Total Energy Services Inc. (TOT) Earnings Call Transcript

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2026 Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Daniel Halyk, President and CEO. Please go ahead.

Thank you, and good morning, and welcome to Total Energy Services Second Quarter 2026 Conference Call. Present with me is Yuliya Gorbach, Total's VP Finance and CFO. We will review with you Total's financial and operating highlights for the 3 months ended June 30, 2026, and then provide an outlook for our business and open up the phone lines for any questions. Yuliya, please go ahead.

Thank you, Dan. During the course of this conference call, information may be provided containing forward-looking information concerning Total's projected operating results, anticipated capital expenditure trends and projected activity in the oil and gas industry. Actual events or results may differ materially from those reflected in Total's forward-looking statements due to a number of risks, uncertainties and other factors affecting Total's businesses and the oil and gas industry in general. These risks, uncertainties and other factors are described under the heading Risk Factors and elsewhere in Total's most recently filed annual information form and other documents filed with Canadian provincial securities authorities that are available to the public at www.sedarplus.ca. Our discussions during this conference call are qualified with reference to the notes to the financial highlights contained in the news release issued yesterday. Unless otherwise indicated, all financial information in this conference call is presented in Canadian dollars. Total Energy's results for the 3 months ended June 30, 2026, represent record quarterly results, driven by continued strong North American demand for natural gas compression and process equipment and the deployment of upgraded drilling and service rigs in Australia and Canada. On a year-over-year basis, consolidated second quarter revenue increased by 31%. Contributing to this increase was $49.1 million of increased CPS segment revenue, $23.5 million from CDS segment and $3.4 million from well servicing as well as $2.5 million from RTS segment. Second quarter EBITDA increased $15.5 million compared to 2025 driven by increased activity and improved fabrication margins in the CPS segment and the deployment of upgraded rigs at the higher day rates in Australia and in Canada. Positively impacting 2026 second quarter financial results was a $3 million year-over-year increase in gain on sale of property, plant and equipment following completion of the disposition of the assets related to company's United States well servicing business that was discontinued in January 2026. Partially offsetting this gain were $2.3 million of nonrecurring expenses in the U.S. contract drilling business related to rig reactivations and resolution of several legacy legal disputes. Geographically, 43% of second quarter revenue was generated in Canada, 34% in the United States and 23% in Australia as compared to the second quarter of 2025 when 38% of consolidated revenue was generated in Canada, 38% in the United States and 24% in Australia. By business segment, Compression and Process Services contributed 55% of second quarter consolidated revenue, followed by the CDS segment at 29%, well servicing at 10% and the RTS segment at 6%. In comparison with the second quarter of 2025, the Compression and Process Services segment generated 53% of second quarter consolidated revenue, followed by CDS at 28%. Well servicing at 12% and RTS segment at 7%. Second quarter consolidated gross margin was 22% in 2026, which was 157 basis points lower than 2025. Contributing to this decline was a 223 basis point increase in second quarter revenue contribution from CPS segment as this business segment historically generates lower margins than other segments. A year-over-year increase in CDS segment and Australian Well Servicing margins partially offset a decline in CDS and RTS segment margin. Second quarter CDS segment revenue increased 33% compared to 2025. A 24% year-over-year increase in operating days was further supported by a 7% increase in segment revenue per operating day. Second quarter pricing increased compared to 2025 due primarily to increased pricing of upgraded rigs in Australia and Canada and stable pricing in the United States. Second quarter CDS segment EBITDA increased by 39% and segment EBITDA margin increased by 110 basis points compared to 2025 due to increased utilization and pricing that was partially offset by $2.3 million of nonrecurring expenses in the United States. Excluding these nonrecurring expenses, Second quarter segment EBITDA increased 54% and segment EBITDA margin by 353 basis points compared to 2025. RTS segment revenue for the second quarter increased 16% compared to 2025. This was the result of the U.S. acquisition completed in June of 2025 and increased industry activity in Canada. Higher costs associated with the change in the mix of equipment operating, competitive market conditions and this segment's relatively high fixed cost structure resulted in a 4% year-over-year decline in second quarter segment EBITDA and 594 basis point decrease in segment EBITDA margin. Second quarter CPS segment revenue increased by 37% compared to 2025 driven by increased fabrication sales and higher parts and service activity. Year-over-year second quarter CPS segment EBITDA increased by $4.7 million or 21%. EBITDA margin during the second quarter of 2026 was 193 basis points lower compared to 2025, primarily due to the year-over-year decline in higher-margin rental revenues following the sale of several rental units in 2025. The fabrication sales backlog at June 30, 2026, was $554.5 million, an 82% increase compared to $303.9 million backlog at June 30, 2025, and 24% higher than $446.9 million backlog at March 31, 2026. In well servicing, a 7% increase in revenue per service hour combined with a 4% increase in service hours resulted in an 11% year-over-year increase in second quarter segment revenue. Increased Australian and Canadian activity was partially offset by a substantial decline in U.S. activity following the discontinuation of U.S. well servicing operations in January 2026. Higher pricing, increased fleet utilization and cost optimization following the upgrade of several rigs over last year resulted in a substantial improvement in second quarter Australian operating income, which, together with the cessation of operating losses in the United States drove a 194% year-over-year increase in segment EBITDA. Total Energy's consolidated financial position remains very strong. At June 30, 2026, Total Energy had $81.9 million of positive working capital, including $50.5 million of cash. Cash on hand exceeded bank debt by $25.5 million at June 30, 2026. Total Energy's bank covenants consist of maximum senior debt to trailing 12-month bank defined EBITDA of 3x and a minimum bank defined EBITDA to interest expense of 3x. At June 30, the company's senior bank debt to bank EBITDA ratio was negative 0.07x as Total was in a net cash position. and the bank interest coverage ratio was 100.02x.

Thank you, Yuliya. We are pleased with our second quarter results. Despite the usual slowdown in Canadian field activity during spring breakup, our substantial investment over the past 2 years to upgrade our drilling and service rig fleets in Australia and Canada, combined with strong North American demand for Compression and Process Equipment resulted in Total achieving record quarterly revenue, EBITDA and net income. Our share repurchases over the past year amplified these results on a fully diluted per share basis. Our Compression and Process Services segment continues to see strong demand for its products and services. The fabrication sales backlog, which grew by 24% during the second quarter to a record $554.5 million at June 30, provides visibility into 2028 and current quoting activity remains vibrant. Expansion of our U.S. fabrication capacity in Weirton, West Virginia is on time and on budget with facility construction scheduled to be completed by the first quarter of 2027. The substantial investment made over the past 2 years to upgrade our Australian, Canadian drilling and service rig fleets continued to bear fruit during the second quarter, highlighted by a significant improvement in the financial performance of our Australian well servicing business and Canadian drilling rig market share gains. During the first half of 2026, we invested $65.8 million to maintain and grow our business. At the same time, we returned $22.5 million to our shareholders by way of dividends and share buybacks and reduced bank debt by $30 million. Total exited the second quarter in a very strong financial position with $50.5 million of cash and $150 million of credit available under our revolving bank credit facilities. Our financial strength and flexibility ensures we are able to continue to fund attractive investments, while at the same time, providing our owners with industry-leading shareholder returns through dividends and share buybacks. In that regard, our Board of Directors approved a $32.7 million increase to our 2026 capital budget. $24.9 million of this increase represents growth capital with $15.5 million budgeted for the recertification and upgrade of 3 service rigs and 1 drilling rig in Canada and 1 drilling rig in Australia. The remaining $9.4 million is directed towards the purchase and refurbishment of 44 pieces of major rental equipment in the RTS segment for deployment throughout North America. 2026 maintenance capital has been increased by $7.8 million and is being directed towards the replacement of 5 heavy trucks and 32 pieces of major rental equipment in the RTS segment as well as additional equipment maintenance in Australia due to higher-than-budgeted activity levels. Including $24.5 million of capital commitments carried forward from 2025, projected 2026 capital commitments totaled $144.6 million, of which $102 million constitutes growth capital and $42.6 million maintenance capital. $65.8 million of capital commitments have been funded to June 30, 2026, and we intend to fund the remaining $78.8 million with cash on hand and cash flow from operations. I would now like to open up the phone lines for any questions.

[Operator Instructions] Your first question comes from the line of Josef Schachter with Total Energy.

We got to onboard Josef on our payroll.

Well, first thing, Dan, congratulations on a fabulous quarter and much better than your peers. So I think that's fabulous. Let me start with Australia. Is there new basins that are very prolific like we have the Clearwater and the Montney that are really helping you grow? Or is it just that your equipment is just so much more modern and you prove to the clients that you can do a better job and a more efficient job, and that's why your business is picking up in Australia.

So no to the first question, hopefully, yes to the second question. I would say we've invested a significant amount of capital in our fleet in Australia, particularly the Saxon fleet that we acquired about 2 years ago. And so we've been pulling those rigs off the fence steadily. And I would say most of the growth has been gaining market share. There's been some market expansion. As you know, the natural gas prices in Southeast Asia are pretty strong. Domestic prices are strong. There's some political activity going on in Australia where you have a kind of the royal -- my fair share thing similar to what happened in Alberta a few years ago. So that tempers things a bit. But overall, I would say, Josef, it's just a stable steady market, and we've worked hard to try and do a good job and deliver value to our customers. So nothing too magical there.

Okay. Next question on Compression with the $554 million of backlog, how long of backlog do you really feel comfortable with? And if you start getting to the point where it gets too late, are you going to move to more higher-margin products and remove some of the lower-margin products from the lineup?

So first of all, we're seeing -- we commented the current backlog takes us into 2028. The lead times on major components, notably engines is naturally going to push and stretch this further. But our reported backlog is signed contracts, which those are firm. And so that is a firm outlook. Obviously, in a stronger market, you tend to gravitate towards how do you allocate scarce resources. You focus on the best margin work. The flip side is what we can do in the medium term is somewhat dictated by the availability of inputs, notably engines. And so we're managing that very tightly and trying to anticipate where the market is going to be over the next 4 years, literally. So we're not perfect, but I think our group has done a pretty good job there. And with Weirton coming on stream in Q1, we'll be ramping up post that, which honestly ties in reasonably well with kind of the lead times on engines. And that's obviously a constraint on near-term activity, but we're managing it like the whole industry is.

Can you talk about your thoughts of the outlook in both U.S. and Canada? We've got these robust commodity prices. Most people's budgets were -- E&P budgets were much lower. Are you getting people wanting to extend their term of rigs? Are they looking to get you to upgrade and they pay? How do you see the comparison between Canada and the States and allocation of capital?

I would say Canada was ahead of the states in terms of the ramp-up. You saw that in Q2, driven largely by oil and liquids plays. I would say right now, Canada is a pretty strong market. We have the second double to triple upgrade underway, and there is very, very strong demand for that rig. I expect we'll have that contracted perhaps sooner than we would have liked based on customer demand, but that's a good thing. The U.S. is catching up. You're seeing that in the U.S. rig count, particularly in Texas, New Mexico. It's definitely starting to pick up. But I would say it was behind Canada. So overall, obviously, if you have a crash in oil prices, all bets are off. But right now, it looks like it should have a pretty good back half with the North American rig count steadily creeping up, not going stupid, but good, steady improvement. And our rig upgrades in Canada really played well into that market.

Super. Last one for me. M&A, we've seen Ensign do a deal in Texas. We saw AKITA do the Fox deal. Do you see much activity? And is there -- are there things that you're looking at that are possible in terms of M&A activity for you guys into late this year, late this year or next year?

Yes. So we're looking at a lot of things. Honestly, we were disappointed that we weren't involved as much as we would like to have been on the Citadel deal, a little surprised by that given we had some previous involvement, but we're definitely active looking. And it comes down to do these work relative to other options such as share buybacks and organic. If our cost of equity gets more competitive, that certainly makes it easier for us to engage in M&A, which we've done in the past and certainly happy to do in the future. But we're going to stay disciplined. But I would say there's still much more consolidation in North America to be had.

Congratulations on a new record high on the stock. It was quite impressive to see how quickly the quote changed.

Your next question comes from the line of Tim Monachello with ATB Cormark Capital Markets.

Congrats, everyone, on a strong quarter, and congrats, Josef, on your new job. First question, just on the CPS segment, great bookings in the quarter and backlog is at record levels here. We saw that revenue level tick meaningfully higher quarter-over-quarter and record revenue for the quarter as well or for the company in the quarter as well. Do you think that, that revenue level will continue to move higher through the back half of the year alongside higher backlog? Or is there anything sort of onetime in nature that allowed you to push more through your current capacity in Q2? And then second part of that question would just be, how much do you think that the Weirton expansion increases your revenue capacity in the CPS segment for '27?

So I would say, first of all, in the U.S., we've achieved some of the efficiencies of the expansion beginning in Q3. Obviously, the full impact of that will be felt once we have the facility done and fully staffed, and that will play out over the course of 2027. We've done some internal restructuring of our manufacturing processes in the U.S. to mirror kind of what we do in Canada and some of the efficiencies we're getting that now. Really for a material step-up in throughput, we need the new facility and we need it fully staffed. So you'll see that occur in 2027 over the course of several quarters. The other thing that's going to limit us is major inventory arrivals. So when we planned the expansion 2 years ago, lead times were probably 1/3 of what they are today. So we're working around that. But like I said, our group there has done a pretty good job managing major component ordering. But that's certainly combined with capacity limitations in the plant going to limit things until we get that fully up and running late next year. So I wouldn't expect you're going to see major increases until we get that plant up and running.

Was the revenue throughput in Q2 anomalous in any way?

No, I wouldn't say so. I think it was just natural working through our backlog. And like I said, a few efficiencies, which you saw in improved margins despite a significant drop in the active rental fleet because we sold a bunch of units last year. We also had a pretty sizable return. Again, we don't get to -- the rental fleet utilization at quarter end is one point in time. There's a lot of movement that occurs. And subsequent to quarter end, for example, we signed a new rental arrangement for a number of idle packages. So that will go up and down. But really, we achieved some efficiencies, which we're seeing in margins with our U.S. operations. So we're continuing to manage this. It's definitely challenging with the lead times on engines. But like I said, we're doing the best we can.

Got it. In terms of the marginal order flow, how does the margin profile within, I guess, the new bookings compare to the average within the backlog?

Yes, we're not going to comment specifically, but I would hope in a strong market that our margins aren't going down. I don't think our sales team is that incompetent there. We've got a good team there. So yes, I think like anything, you have a scarce resource, the market will push margins higher. That said, it's still a very competitive market, and we compete in that. But again, I think as we build that business and grow our fabrication capacity, you naturally have apart from market tailwinds, you also have efficiencies of scale and your overhead absorptions are better and all of that. And we're also -- all the costs of ramping up, we're expensing and we're not breaking that out. That's just to me, part of growing the business as opposed to the capital cost for the plant. So we're absorbing that as we speak as well. But yes, no, I would say in the current market, it's definitely a favorable environment to try and continue to grow your margins there.