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Transcript Summary

Total Energy Services Inc. delivered a robust Q1 2026 performance, marked by a 25% revenue increase driven primarily by the Compression and Process Services (CPS) segment. The company ended the quarter with a record fabrication backlog of $446.9 million, fueled by North American LNG and power generation demand. While a significant non-cash share-based compensation expense impacted reported EBITDA, the underlying operational strength was evident across most segments. Notably, Well Servicing EBITDA jumped 110% following the cessation of loss-making U.S. operations and growth in Australia. The Australian market provided a hedge against softer North American drilling activity, with upgraded rigs performing well despite seasonal weather challenges. Financially, the company maintains a fortress balance sheet with $91.4 million in cash and a net cash position, facilitating $20.7 million in Q1 capital expenditures. Key growth projects include doubling U.S. fabrication capacity in West Virginia by 2027 and continuing rig upgrades in Canada. Management expressed concern over extreme lead times for engines—now exceeding three years—but remains confident that their inventory management and strong liquidity will sustain growth. The outlook is positive, with increasing inquiries in the U.S. and a stable, high-margin contract base in Australia.

5-year share-count history (top 10 holders by peak, incl. exited) + price

Full Earnings Call Transcript — Q1 • 2026-05-13

Operator: Hello, and thank you so much for standing by. My name is [ AP ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Total Energy Services Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] And I would now like to turn the call over to Mr. Daniel Halyk, the President and CEO of Total Energy Services Inc. Please go ahead.
Daniel Halyk: Thank you, and good morning. 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 March 31, 2026. We will then provide an outlook for our business and open up the phone lines for any questions. Yuliya, please go ahead.
Yulia Gorbach: 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 business 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 March 31, 2026, reflect continued strong North American demand for natural gas compression and process equipment and the deployment of upgraded equipment in Australia and Canada that more than offset lower North American drilling and completion activity. On a year-over-year basis, consolidated first quarter revenue increased by 25%. Contributing to this increase was $58.4 million of increased CPS segment revenue, $6.1 million from CDS segment and $2 million from Well Servicing. First quarter EBITDA increased $4.7 million compared to 2025, driven by the increased activity and improved fabrication margins in the CPS segment and the deployment of upgraded rigs and higher day rates in Australia and Canada. Negatively impacting first quarter financial results was a $6.5 million year-over-year increase in share-based compensation expense due to a 52% increase in the company's share price during the first quarter of 2026. That was partially offset by a $2.9 million year-over-year increase in the gain on sale of property, plant and equipment following the sale of Well Servicing equipment in the United States in February of 2026. $6.3 million of the $6.6 million of share-based compensation expense recorded in Q1 2026 was a noncash in nature. Geographically, 46% of first quarter revenue was generated in Canada, 32% in the United States and 22% in Australia as compared to the first quarter of 2025 when 47% of consolidated revenue was generated in Canada, 31% in the United States and 20% in Australia. By business segment, the Compression and Process Services segment contributed 52% of first quarter consolidated revenue, followed by the CDS segment at 31%, Well Servicing at 11% and the RTS segment at 6%. In comparison, for the first quarter of 2025, the Compression and Process Services segment generated 42% of the first quarter consolidated revenue followed by CDS at 36%, Well Servicing at 13% and RTS segment at 9%. First quarter consolidated gross margin was 22% in 2026, which was 260 basis points lower than 2025. Contributing to this decline was a 10 percentage point increase in the first quarter revenue contribution from the CPS segment as this business segment historically generates lower margins than the other segment. A year-over-year increase in CPS segment and Australian margins partially offset a decline in RTS and North American CDS and Well Servicing segment margin. First quarter CDS segment revenue increased 7% compared to 2025, an 18% year-over-year decline in first quarter North American operating drilling days was partially offset by a 38% increase in Australian operating days. Segment revenue per operating day increased by 11% during the first quarter of 2026 due primarily to increased pricing on upgraded rigs in Australia and Canada that was partially offset by a change in the mix of equipment operating and competitive pricing in the United States. First quarter CDS segment EBITDA decreased by 5% as segment EBITDA margin decreased by 3 percentage points compared to 2025. due to competitive pricing costs incurred to reactivate equipment in the United States and lower utilization in Canada that was partially offset by improved Australian results. RTS segment revenue for the first quarter decreased 15% compared to 2025. This was a result of lower industry activity exacerbated by lower revenue for utilized fees resulting from the change in the mix of equipment operating. 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 23% year-over-year decrease in the first quarter segment EBITDA and a 4 percentage point decrease in the segment EBITDA margin. First quarter CPS segment revenue increased 55% compared to 2025, driven by increased fabrication sales and higher parts and service activity. Year-over-year first quarter CPS segment EBITDA increased by $6.1 million or 39%. EBITDA margin during the first quarter of 2026 was 2 percentage points lower compared to 2025, primarily due to the year-over-year increase in the relative contribution of lower-margin fabrication sales to segment's revenue. The fabrication sales backlog at March 31, 2026, was $446.9 million, which is $181.5 million or 68% higher compared to $265.4 million backlog at March 31, 2025, and $0.2 million higher compared to $446.7 million backlog at December 31, 2025. In Well Servicing, a 2% increase in revenue per service hour combined with a 4% increase in operating hours resulted in a 6% year-over-year increase in first quarter segment revenue. Increased Australian and Canadian activity was partially offset by a substantial decline in U.S. activity following the discontinuance of U.S. Well Servicing operation in January of 2026. Higher pricing and increased fleet utilization following the upgrade of several rigs over the past year contributed to 126% and 10% increases, respectively, in the first quarter Australian and Canadian operating income. Segment EBITDA for the first quarter of 2026 was 110% higher compared to 2025 due to improved Australian and Canadian results as well as the cessation of operating losses in the United States. Total Energy's consolidated financial position remains very strong. At March 31, 2026, Total Energy had $113.4 million of positive working capital, including $91.4 million of cash. Cash on hand exceeded bank debt by $46.4 million at March 31, 2026. Total Energy's bank covenants consist of maximum senior debt to trailing 12 months bank-defined EBITDA of 3x and a minimum bank-defined EBITDA to interest expense of 3x. At March 31, 2026, the company's senior bank debt to bank-defined EBITDA ratio was a negative 0.19x as Total's was in net cash position and the bank interest coverage ratio was 51.1x.
Daniel Halyk: Thank you, Yuliya. We are pleased with our first quarter results. But for the substantial noncash share-based compensation expense recorded due to the significant increase in Total's share price during the quarter, these results would have constituted record quarterly financial results. The substantial investment we have made over the past 2 years, reactivating Australian and Canadian equipment and supporting the inventory needs of our CPS segment continued to bear fruit and position us well for the future. Our strong balance sheet ensures we are able to continue to fund such investments while at the same time, providing our owners with industry-leading shareholder returns through dividends and share buybacks. In Australia, an upgraded service rig commenced operations in early May, bringing our current Australian active rig count to 13 drilling rigs and 8 service rigs. The currently active drilling rig will be taken out of service during the third quarter for approximately 2 months to complete certain upgrades, following which it will commence operations under a new long-term contract. A new Australian service rig is currently under construction and is scheduled to commence operations in the first quarter of 2027. In Canada, the upgrade of a second idle mechanical double drilling rig into a state-of-the-art AC electric triple pad rig is underway with completion expected by the first quarter of 2027. Demand for this style of rig is strong, and we will look to contract the rig closer to completion. Our current expectation is that post breakup, Total's active Canadian drilling rig count will exceed last year. In the United States, we are beginning to see signs of improvement with our current active U.S. drilling rig count at 4. Inquiries to put additional rigs back to work have increased significantly over the past few weeks. Recent oil price strength is also contributing to increased demand for our high-spec service rigs in Canada. Any pickup in Canadian and U.S. drilling and completion activity will also provide tailwinds for our RTS segment. Our Compression and Process Services segment continues to see strong demand for its products and services driven by North American LNG infrastructure and natural gas-fired electricity generation projects. The record fabrication sales log of $446.9 million at March 31 provides visibility well into 2027 and current quoting activity remains vibrant. While increasing lead times for major components such as engines makes managing this business more challenging, Total's balance sheet strength provides the capital required to support the significant inventory investment required to ensure we can continue to satisfy our customers' demands well into the future. Expansion of our U.S. fabrication capacity in Weirton, West Virginia is underway with completion expected by the first quarter of 2027. Once completed and fully staffed, this expansion is expected to almost double our U.S. compression fabrication capacity. Our first quarter results clearly demonstrate the capacity of our business to generate free cash flow. After funding working capital needs and lease payments as well as $20.7 million of capital expenditures and $6.5 million of dividends and share buybacks, we repaid another $10 million of bank debt during the quarter and grew our quarter end cash balance to $91.3 million or $2.49 per outstanding share. In closing, I would encourage shareholders to join us at our 30th Annual Meeting of Shareholders, which will be held at 10:00 a.m. on Tuesday, May 19, at the Calgary Petroleum Club. I would now like to open up the phone lines for any questions.
Operator: [Operator Instructions] Your first question comes from the line of Tim Monachello with ATB Cormark Capital Markets.
Tim Monachello: Australian activity levels were really strong in the quarter. I'm curious about weather impacts in the quarter. It typically would be a slower seasonal activity quarter and what activity levels would have been if it hadn't been for the weather impacts that you may have seen?
Daniel Halyk: So first quarter is typical was pretty wet, particularly we saw in the Cooper Basin where a lot of our heavier rigs were shut down, put on standby for pretty extended periods of time. So definitely, that had an impact on the financial performance of Q1, but that's pretty typical, Tim. So as we come out of the wet season, everything else being equal, you should see better performance as we go back to full operating rate and normal operations.
Tim Monachello: Did that have an impact on the Australian day rate in the quarter as well, which was down a little bit quarter-over-quarter?
Daniel Halyk: Yes. You get a reduced rate, either standby with crew or standby without crew or zero
Tim Monachello: Okay. Got it. And then were there any reactivation costs or onetime costs in the drilling segment in Q1?
Daniel Halyk: Yes. In the U.S., we went from very low utilization came into Q2 with 4 rigs utilized. So we spent some money expended, not capitalized money to reactivate rigs there. So that hit our U.S. In Canada, nothing out of the ordinary or normal kind of ramp up into Q1, but I would say it was a bit more pronounced in the U.S.
Tim Monachello: Do you expect those reactivation costs to continue in the next couple of quarters? It sounds like you're expecting some stronger activity levels in the U.S. in particular?
Daniel Halyk: Well, hopefully, as we put more rigs to work, and we expense all that unless it's obviously a major upgrade or reset. But yes, the difference is you're going to be spreading those costs over more operating days, which obviously helps. But to the extent we continue to ramp up in the U.S., we'll have additional reactivation costs. But we have traditionally not broken that out. That's just part of running a business.
Tim Monachello: Can you speak a little bit about the pricing environment in Canada and U.S. for drilling?
Daniel Halyk: Really depends on the class of rigs. I would say high-spec rigs in Canada, notably AC triples, doubles, AC doubles and super singles. It's a tight market. So pricing tends to be pretty stable and positive there. The mechanical double, lower spec market tends to be very competitive still. The U.S., we're not big enough, I think, to give any meaningful insight. We certainly saw some pretty competitive pricing last year, which caused us to give up some market share. But obviously, that's changing we're comfortable putting rigs back to work here. So -- but we're not big enough player in the U.S. to give any market insight.
Tim Monachello: Got it. In the Compression and Process business, the financial performance, the revenue is up a lot, maintained the backlog at record levels. So that would suggest that your throughput of backlog and bookings were relatively strong in the quarter. Have you changed anything in terms of the amount of shifts you're running in those -- in your manufacturing facilities to increase throughput? Or how should we think about throughput through the year relative to the Q1 level?
Daniel Halyk: No, we're running a pretty steady state there. I think the big difference will be next year as we look to ramp up our U.S. operations. Completion of the facility for Q1 is the target. We're on track. And obviously, staff taking your headcount up will take some time, but we're already working on that. But I would say good, steady operations that will help us improve margins over time. Trying to add a whole bunch of overtime in that, easier said than done. Again, if someone is willing to pay a premium, we'll get things done. But we're really trying to load level and run a steady operation. One of the big challenges in that regard is just the engine deliveries and working around that. But so far, our group has done a pretty good job on that front.
Tim Monachello: Got it. And with that capacity addition in the U.S., you mentioned 50% addition to your U.S. manufacturing capacity. What would that addition be in terms of your total CPS manufacturing capacity?
Daniel Halyk: It would almost double our U.S. fabrication capacity, not 50%...
Tim Monachello: Sorry, double that...
Daniel Halyk: Our initial projection was at least 75% as we -- as we work through some things here, we're seeing a near double. You can look at U.S. There's, again, for various reasons, competitive and otherwise, we don't break out rental revenues. But you can see the U.S. rental fleet has shrunk considerably over the past several quarters as we sell units. So increasingly, the revenue is primarily fabrication. And you can sort of extrapolate assuming we can ramp it up to almost 100%, what that means from a revenue point of view. Obviously, if you're doubling production, you're going to get some cost synergies. So everything else being equal, I'd expect a significant ramp-up in activity in the U.S., once we've got crews properly orientated and all that because there's going to be some start-up expenses and headaches and efficiency challenges. But once we get that ramped up, again, you're spreading your overhead over a larger number of hours, which should benefit margins.
Tim Monachello: Got it. And then just given the lead times for large engines being over 2 years here and the increased capacity you have, I would imagine that you have some lead orders in place that would help you fill that capacity. Is that the right way to think?.
Daniel Halyk: Yes. Lead times on certain engines are now well north of 3 years. So we're looking into -- it's actually kind of ridiculous where it's at right now. But what we're doing is certainly trying to load level as much as we can and manage our inventory purchasing decisions around load leveling of shops.
Tim Monachello: Okay. And then getting pretty long in the tooth here, but just one more. Can you talk a little bit about how you're thinking about M&A in the current market? And obviously, your balance sheet is in a very good position, and we've got lots of capacity. But just curious if you're tracking anything or how to think about it?
Daniel Halyk: Yes. No, I think we're thinking about it the same way we always do, which is can we get a return on the investment that reflects our cost of capital and how does it compare to organic opportunities and which include share buybacks. So we're very active in evaluating opportunities, both internal, external. We continue to see good opportunities to upgrade equipment and -- but we can also walk and chew gum at the same time. So we're going to stay disciplined, but our bias is to grow if it makes sense, but it's got to make sense financially as well. So -- but we are active evaluating many different opportunities. So we'll update as appropriate.
Operator: [Operator Instructions] All right. That will conclude our question-and-answer session. And I will now turn the call back over to Mr. Daniel Halyk for closing remarks. Please go ahead.
Daniel Halyk: Thank you. Well, thank you, everyone, for joining us this morning, and hope to see some of you at our AGM next Tuesday. Have a great weekend. Thank you.
Operator: Ladies and gentlemen, that concludes today's call. Thank you so much all for joining. You may now disconnect. Goodbye.