approximately $2.5 million of assets to the U.S., including the Permian Basin in West Texas where we have secured a long-term project with a super major E&P customer. This is the company's first foray into the Permian, and we look to leverage this relationship in this region and continue to be opportunistic with our Equipment Rentals fleet, deploying equipment in the U.S. wherever possible.

I'll now hand the call over to Michael Donovan 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.

On January 1, 2019, the company adopted the new IFRS leasing standard, IFRS 16, which resulted in operating leases being recognized on the balance sheet. As a result of the adoption of IFRS 16, $1.2 million of what would have historically been operating expenses are now recognized as right-of-use amortization, contributing to our year-over-year improvement in first quarter EBITDA. We expect the impact of IFRS 16 to increase 2019 EBITDA by $4.8 million.

The first quarter continued our momentum from the end of last year, and our total revenue increased 9% to $30.9 million, compared to $28.4 million in 2018. And EBITDA increased 75% to $9.2 million, compared to $5.3 million in the prior year. The increase in revenue and EBITDA was primarily attributable to stronger results in our Industrial Matting segment year-over-year.

On a segmented basis for the 3 months ended March 31, Industrial Matting revenue and EBITDA increased 70% and 156% to $17.7 million and $7.6 million compared to the same period in 2018. The increase in revenue was primarily due to the large-scale matting project, which was completed in April.

Utilization rates for Industrial Matting were up in the first quarter in both Canada and the U.S. Our matting fleet increased by 32% year-over-year by approximately 29,000 mats, and utilization increased to 36% from 27% when compared with the prior year.

Turning to our Equipment Rentals segment. For the 3 months ended March 31, revenue decreased 27% to $13.1 million primarily due to lower Canadian activity where rig counts were near historic lows. The decrease was partially offset by an average utilization increase from rig counts in the Bakken, Marcellus and Rockies regions in the U.S. And as Andy mentioned, we moved approximately $2.5 million of assets into the U.S. year-to-date, and we expect this trend to continue.

EBITDA for the quarter decreased by 24% to $2.5 million compared with the prior year. Subsequent to the quarter, the Board of Directors approved an additional $8 million of capital spending, bringing the approved capital for 2019 to $26 million of an expected $30 million total capital program.

Capital additions for the quarter totaled $6.6 million, which was deployed to maintain and grow the company's Industrial Matting fleet to meet the expected demand in Canada and the U.S.

With our available cash flow for the quarter, we continue to grow our matting fleet, made payments on our long-term debt and bought back 482,000 shares through our NCIB. As of March 31, our balance sheet remains strong with funded debt at $8.2 million, and we continue to focus on cost containment. The strong position, combined with more than $38 million in unused credit facilities, provides a solid footing to grow our matting business.

That concludes my comments for this morning. I'll 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. - President, CEO & Director [4]

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Thanks, Michael. Strad's Board and management team are optimistic regarding the company's outlook. Strad believes a strong Board is fundamental to a strong company, and with that, we welcome Mr. Lee Matheson of Ewing Morris to our Board of Directors. Over the past 2 years, Ewing Morris has become one of our largest shareholders and a strong supporter of Strad and our strategy to focus on Industrial Matting. We look forward to Lee's contributions to our Board.

Demand today for our matting services continues to grow, and our pipeline of opportunities is deep here in Canada and the U.S. Despite an expected slowdown in activity in Q2, we have several committed Industrial Matting projects, which will launch later this summer and early fall.

Formal approval of the LNG Canada project and associated Coastal Gaslink project will continue to provide significant opportunity for the Industrial Matting segment in late 2019 and beyond. With the potential approval and launch of the Trans Mountain expansion project, we expect similar opportunities in 2020 and beyond.

Looking forward, we have a goal to organically increase our matting fleet to 180,000 units by 2021 and build on our foundation as a large and highly scalable matting provider in North America. We have an expanded matting fleet, a growing pipeline of opportunities and committed capital as we look to increase our market share in this growing segment.

With that, I'd like to hand the call back over to the operator to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Elias Foscolos with Industrial Alliance.

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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 on matting utilization. It was extremely strong in Q1, and I understand that is it's specifically project-related. Do you see matting utilization reverting to the more normalized levels that we've seen over the past few years by Q3 and Q4 despite the increase in matting that you're projecting?

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

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Michael here. So in terms of the matting utilization in the first quarter, for sure, it was related to the large projects that we are working on in Northeast B.C., similar to what we saw in the fourth quarter of 2018, higher utilization. In terms of utilization going forward, when we look at the matting business, the third quarter is typically a peak season for that business, so we would -- we do expect to see utilization increasing in the third quarter, for sure, as the committed projects that Andy alluded to begin work in the summer and late fall.

Second quarter here, we're expecting utilization to be a bit softer, just given less activity on the meter at this point. And then depending on the length of the projects in the third quarter, we'll see that activity most likely continue into the fourth quarter of 2019.

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

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Okay. Just a follow-up on that, when you say a bit softer, are you meaning a bit softer on a sequential basis? I would expect that. Or a bit softer relative on a year-over-year basis relative to Q3?

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

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On a sequential basis. On a sequential basis, yes.

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

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Okay. I wanted to focus on now, last thing, the U.S. and moving equipment into the U.S. And also, I might have missed this, the color that you added regarding a contract in the Permian. When might we be able to see the impact of that on the financial results? I wouldn't necessarily expect Q2, but maybe I'm incorrect.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [7]

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Yes. No, that's -- you didn't miss anything there, Elias, in terms of we haven't disclosed or talked about that before, new information. Yes, so we have some equipment rental work in the Permian, which is a fairly large project, as I mentioned, with a large customer that's causing us to pull quite a bit of equipment south of the border. So we're incurring some pretty significant upfront costs, but we're doing that to reposition that equipment in, obviously, better utilization and better return and more active areas, goes without saying, compared to Western Canada.

So we're certainly going to see some initial potential even negative contributions, given the pretty significant trucking charges that are incurred to move that equipment. But over time, we'll see some additions to revenue and EBITDA, based on that. I mean it's not -- I think it will be more small step changes that are evident, not anything material at this point.

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Operator [8]

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(Operator Instructions)

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

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Operator, it's Andy. I'll just add a little more color on the West Texas project in terms of our strategy there. So, certainly, this is having kind of, I call it, an anchor tenant in the West Permian -- sorry, in West Texas in the Permian Basin. It's been very beneficial for us to plant the flag down there. We've been looking to do that for some time and certainly goes to the theme across the space where equipment is leaving Canada at a pretty frantic pace and moving to the United States. So we're no different in that sense where we -- definitely, any piece of equipment we have in Western Canada today, we would have better utilization for it in the U.S. and at better rates and at U.S. dollar rates. So the returns are far greater in the United States for us on that equipment.

As I mentioned, the challenges just the trucking and transportation costs that we typically have to incur to get that equipment logistically in the right spots for our customer. But certainly, based on the momentum in the United States, we've seen, particularly in the Rockies, more so in the Marcellus and, of course, in the Permian, we believe that investment will (inaudible). So we'll see some initial costs to move that equipment, but we're definitely going to continue to focus on that. We're definitely going to leverage our relationship with this new customer and -- in Texas to look at other opportunities there.

Today, we have -- we don't disclose this, but just for disclosure on this call, our book value, U.S., Canada, on Equipment Rentals, is about 55% Canadian, 45% U.S., and we'll see that shift over time to where we have our fleet predominantly placed in the United States. Just wanted to add to that color, operator. And back to you if there's any other questions.

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Operator [10]

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(Operator Instructions) Our next question is a follow-up from Elias Foscolos with Industrial Alliance.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [11]

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Thanks for that color on the redeployment, Andy. Just a bit of a follow-up question that's related to Industrial Matting in the U.S. It seems like a lot of the Industrial Matting is still tied to the drill bit. Can you comment on the outlook for Industrial Matting in the U.S. that could be related to infrastructure projects?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [12]

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Yes, absolutely. I mean, certainly, we see a significant opportunity there in the areas of pipeline and also power transmission and other segments. You are right today that a vast majority of our revenue generated from Industrial Matting in the U.S. is oil and gas, upstream oil and gas-related, so drilling completions-related, where we've got quite good penetration with our customer base in the regions we operate.

So, for us, I mean it's about repositioning our sales team and hiring some new salespeople to focus on that U.S. market, which we're doing now. We have several people doing that, but it takes time. It's just a longer sales cycle to get into some of these larger projects. We're not as familiar with the U.S. territory, but we're gaining knowledge quickly and we hope to see some meaningful additions in that segment, I would say, later this year and certainly in years to come.

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Operator [13]

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(Operator Instructions) Our next question comes from Jeff Fetterly with Peters & Co.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [14]

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Just a clarification off of that last question. Of the matting fleet today, how much of it is currently located in the U.S?

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

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Matting fleet today, Jeff, we've got about -- of our 118,000 sheets, it will be about 20% to 25% in the U.S. Vast majority, still, is in Canada.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [16]

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And when you look at the utilization between the Canadian and U.S. matting fleets, is there a material difference right now?

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

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There's a pretty sizable difference in terms of the fleet in the U.S. is actually fairly highly utilized, parts of that. Again, there's -- we kind of divide our fleet into kind of the wood access matting and then other matting, which would include rig mats or other specialty mats. U.S., we have -- we're beginning to accumulate a bit of an inventory in timber mats, which are typically used especially in pipeline applications down there. But we -- yes, we see, definitely -- so far, we've seen some higher utilization on the wood matting fleet in the U.S., as we've been more surgically supplying customers with product. So we've almost gone from procuring direct-to-site, and so that's yielded some pretty good utilizations on the U.S. site today.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [18]

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And the matting additions you're adding in 2019, is there a bias or a weighting between Canada and the U.S.?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [19]

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So far, it's been -- it's more -- been more Canada than U.S., but we're starting to shift that as we gain a little bit more foothold, a little bit more knowledge and are bidding more in the U.S. market. So we would see that start to shift in the back half of the year.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [20]

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Okay. The matting projects that you referenced earlier in terms of starting up this summer and fall, from an aggregate basis, can you give us a sense of what magnitude they are?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [21]

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Yes. I mean we won't get into specifics, for competitive reasons, but I would say that on a combined basis right now, what we have committed to would be similar in nature to the impact of North Montney MainLine project that we've seen in Q3 and -- Q4, Q1. So it's a fairly substantial number of projects when you combine them in terms of commitments in terms of the size and scope of those.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [22]

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And you referenced that North Montney was in excess of 20,000 mats?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [23]

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Yes.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [24]

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Did I say that correctly?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [25]

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Yes. We've stated that part, so you're correct, Jeff.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [26]

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Okay. And what is -- what's your -- in terms of fleet utilization, when you look at the project mix and the line of sight you have, combined with the fleet additions, do you expect that utilization will be higher when you look at the peak of Q3 and Q4 compared to where you were last year?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [27]

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Yes. When we look at utilization for Q3, we would probably see, overall, similar utilization year-over-year. Q3 this past year was probably a little in excess on Q3 and not sure yet on Q4. But yes, so at or above utilization in the prior year during the construction season, which we would call Q3 and into Q4.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [28]

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Okay. And just a clarification, so you referenced a couple of different times higher pricing, but also how there was a mixed element that impacted that. When you look at the market right now, apples-to-apples or specific product lines, are you seeing price interaction in any areas of the matting business, Canada or the U.S.?

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Michael R. Donovan, Strad Energy Services Ltd. - CFO [29]

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No, Jeff. Michael here. I'd say from a pricing perspective, we're seeing things pretty consistent. That pricing increase that we've referenced year-over-year is 15%, so relatively modest. But that just depended on kind of projects and the weighting of matting in the U.S. versus Canada when you start to factor in exchange rates. But overall, if we look at the different product types that we have, predominantly the access mats in both countries, pricing has been very stable to this point.

As you start to quote on longer-term projects, as we've talked about before, from a returns perspective, you can trade maybe a bit of pricing, if you have to, for a longer duration for the utilization component. But at this point, yes, year-over-year, we've seen things relatively consistent in both markets.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [30]

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And what is the status in terms of bidding or timing associated with Coastal Gaslink?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [31]

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There's been some bidding on some of the spreads for Coastal Gaslink, so still waiting to kind of, a, hear on those; and, b, each of those, each of those sections or spreads will have different contractors and are being bid separately. So -- and the timing is different, so it's kind of like about 7 or 8 mini projects or smaller projects within the entire Coastal Gaslink project.

So still no word on that, and again, we're still waiting in terms of some of the spreads to bid on, on those as well with the various contractors, so still to be determined at this point.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [32]

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Last question. So you have approved $26 million of $30 million for capital spending. How strong is your line of sight for where that, both $26 million and $30 million, will go? Is it dependent on Coastal Gaslink coming through at some point in 2019 to absorb that capacity? Or do you have a pretty good sense of end markets or customers for those, the new mats?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [33]

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You know what, I would say that not just Coastal Gaslink and, potentially, trends. I mean there are many other projects that are out there and being bid on. So our sales funnel continues to be pretty deep, as I mentioned in my comments. I would say that the capital build, our strategy is to have some element of new product available. Some of these projects are more environmentally sensitive, require new matting, brand-new matting, and so we feel we need to have some element of our fleet as new and ready to go, so we can potentially execute on some of these larger applications, larger projects once they launch.

So I think in terms of the buildout of the capital program, it's not necessarily dependent upon Coastal Gaslink. And again, the sizing of that project is still to be determined by the contractors, so there's still a lot of wide ranges in terms of potential matting, even on CGL. So we're not exactly sure what -- how that's going to shake out at this point, but being as ready as we can be, for that and other projects, quite frankly, in both countries is important. And so we've certainly had more newbuild and newbuild in our inventory than we've ever had at this point. And again, that's just to be poised and ready for not only CGL, but any project.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [34]

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Sorry, I lied. One last clarification. On the Permian expansion, is there any bias to the type of equipment that you're deploying and utilizing in that market?

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [35]

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Yes. A lot of fluid storage-related equipment, Jeff, that would be the primary driver on any ancillary equipment on-site to support that.

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Operator [36]

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(Operator Instructions) And I'm not showing any further questions at this time. I would now like to turn the call back over to Andy Pernal, President and CEO, for any further remarks.

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Andrew Robert C. Pernal, Strad Energy Services Ltd. - President, CEO & Director [37]

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Thanks, operator. Nothing further. And thank you, everybody, for joining us today. Well, we will talk to you soon. Bye-bye.

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Operator [38]

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