CES Energy Solutions Corp

TSX:CEU

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the CES Energy Solutions Corp. conference call and webcast with respect to the recently announced results for the first quarter ended March 31, 2018. Presenting for the company today will be Mr. Tom Simons, President and Chief Executive Officer; and Mr. Craig Nieboer, Chief Financial Officer. Please be advised that this call is being recorded. [Operator Instructions] Please also be advised that this conference call may not be recorded or rebroadcast without consent of CES Energy Solutions. I would like to turn the conference over to Mr. Craig Nieboer. Please go ahead, Mr. Nieboer.

[Craig Frederick Nieboer, Chief Financial Officer]

Thank you. Good morning, everyone, and thanks for attending today's call. And congratulations to the Winnipeg Jets on their big win last night. I'd like to note that in our commentary today, there will be forward-looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our first quarter MD&A and press release dated May 10, 2018, and in our annual information form dated March 1, 2018. In addition, certain financial measures that we will refer to today are not recognized under currently generally accepted accounting policies. And for a description and definition of these, please see our first quarter MD&A.At this time, I'll turn it over to Tom Simons, our President and CEO.

[Thomas J. Simons, President, CEO & Director]

Well, good morning to everyone. And thank you, Craig. Thank you to listeners. We're very pleased to report revenue of $300 million for the quarter and EBITDAC of $41.4 million. While we feel we're reporting a great quarter, we do understand that some expectations for us to put better results to the bottom line existed. We believe we have a social contract with all of you, so we want to speak to that. We want to always maintain the trust that exists between management of our company and our shareholders. It's no different than with our customers and our employees. So we'd like to openly discuss why bottom line results were a little less than some expected. The business saw cost inflation across the entire platform of the business, particularly in busy markets like the Permian. We so far have not achieved any price increases. We had attrition to the Canadian drilling fluid business in the quarter. We are running effectively a startup with our HDD business, and we've got many of the cost attributes of a startup as we build out our frac business. I'll get back to the normal cadence of our calls and just invite listeners or analysts to feel free to ask us questions about that as we go to Q&A. So notwithstanding the effect on the quarter of the items I noted, all facets of the business delivered very positive results in the quarter. On today's call, I'll provide a summary of operations in the quarter, and we'll share our outlook for the different business units going forward. Craig will provide a detailed financial summary and update. We'll take questions, and then we'll provide a brief summary and wrap up the call. As is customary, I'll start with the origins of the company, Canadian drilling fluids. We ran 34% of the drilling fluid market share in Western Canada in Q1. We peaked at 114 jobs on January 25. I'll note that, that was a month earlier for a peak than a year ago in the same quarter. We exited the quarter at 39 jobs. Today, we have 30 jobs running, which is in keeping with spring breakup in Canada and muted upstream activity in the basin in general. Our share in SAGD Southeast Saskatchewan and deep basin continue to drive our drilling fluids business. However, operators significantly trimmed their deep programs in the quarter. The opportunity cost to us significant. The lack of political will in Canada to truly get energy infrastructure approved and built hit our drilling fluid business hard. Canada holds world-class assets, and our best-in-class value proposition continues to be to help our customers maximize their assets. Our drilling fluid customers in Canada continue to be the top producers in the basin. We recognize the challenges the market faces. We remain committed to our customers and our employees and expect to remain the drilling fluid supplier of choice in Western Canada. We are the same company that provided fluids on the longest well in the history of the basin this past winter. Our team is incredible; our technology, leading edge; and I believe our upside, significant. We can also report great technical success from our winter Canadian HDD project. For people unfamiliar with that term, it's basically when a drilling rig drills a horizontal hole under an environmentally sensitive area such as a river for pipeline or utility construction. We still have a ways to go to make it commercially successful, which for CES is code for putting money to the bottom line. But we're excited by the technical results. I'll speak a little bit to them in the AES update as well regarding the U.S. We have many jobs in the queue in Canada for HDD. When pipelines are built, our technology can be a differentiator for the construction of the pipeline, keep costs down and protect the environment. It uniquely prevents frac outs. I can report recently that we did get NSF certification in the states and have already done a successful job in North Carolina. We feel encouraged by this new business line. But like all good things, it takes some time. I'll now move on to our Canadian production chemical business. PureChem continues to win additional market share. As we've disclosed, Treatment Points continue to rise as we win more conventional market share. We anticipate nice operating leverage over the next several years as we win -- continue to win business in what I would call the new horizontal fracked market. While these are single wells or pads and won't show up as Treatment Points showing the same growth, they produce enormous fluid volumes, which accordingly require complex and higher volume production-treating chemicals. The same is true of the SAGD market, which we continue to chip away at. We added another significant oil sands customer just recently this spring. From deep gas and condensate wells to heavy oil horizontals and SAGD horizontals, the real upside for PureChem comes for the company as we capture increasing parts of the horizontal production market. We believe we're poised to see that happen. We have the people, the products and the credibility. We continue modest supply of frac products in the quarter to 2 pumpers, and we're actively working on trialing our new, what I'd call produced or high-brine water frac FR. As we've previously talked about with our cationic FR, I can update that we continue to await several trials. We've now manufactured enough of this complex friction reducer that works in high chlorides and high iron water, which are typical characteristics of produced water, that after much effort, we're now actively seeking trials. Warren Buffett talks about building moats around businesses. This technology has a mote. It's been very challenging to scale up or make it in volume. This remains a long-term target for the company. For this to take, it will require increased use of produced water for fracs. And because we're in this for the long haul, we think we can see this out. StimWrx, our stimulation chemical group, had a great first quarter. We added customers and see good sustainable upside for StimWrx in both Canada and the U.S. Sialco is benefiting from the general recovery of the oil and gas sector. It continues to in-service products and technology for all parts of the company. Volumes at Sialco were increasing, and we see good things ahead for Sialco. Clear had a modest but positive quarter. Clear is -- Clear remains focused on water solutions for our customers. We think in time, this can complement our frac product initiatives. We also see water moving up the value chain for our customers, so we'll remain focused on that market. I'll now move on to the U.S. AES, our U.S. drilling fluids business, had a strong Q1. We averaged 111 jobs through the quarter, which included 17% market share in the mighty Permian. Today, we have 117 jobs running at AES. We have 77 in the Permian, 12 in the Northeast U.S., 10 in Mid-Con, and 16 on the Gulf Coast. Since the U.S. has chosen to sell their commodities for what I would call real-world prices and not at a massive discount like Canada, we expect the balance of 2018 to be very good for AES. We remain the leading-edge provider of technology in the Permian. Our MMH and direct emulsion technologies save a casing string, which creates massive NPV for our customers. I'll move on to U.S. production chemical business, Jacam Catalyst. As U.S. production rises, we're growing with our customers. And to clarify, while Treatment Points appear to have plateaued, we're actually treating much more production. We're winning new horizontals that show up as single wells or a pad of wells. But the fluid volumes being produced are prolific, requiring complex and large chemical programs. Growth for us is primarily in the Permian, with modest gains also in California, Oklahoma and the Rockies.Solid chemistry, SuperCorr, being a primary manufacturer and having local leadership and values, is our competitive advantage in the U.S. We see a long and great future in the new energy superpower of the world, the United States. For U.S. frac, we continue to have modest sales and are actively seeking trials with our cationic polymer. I'll note that we chose to decline a previously scheduled trial. We were not satisfied with the parameters of the job at the last minute. Again, we're in things for the long haul, so we want to do things right. I'll touch on infrastructure, and then, turn things over to Craig. We're nearly ready to utilize our yard in Midland for drilling fluid returns. This will significantly increase Permian throughput for AES. We're expanding the Catalyst yard, and I can say we're very pleased that we previously expanded the Catalyst offices and the lab. We continued to examine options to have additional throughput at barite milling, which is weight material and drilling fluids, likely in the Northeast U.S. The nitrile part of the Jacam plant is fully operational and is being very nicely utilized. The organophilic clay plant is rebuilt and operational, which follows last Easter's fire. We have 1/2 repurposed hydrogenation reactors to take advantage of existing opportunities. We're also now working on automating our solid chemistry manufacturing facility. This will both increase throughput and improve safety for our workers. Grand Prairie remains on track to open this summer, which will primarily be a production fluid facility. We'll also continue to add rolling stock, which is trucks as required to service our expanding business, which primarily will be in the U.S. I'll now turn things over to Craig.

[Craig Frederick Nieboer, Chief Financial Officer]

Thanks, Tom. And just, also, I think, Tom, you missed the Kermit mud plant facility expansion as well, up in North -- or the North part of the Permian, in Texas, just outside the New Mexico border. That's being effected today. And from reports from our U.S. joint fluids folks, that will double our ability to throughput in that facility from about 50 rigs up to 100 rigs to service the Delaware Basin. So I think that's very positive capital spend as well coming up. On to the financials. Q1 record revenue for -- is record revenue for the quarter. I think it's significant first time over $300 million of revenue, and for sure, not the last in our opinion. Up significantly from Q1 2017 of $252 million and up sequentially from our Q4 2017 of $278.8 million. Q1 2018 U.S. revenue was $179.5 million compared to $141.7 million in Q1 2017 led by U.S. operating days and drilling fluids up 34% year-over-year and U.S. Treatment Points up 10% year-over-year. Q1 2018 Canadian revenue was $120.9 million compared to $110.7 million in Q1 2017. As mentioned by Tom, with early breakup and some loss in Canadian market share on the drilling fluid side, which were down 10% -- 11% year-over-year on operating days, these losses on the drilling fluid side were made up by revenue gains year-over-year attributable to PureChem growth with Treatment Points up 21% year-over-year, and as Tom mentioned, the added HDD pipeline crossing revenue. As stated by Tom, we are still operating in trough pricing in our business lines. 2017 saw significant margin improvement on operating leverage throughout the year, but Q1 2018 is seeing cost inflation and product cost, people cost, and logistics cost, start to outpace our ability to obtain operating leverage in our business and our ability to pass those costs through to our customer in real time. Much of this, we believe, is transient, but obviously affected the results of the quarter. As a result, our cash gross margin year-over-year was relatively flat at about 27% and sequentially down slightly from Q4 2017 to Q1 2018 of about 1%. Gross SG&A has gone up year-over-year as the business continues to grow. But as a percentage of revenue remains in our target zone of around 12.5% of revenue. As a result, our EBITDAC for Q1 2018 of $41.4 million were 13.8% of revenue, which as a percentage is slightly down from 14.8% of revenue in Q4 2017. And now just to put it in context, we had $278 million of revenue in Q4 and roughly the same EBITDA. We have $22 million more of revenue and roughly the same EBITDA. So the margin compression is pretty small, and once again, we believe it will be transitory as the business continues to grow, particularly in the United States, and as oil price will lead to our mines, more activity in our customer base. Balance sheet is in great shape. We have drawn roughly $115 million on our $165 million operating line, with significant liquidity and cash flow to fund our CapEx program for 2018. And we see the ability to increase our return of capital to shareholders later this year as we begin to pay down the operating line with cash flow and have the opportunity to either increase the dividend or look at a share buyback program later this year. At this time, I'd like to turn it over to callers for questions.

[Operator]

[Operator Instructions] And your first question is from Greg Colman from National Bank Financial.

[Greg R. Colman]

Great looking revenue, but wanted to focus on the cost as you mentioned. The core of my questions here are going to be to try to determine if the 14.1% margins in Q1 are local low, if there's further downside or if there's a recovery, and what that recovery looks like. Craig, you mentioned that you have a view that it's a transitory period. I'm wondering what confidence drives that. Is it costs falling? Prices rising? Or operating leverage? Or something else?

[Craig Frederick Nieboer, Chief Financial Officer]

Well, I think it's inherently logical that as oil has continued to rise and as things get tighter on the service side, I think all service companies believe at some point in the cycle, there will be more pricing power to the services. Obviously, we can't predict exactly when that comes. And obviously, we're working with our customers in real-time on making their business more successful. We have had success passing costs through. But at this stage of the cycle, that cost increase is coming at us faster than our ability to do that. I think pricing for us is going to come differently potentially in different parts of our business. So when I say it's transitory, I mean, you can't put really a time frame on everything. We -- I'm like a guy that has 100 rigs and knows what his day rate is, and here's the people on the rig and the fuel cost, and there's my margin. I mean, at the end of the day, we have thousands and thousands of transactions. We have people that are continually working on procurement to lower our input costs. We have people working on manufacturing, processing -- to improve our processing. We're continually trying to improve our logistics cost. But some of these things are coming at us faster today than our ability to pass those on or are the influence of the operating leverage in our business. As we build out some infrastructure in West Texas that will make us more efficient in the drilling fluids market as we expand facilities in Catalyst, that will make us more efficient. And as we think in time, there will be price availability to us in the marketplace, it's unrealistic in our mind to think that margins aren't going to improve over time. But in the short -- short period, I mean, going into Q2, we have breakup in Canada. So that's not going to be margin positive for us obviously. And we're still stuck in a situation in our pricing that it's more of an attempt to pass through cost at this stage than general price increases. So when I say transitory, it's not something that's solved in a week. It's something that I think happens over time. But I mean, back to put it in context, we're talking from a margin, Quarter 4 to Quarter 1 of 1% on gross margin. Well, the difference is $22 million of revenue for the same EBITDA. So it's pretty small numbers that we're dealing with.

[Greg R. Colman]

That makes sense. I mean, it sounds like when you talk about the cost continuing to move up, it's unlikely that, in what I'll call the short run being 1 or 2 quarters, that the costs are likely to moderate or move down. So it will be more about the ability to pass that through eventually with your customers. And is it reasonable to assume that in an environment with WTI trending up through 70-plus, that the market is more receptive to cost pass-through? Not pure price increases, but cost pass-through.

[Thomas J. Simons, President, CEO & Director]

Greg, I'll jump in because I'm on the front lines with customers. We're going to be a price follower with Hal Schlum, GE Baker and Ecolabs. I'll say from my seat, I think it's more likely in the medium term that it gets better than worse for the following reasons. We're going to grow our production-treating business. And the growth is increasingly profitable because we're winning more of the big multistage fracked wells. And so there's more product going in the ground every day through the same number of people out of the same number of trucks. I think we've got upside in the medium term in frac, and I think we have upside in the medium term in HDD. I think the rest of the stuff, if it's just equal over the medium term, we're more likely to be better than worse.

[Greg R. Colman]

That makes sense to me. Can I move on to just one other thing? Outside of the costs. Can you estimate your market share and production services in both Canada and the U.S. today?

[Thomas J. Simons, President, CEO & Director]

Between 5% and 10%, probably closer to 10%. And that's why we drew attention to Treatment Points. Conventional vertical wells add up, but they don't take as much product. A single horizontal well might consume 10x or 20x what a 10-year old vertical wells does. So there's a lot of nuance in this stuff. The baseline is you need to prove yourself out on conventional to get entrusted with the big wells. Same applies to the oil sands. So we think as we move up, say, the next 5% or 10% of the market, more money goes to the bottom line from that percent of the market than the baseline of the business.

[Greg R. Colman]

So is it reasonable to assume that the Treatment Points you're adding are incremental from existing customers to, your point, you're moving up the complexion curve for those same customers?

[Thomas J. Simons, President, CEO & Director]

Yes. The reason that the Treatment Point isn't going up as much in the states and it's counterintuitive is because we're more established. We bought a 30-year-old business and an 11-year-old business and a 10-year-old business, and have successfully integrated them under common leadership. Those businesses proved themselves up on the verticals years ago so they're now picking up the cream. In Canada, we did this from scratch starting 9 years ago. We're just getting over the vertical hump and on to the stuff where all the juice is.

[Operator]

The next question is from Tim Monachello from AltaCorp Capital.

[Tim Monachello, Analyst of Institutional Equity Research]

I just wanted to ask you a little bit about U.S. revenue. It is only up about 1% sequentially even though you saw about 10% increase in operating days in the drilling fluid side and almost 2% in the specialty chemicals production treating -- Treatment Points side. Could you speak to that a little bit, please?

[Thomas J. Simons, President, CEO & Director]

Sure. On the drilling fluid side, Tim, it's geography. A well in the Northeast U.S. or in the Gulf Coast is a little trickier to drill, in general, than in the Permian. And so you put more product in the ground every day. Depends where in the Permian. The Delaware is very good for us. New Mexico is very good. We've got 22 jobs running in New Mexico today. That's why we've increased our Kermit facility throughput. The work is still great. I think in the -- our -- go 10 years from now, we're going to have, I think, being the technology leader, job count leader, work for the top producers in the Permian. But the jobs aren't quite what they were up in the Northeast U.S.

[Tim Monachello, Analyst of Institutional Equity Research]

Okay. So you expect this to sort of persist until you see more development back in those more intense regions?

[Thomas J. Simons, President, CEO & Director]

Yes. And the other trend, I think, that my experience has taught me is that people go for the shallower stuff first because it's cheaper to D&C. So the other trend that I believe will emerge over time is that people will go deeper. And if you go 1,000 feet more vertically deep on a horizontal well, it may double the drilling fluid invoice. So the rock may take care of that for us. The size of the acreage, the strength of the companies that own the acreage, we see there being a career worth of work out there.

[Operator]

Your next question is from Ben Owens from RBC Capital Markets.

[Benjamin Edgar Owens, Associate]

I just wanted to follow up on the margin dynamic. Tom, in your opening comments, you talked about some of the dilution to margins being caused by running order amounts through a couple of start-ups in the frac chemicals and HDD businesses. So my first question would be just is -- are either of those businesses profitable right now? And then, second question, could you give us an estimate of what the drag on the bottom line was from those 2 businesses in the first quarter, relative to where you think they could be or should be, eventually?

[Thomas J. Simons, President, CEO & Director]

Unless you come work in our finance group, I can't answer the second question. But we're making money in frac, and we've yet to put money to the bottom line at HDD.

[Benjamin Edgar Owens, Associate]

Okay. Fair enough. And just kind of an unrelated follow up. You talked about the success you're seeing in U.S. especially the activity in the Permian. There's obviously been a lot of talk recently about Permian differentials recruit pricing. What are you seeing from your customers or what are they talking about in terms of the activity for the rest of this year and into the early part of 2019 before maybe some of those pipelines come online? Do you expect to see any pullback in activity or maybe a slowdown or pause? Just curious what your thoughts on that are?

[Thomas J. Simons, President, CEO & Director]

I think that everyone is going to go with the mantra live out of cash flow. Don't grow to grow. So I think that's number one. It won't be to spend 30% more than your cash flow like it's been for 20 years. We haven't seen any indications that anyone's trimming. In fact, we're being told the opposite. So we're gearing up to be very busy there. We're expanding Vern's yard at Catalyst. We've expanded Kermit. We're sort of repurposing a yard in Midland to take product for return. So we're acting on the instructions, I guess, of our customers, which is that they're going to go.

[Craig Frederick Nieboer, Chief Financial Officer]

And Tim (sic) [ Ben ] as well -- this is Craig. So as well, our guys did our on-the-ground in the Permian who were here in Calgary yesterday at the board meeting. We're both asked that same question by our Board of Directors, and their answers were pretty clear, that the customers' telling them that they don't have -- the big customers are saying they're not going to have issue of access to market. Some of the smaller customers might have some issue to access to market, but the rig count going up for us is mostly in larger guys' hands. So the EOGs of the world aren't worried about offtake at this stage. And Vern, who's been in the Permian his entire life, is like, these headlines have been going around Midland for years and there never seems to be a problem. And then, as an observer from Canada, we can all say if there's a pipeline or access issue in the United States, it's going to get solved in the short period of time without protesters, and in Canada, we'll continue to navel-gaze about those things. So I don't think we have a big concern that constraint on activity in the Permian is going to manifest itself with offtake. I think what Tom said is where the operator is still today though, that they're going to operate within cash flow. Our U.S. drilling fluids guy was telling our board yesterday, he sees line of sight to get to over 130 jobs by the end of this quarter. And then, from there, I think it will be a question of where this WTI go if we're going to take another leg up or not.

[Benjamin Edgar Owens, Associate]

Okay. That's helpful color. I think, just one follow-up on that. The 130, I think you said 117 today. The incremental 13, I guess, with the lion's share of those be coming in West Texas or New Mexico? Or would they be anywhere else?

[Thomas J. Simons, President, CEO & Director]

Mostly in the Permian, Ben.

[Operator]

The next question is from Steve Kammermayer from Clarus Securities.

[Stephen John Kammermayer]

Just on heading back to the Permian here. You were running close to 450 rigs now. You're hearing that pipeline capacity is not an issue as of yet. Do you have an idea of how much growth the Permian could sustain on an active rig basis before pipeline capacity would be an issue?

[Thomas J. Simons, President, CEO & Director]

I don't know if you want to take a stab at that, Craig. That's probably out of our bandwidth, Steve, to be honest. I share Craig's view. There's money to be made building offtake, and they have social license to be in the oil business there. So I think they would quickly solve those issues. We see people moving to solve access to water issues, produce water disposal issues. If you fly over it, there's a sand mine under construction every 20 miles. So people are making long-term investments. We're not taking anything for granted. If it doesn't get any busier, it's going to be great.

[Craig Frederick Nieboer, Chief Financial Officer]

Okay. I think that, once again, it's above our pay grade, particularly on the details of the offtake. But I do think that, anecdotally, what we're seeing is as equipment gets tighter, access to that equipment is getting harder, getting trucking in the Permian is getting harder, getting people in the Permian is getting harder. My view is that it's probably going to be equipment, people and access to the right people and equipment that probably makes it hard for the rig count in the Permian to go up another 200. It's not going to be a pipeline issue that keeps it from going to where it might be able to go.

[Stephen John Kammermayer]

Okay. Okay. And then, just on the pricing, you mentioned we're still at trough pricing and you guys are likely going to be a price follower. But you have noted in the past that as drillers and the frac crews start raising prices, that, that tends to trickle down after a little bit of time. That's something we have been seeing in the Permian, and I was wondering if you could give us an idea of when -- or maybe just a historical timeframe of how long pricing gains would take to trickle down to your service lines.

[Thomas J. Simons, President, CEO & Director]

I think the crash for the industry, you got to go back 30 years to see one that's similar. I was in medicine at college at that time, Steve. So we weren't in these roles, then. Common sense tells us and what our plan is as management is if the equipment guys can get it because of supply and demand, good for them. We need to react when our competitors react. So when Baroid, which is Halliburton's mud company, when they move, then, our customer -- if they value your service and you're creating enough value, you've got a chance to get an increase because they don't have another great alternative that's willing to do it for way less. Same thing with Nalco and GE Baker. As big as Nalco is, their press release 18 months ago or whatever it was, or maybe it was last fall, about the increase, they actually were unsuccessful with that. So we've got to follow our competitors. I think other service providers getting it is a good indicator that there's a bit of money there that the producer could afford to spend. But they haven't gotten rewarded in their equity prices with increase in oil for the most part so they're not exactly rushing to pay the service people more money.

[Operator]

Your next question is from Ian Gillies from GMP Securities.

[Ian Brooks Gillies]

Are you able to provide, I guess, or perhaps remind us of why G&A tends to hang around at 12.5% of revenue? And perhaps how you could possibly get some more leverage out of that number, as activity continues to increase?

[Craig Frederick Nieboer, Chief Financial Officer]

Yes. This is Craig, Ian. I mean, I think we've been cautious to have anyone try to build big margin improvement on -- off of an SG&A number. We're adding people as the business grows. We have variable compensation that is rewarding people for getting work that pays money to the bottom line. So our view is that, I mean, could it be 12%? Yes, maybe. But that 12.5% for us is kind of an internal target number that we manage to. So I think that's probably -- if when we're a $2 billion company, maybe it's less. But in a $1 billion to $1.5 billion company range of revenue, I think that's a reasonable number.

[Ian Brooks Gillies]

Okay. That's helpful. With respect to the quarter, on the drilling fluid side, given some of the ramp in WTI, was there -- was base oil one of the primary issues from a product input cost? Did that piece just kind of run a bit?

[Thomas J. Simons, President, CEO & Director]

Yes, that's definitely one of the things that went up. Although that is something that you have a bit of success recovering. Transportation has moved up. And so that's tough to get back because it affects everything that gets moved, whether you're buying it to sell it or making it to sell it. And then, the inputs that go into this stuff, a lot of them are derivatives of energy. The cost for us and other companies to run their facilities has gone up. And people want to make more money because they can see that the oil companies and the service companies are back in the black, so you're paying people more. And we -- our field labor shows up at the top cost, and you've had to touch those people. And you want to. You want to keep the best people so you can solve the problem and get the work. I know you know that. It just -- it touches everything a bit.

[Ian Brooks Gillies]

Got it. And I guess, with respect to the transportation piece and all the headlines you see around some of the issues in West Texas, I mean, would there be any strategic benefit to adding in your own trucking fleet or doing more of it yourself, just given some of the cost escalation there?

[Thomas J. Simons, President, CEO & Director]

We already have rolling stock there. The problem's getting a driver. It's so ridiculous. I texted Murray Mullen after a NAFTA breakfast we were both invited to 3 months ago, asking him, is there any way that Elon can actually build that truck? Because we could use a lot of driverless trucks out there. The difficulty is the labor. It's not the truck. It's not the cost of the truck. It's getting someone you trust to drive it.

[Ian Brooks Gillies]

Okay. No, that's helpful. And then, I mean, with the potentially steering returns from capital to shareholders in the back half of the year, with respect to the NCIB, if I look where consensus valuation is and relative to what you can get for an invested dollar of capital. I mean, under what parameters does an NCIB become attractive relative to, say, the dividend?

[Thomas J. Simons, President, CEO & Director]

Craig, do you want to take this?

[Craig Frederick Nieboer, Chief Financial Officer]

Yes. Sure. I mean, I think, realistically, we have a free cash flow model that was proven out in the last cycle as we grew the dividend significantly while growing the business. We've been on hold on the return of capital to shareholders in the up cycle here, as we've grown working capital to take on all this work that's come to us. That's starting to flatten out. Our operating line has flattened out. We -- our own models, and I'm sure that you and the other analysts' models will see our operating line start to recede in your own projections. So we're back to the place without having to increase debt. We have the ability to either touch the dividend or buy back shares. I mean, our current dividend yield, we're a long ways away from being a yield story. We're a growth story anyway. So I think we're looking at it more, the dividend, more like an industrial company, likely touch the dividend, maybe once a year, modestly. So I think it will be part of that package. But there will be excess free cash flow above that dividend increase and above our CapEx requirements to grow and above our, call it reasonable debt level in the company. So the NCIB seems to be a tool that the most effective way to return capital to shareholders, do that strategically, do that opportunistically, and be in a position where we can shrink the share count. But maybe an initial internal target might be to at least absorb the shares that we've traditionally put out as compensation for employees on the stock-based comp side. So maybe somewhere in the 1.5% to 2% range a year of share buyback. So that's kind of the thought process that we've been going through, but nothing has been decided. And quite frankly, we have the belief that we're not going to announce something until we're ready to action it, but it feels like were getting closer to a point in the cash flow cycle that we can announce something.

[Operator]

The next question is from Jason Zhang from Cormark Securities.

[Jason Alexander Zhang, Analyst of Institutional Equity Research]

Just wondering if you could help us understand that HDD business a little better, in terms of the cost structure. So I understand it's sort of an existing product that's now being used for something different. So presumably, you would have the benefit of scale on the production side. So was it just a different labor pool that you're pulling from? And are the field costs just very different from what you would do on the drilling fluid side?

[Thomas J. Simons, President, CEO & Director]

So it's effectively like a drilling fluid or drilling mud job, but on a different kind of rig, in almost a different industry, Jason. And I'll kind of maybe take a step back and get everyone level set. So we've done plus or minus 250 jobs in the Delaware Basin with the same technology. So very proven out as a down-hole drilling fluid system. The trick to this technology or what's interesting about it is we can put a formulation in water. And when that water is still, when there's no energy going into it, so it means you're not pumping it, it looks like Jell-O. The minute you put energy to it or pump it, it moves like water. And that has great application in certain geology. In the crash, we challenged our people, reinvent yourself, find a market for our technologies that we haven't thought of or found yet and kind of save yourself. We had people that we'd set up in town that have had long runs in the field, work their way to sales or operations, and then there's no industry to sell to. So a couple of our people put their heads together and identify this as maybe a fit. We did a job for a pipeline company in Canada where they board under the Peace River, 3 times in the previous 20 years, different operators have tried to do that exact job in that place. And each and every time, the fluid fracked out or went out of the ground through a fault into the river and the job was shut down. We knocked that job off without a barrel or a cubic meter of mud getting into that river. Recently, early Q2, we took over a job in North Carolina. It was a job in progress. The HDD company and the pipeline company were trying to drill a hole under a river. I don't know the name. 250,000 barrels of viscosified water, so clay in water, and manipulate the pH of it, had been fracked or pumped into this river. We got there days after we received what's called NSF certification. So these products are determined to not be toxic to groundwater, which then frees up the HDD industry to use these things because you're drilling 100 to maybe 500 feet underground. We put our fluid in the hole, instantly cured the losses because when that fluid gets into that fault or fracture that's feeding the river, it viscosifies, and it basically cures the losses. You may pump a little fluid away, but eventually, that stuff gels or sets up and we have the ability to mix course materials in to try and assist sort of healing the losses. It shut off the losses. The operator was able to resume drilling rather than just feeding fluid to the hole hoping it would cure. We've got more orders from those guys. So we see a lot of upside in this. The reason we have not made money in it is because we've had to third-party a bunch of equipment, centrifuges and tanks, to make the system works. So there's going to be a process of educating and getting buy-in from the rig company that it needs to be treated like a drilling rig, not a conventional pipeline rig. And we need the right equipment on these rigs to make this stuff work. But that it's worth it, because you drill these things faster, and you don't damage the environment and risk a fine or getting shut down. So it's going to be a process, but we have IP around the formulation. We bought this technology from an old colleague of mine from the '90s, and we've applied it with success in the Delaware. We run it all over the place on surface hole in Canada. And we think we've got a niche market there that can be pretty good for us.

[Jason Alexander Zhang, Analyst of Institutional Equity Research]

Okay. Great. And then, moving on to the U.S. side, I wanted a bit of a sense for growth rates within sort of the drilling fluids and production businesses. So I realize you may not want to zoom too much into this for competitive reasons, but is it at least fair to assume that given the jump in rig counts we've seen year-over-year, your U.S. drilling fluids business has grown quicker than your production chemicals business in the U.S.?

[Thomas J. Simons, President, CEO & Director]

One doesn't affect the other, for starters. As great as it would be to cross-sell, there is often more risk in it than benefit. They're not dissimilar, Jason. Maybe a snick more on drilling. It's not that we're not winning more work in production treating, it's that you don't take a semi-loaded chemical to the wellhead. You take a drum or a tote, so it doesn't show up with as much torque. But over time, it really piles up.

[Operator]

There are no further questions registered at this time. I'd like to turn the meeting back over to you, Mr. Simons.

[Thomas J. Simons, President, CEO & Director]

Okay. Great. Thank you. In summary, 2018 looks to be a great year for the company. Our vision continues to be to expand our drilling, fluid and production chemical businesses, and to develop material frac and pipeline-related businesses. To do that, we know what needs to be done. We need to help our customers maximize their assets. We believe we can leverage being vertically integrated in making our products, our 8 labs and 70 scientists, our unique culture of problem solving with a high degree of urgency, almost bordering on paranoia. We'll maintain decentralized sales and service, which will be backed up by world-class technology and solutions. We're going to run a conservative balance sheet and stay asset light. With that, we say thank you, and we'll conclude.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.