Good morning, ladies and gentlemen.Welcome to the Trican Well Service Q1 2022 Earnings Results Conference Call and Webcast.As a reminder, this conference call is being recorded.
I would now like to turn the meeting over to Mr. Brad Fedora, President and CEO of Trican Well Service Ltd.Mr. Fedora, please continue.
thank you very much.Good morning, ladies and gentlemen.I want to thank you for joining the Trican conference call.A brief overview of how we intend to conduct the conference call.First, our Chief Financial Officer, Scott Matson, will provide an overview of quarterly results, and then I will discuss issues related to current operating conditions and near-term prospects.Daniel Lopushinsky will talk about logistics and new technologies.Then we’ll open the phone for questions.Several members of our team are with us today and we will be on hand to answer any questions that may arise.I will now turn the call over to Scott.
Thanks, Brad.Therefore, just before we begin, I would like to remind everyone that this conference call may contain forward-looking statements and other information based on the company’s current expectations or results.Certain important factors or assumptions that were applied in drawing conclusions or making projections are reflected in the Forward-Looking Information section of our MD&A for the first quarter of 2022.A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial prospects.Please see our 2021 Annual Information Sheet and the Business Risks section of the MD&A for the year ended December 31, 2021 for a more complete description of Trican’s business risks and uncertainties.These documents are available on our website and on SEDAR.
During this call, we will refer to several common industry terms and we will use certain non-GAAP measures that are more comprehensive in our 2021 annual MD&A and our 2022 first quarter MD&A describe.Our quarterly results were released after market close last night and are available on SEDAR and on our website.
So I’ll turn to our results for the quarter.Most of my comments will be compared to the first quarter of last year, and I will provide some comments on our results in order compared to the fourth quarter of 2021.
The quarter started a bit slower than we expected due to some extreme cold weather after the holidays, but has grown fairly steadily since then.Activity levels in our service lines improved significantly compared to last year due to continued strength in commodity prices and an overall more constructive industry environment at the start of the year.These factors resulted in the average rig count in Western Canada being just over 200 rigs this quarter, a significant increase from the fourth quarter of 2021 and somewhat stronger than the first quarter of last year.
Revenue for the quarter was $219 million, an increase of 48% compared to our first quarter 2021 results.From an activity perspective, our overall job count was up about 13% year over year, and total proppant pumped, a decent measure of well strength and activity, was up 12% year over year.Another major factor affecting our revenue in the quarter was a generally stronger pricing environment compared to the same period last year.However, as you can see from our relatively flat year-over-year margin percentages, we’ve seen very little in terms of profitability as sharp and persistent inflation pressures have absorbed nearly all of the upside.
Fracking operations have been busy consecutively from the fourth quarter of 2021 and are significantly busy compared to the same period last year.We are excited to deploy our first stage 4 dynamic gas mixing frac extension this year.Feedback on its operational performance has been very positive and we are seeing increasing demand for state-of-the-art equipment in the basin.This brings our fracturing crew to seven for the quarter, with a utilization rate of about 85%.
Our operations continue to focus on pad-based programs, which help minimize downtime and travel time between jobs and help improve our overall efficiency.Fracking margins remained effectively stable year over year compared to last year, as inflation pressures experienced from year-end through the first quarter offset most of the pricing improvements we achieved.Our cementing service line benefited from an increase in rig counts, which provided steady utilization through much of January and February before slowing in mid-March and entering the spring breakup.
Coiled tubing days increased 17% sequentially, driven by our first calls with core customers and our continued efforts to grow this segment of the business.
Adjusted EBITDA was $38.9 million, a significant improvement from the $27.3 million we generated in the first quarter of 2021.I would point out that our adjusted EBITDA numbers included expenses related to fluid end replacement, which totaled $1.6 million in the quarter and were in the period.I would also like to point out that the Canada Emergency Wage and Rent Subsidy Program, which was implemented throughout 2021, made no contribution during the quarter, which contributed $5.5 million to the first quarter of 2021.
It’s also important to note that our adjusted EBITDA calculation does not add back the impact of cash-settled stock-based compensation amounts.Therefore, to more effectively isolate these amounts and to more clearly present our operating results, we have added an additional non-GAAP measure of Adjusted EBITDAS to our continuing disclosures.
We recognized a $3 million charge related to cash-settled stock-based compensation expense during the quarter, reflecting the rapid increase in our share price since the end of the year.Adjusting for these amounts, Trican’s EBITDAS for the quarter was $42.0 million, compared to $27.3 million for the same period in 2021.
On a combined basis, we generated positive earnings of $13.3 million or $0.05 per share in the quarter, and again we are very pleased to show positive earnings in the quarter.The second metric we’ve added to our continuing disclosure is free cash flow, which we’ve outlined more fully in our MD&A for the first quarter of 2022.But in practice, we define free cash flow as EBITDAS minus non-discretionary cash-based expenses such as interest, cash taxes, cash-settled stock-based compensation and maintenance capital expenditures.Trican generated free cash flow of $30.4 million in the quarter, compared to approximately $22 million in the first quarter of 2021.The stronger operating performance was partially offset by higher maintenance capital expenditures in the budget for the quarter.
Capital expenditures for the quarter totaled $21.1 million, divided into maintenance capital of $9.2 million and upgrade capital of $11.9 million, primarily for our ongoing capital refurbishment program to upgrade a portion of our conventionally powered diesel with Tier 4 DGB engines Pump truck.
As we exit the quarter, the balance sheet remains in good shape with positive non-cash working capital of approximately $111 million and no long-term bank debt.
Finally, regarding our NCIB program, we remained active during the quarter, repurchasing and canceling approximately 2.8 million shares at an average price of $3.22 per share.In the context of returning capital to shareholders, we continue to view share repurchases as a good long-term investment opportunity for a portion of our capital.
OKThanks, Scott.I’ll try to keep my comments as brief as possible because most of the prospects and comments we’re going to talk about today are very much in line with our last call, which was a few weeks or two months ago, I guess.
So really, nothing has changed.I think — our view on this year and next year continues to improve.First quarter activity increased significantly across all of our business lines compared to the fourth quarter as a result of commodity prices.I think for the first time since the late 2000s we have $100 oil and $7 gas.Our client’s oil wells will pay off within a few months.So that’s — we’re happy to see that they’re making money and they see their drama as a great investment, especially against the backdrop of what’s going on in North America.
We averaged over 200 rigs in operation during the quarter.So, all things considered, oilfield activity is pretty good overall.I mean, we did have a slow start to the quarter just because I think everyone was on pause for Christmas.And then when the well is drilled and then we go to the side of the completion where we fit, it’s going to take a couple of weeks, which is to be expected.And always – and we’ve had some really bad cold weather affecting the live events and the rails.But this is always to be expected.I don’t remember the first quarter where we didn’t have some kind of weather event.So we included it in our budget, of course nothing should be surprising.
The other thing, I think, what’s different this time is that we do have ongoing COVID disruptions in the field, we’re going to have various field workers shut down for a day or two, we’re going to have to scramble to get people off the workday, Wait, but there’s nothing we haven’t managed to accomplish.But I think, thank goodness, that seems to be all but gone.I think we’re getting back to normal in terms of COVID in Western Canada.
We peaked – we averaged over – over 200 rigs.We peaked at 234 rigs.We didn’t actually get the kind of completions activity in the type of rig count you’d expect, and a lot of that activity spilled over into the second quarter.So we should have a pretty good second quarter, but we don’t see a system tightening that corresponds to the rig count.I think we’ll discuss that here later, but I think we’ll see that in the second half of the year.
So far in the second quarter, we have 90 rigs, which is much better than the 60 we had last year, and we’re almost halfway through the breakup.So we should start to see activity start to build momentum in the second half of the second quarter.So the thing – the snow is gone, it’s starting to dry up and our clients are very eager to get back to work.
The majority of our operations are still in British Columbia, Montney, Alberta and the Deep Basin.Nothing will change there.Just as we have oil at $105, we see oil companies in southeastern Saskatchewan and the whole region — or southeastern Saskatchewan and southwestern Saskatchewan and southeastern Alberta, they’re very Active, we expect them to be active.
Now with these gas prices, we’re starting to see plans for coalbed methane wells unfold, that is, shallow gas drilling.It is coil based.They use nitrogen instead of water.It’s something we’re all very familiar with, and we think the Trican has the edge in this game.So we’ve been active all winter, and we expect to be even more active in the coming years.
We ran — during the quarter, we ran 6 to 7 workers, depending on the week.18 cement teams and 7 coil teams.So nothing really changed there.We did have a seventh crew in the first quarter.Staffing remains an issue.Our problem is keeping people in the industry and that’s a priority.Obviously, if we want to expand and we want to acquire — we see the activity of our customers expanding and we want to be able to keep up with them, obviously we not only need to attract people, but we need to be able to retain them.We’re still losing people in the oil and gas fields, and we’re losing them to other industries as their wages increase and they seek better work-life balance.So we’re going to keep trying to get creative and address those issues.
But to be sure, the labor issue is both a problem we need to address, and probably not a bad thing, because it will prevent oilfield service companies from expanding too quickly.So some things need to be managed, but I think we’re doing a good job of trying to figure things out.
Our EBITDA for the quarter was decent.Of course, we’ve discussed this before.I think we need to start talking more about free cash flow and less about EBITDA.The benefit of free cash flow is that it removes all balance sheet inconsistencies between companies and addresses the fact that some of these pieces of equipment require extensive repairs.Whether you choose to spend or capitalize, it’s all about free cash flow.And I think in general, the market wants to see companies generate good free cash flow on their assets.I think Scott has talked about it.
So we managed to raise the price.If you look at that compared to a year ago, our various service lines have grown from 15% to 25%, depending on the customer and the situation.Unfortunately, all of our growth has been offset by cost inflation.So over the past 12 months, our margins have been frustratingly stable.I mean, over the last 15 months, our operations have been at a margin advantage compared to our competitors.But we’re thinking now that we’re going to start seeing EBITDA margins in the mid-20s, which is really what we need if we’re going to get a double-digit return on invested capital.
But I think we’ll get there.It will only – need more discussions with our clients.Obviously, I think our customers want to see us have a sustainable business.So we’re going to keep trying to get some profit for us, not just pass it on to our suppliers.
We did see inflationary pressures very early on.In the fourth and first quarters, we were able to maintain our margins when the margins of many were eroded.But – and not just – we have a lot of responsibility to our supply chain team to make sure we’re ahead of this and we’re able to model it all winter.We will continue to work hard on this, and inflationary pressures will not go away.And I think it’s well known that when you have $100, $105 oil, diesel prices go up a lot, and diesel affects the entire supply chain.Nothing is excluded.Whether it’s sand, chemicals, trucking, everything, or even 3rd party services at the base, I mean they have to drive the truck.So diesel just ripples through the entire supply chain.
Unfortunately, the frequency of these changes is unprecedented.We expected to see inflation, but we didn’t see — we didn’t really see — we hope we don’t start getting price increases from suppliers every week.Customers get very frustrated when you talk to them about a few price hikes a month.
But in general, our customers understand.I mean, they’re obviously in the oil and gas business, they’re taking advantage of high commodity prices, but naturally, that does impact all of their costs.So they did take a cost increase to offset our cost increase and we’re going to work with them again to get some of the profit for Trican.
I think I’ll turn this over to Daniel Lopushinsky now.He’ll talk about supply chains and some layer 4 technologies.
Thanks, Brad.So from a supply chain perspective, if Q1 proves anything, it’s that supply chain has become a major factor.In terms of how we’re managing our business against the backdrop of higher activity levels and the continued pricing pressure that Brad mentioned earlier.If activity picks up, the entire supply chain becomes very weak in the first quarter, which we think will come later in the year.From a management perspective, this will become even more important.
So we believe we have very good logistics and we welcome a tight market on that and how we manage our suppliers.As we’ve communicated, we do experience much higher inflation across the supply chain than ever before.Clearly, diesel prices, which are directly related to oil prices, spiked at the start of the year, increasing exponentially from January, February and March.
As an example, if you look at the sand, when the sand gets to the location, about 70% of the cost of the sand is transportation, so – what kind of diesel, it makes a big difference to these things.We do supply quite a bit of diesel to our customers.Approximately 60% of our fracking fleet is internally supplied diesel.
From a third-party trucking and logistics perspective, trucking was really tight in the first quarter with an increase in support dose, larger pads, and more work in the Montney and Deep Basin.The biggest contributor to this is that there are fewer trucks available in the basin.We talked about things like the labor crunch.So just generally smaller than the workforce we used to have, you have to be flexible when you manage from a logistical standpoint.
Another factor that makes it difficult for us is that we operate in more remote parts of the basin.So from that perspective, we have significant logistical challenges.
As for sand.Primary sand suppliers are basically operating at full capacity.Earlier this year, the railroad faced some challenges due to the cold weather.So when the temperature reaches a certain temperature, railway companies basically stop their operations.So in early February, from a proppant perspective, we did see a bit of a tight market, but we managed to overcome those challenges.
The biggest growth we’ve seen on sand is the diesel surcharge, driven by railroads and stuff like that.So in the first quarter, the Trican was exposed to Grade 1 sand where 60 percent of the sand we pumped was Grade 1 sand.
about chemicals.We did experience some chemical interference, but it didn’t make much sense to our operations.Many of the basic components of our chemistry are derivatives of oils.Therefore, their manufacturing process is similar to that of diesel.So as the cost of diesel increases, so does the cost of our product.And those — we’ll continue to see those as we move through the year.
Many of our chemicals come from China and the United States, so we plan to deal with expected delays and increased costs related to shipping, etc.Therefore, we are always looking for alternatives and suppliers who are creative and also proactive in managing the supply chain.
As we have communicated before, we are very pleased that we launched our first Tier 4 DGB fleet in the first quarter.We are very happy with how it works.Field performance, especially diesel displacement, meets or exceeds expectations.So with these engines, we are burning a lot of natural gas and replacing diesel at a very fast rate.
We will reactivate the second and third Tier 4 fleet in the summer and by the end of the fourth quarter.The value proposition of the device is significant in terms of fuel savings and reduced emissions.I mean in the end, we want to get paid.Since the gap between diesel price hikes and gas is more or less a steady cost, it’s even an excuse for us to get a premium for these fleets.
New Tier 4 engine.They burn more natural gas than diesel.Therefore, the net benefit to the environment is also reflected in the cost of natural gas, which is cheaper than diesel.The technology could become the standard for years to come — at least for the Trican.We are very excited about this and we are proud to be the first Canadian company to launch this service in Canada.
yes.It’s just — so the rest of the year, we look — we’re very positive.We believe that budgets will only increase slowly as commodity prices rise.If we can do this at an attractive price, we will use this opportunity to put more equipment on the field.We are very focused on return on invested capital and free cash flow.So we’re going to continue to maximize this as much as possible.
But we’re finding that breakups are becoming less of a breakup now as people try to balance their activities throughout the year and take advantage of warmer weather like hot water and less crazy oil fields.So we do expect to see a lesser penalty on our financials in the second quarter than in the past.
The basin is still gas-focused, but we are seeing more oil activity as our oil prices remain above $100 a barrel.Again, we will use this activity to try to deploy more devices at a profitable rate.