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CES Energy Solutions Corp
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Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions First Quarter Conference Call. [Operator Instructions]
I would now like to turn the conference over to Tony Aulicino, Chief Financial Officer. Please go ahead.
Thank you very much, officer -- operator. Good morning, everyone, and thank you for attending today's call.
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 12, 2022, and in our annual information form dated March 10, 2022. In addition, certain financial measures will -- which we will refer to today are not recognized under current general accepted accounting policies, and for a description and definition of these, please see our first quarter MD&A.
At this time, I'd like to turn the call over to Ken Zinger, our President and CEO.
Thank you, Tony.
On today's call, I will provide a brief summary on our financial results released yesterday, followed by our divisional updates for Canada and the U.S., along with a brief update on our international businesses. I will then pass the call over to Tony to provide a detailed financial update and an update on capital allocation. We'll take questions, and then we'll wrap up the call.
I'm very proud to present our first quarter 2022 financial results. We view the first quarter of 2022 as a tremendous success for CES Energy Solutions. We once again set a record for quarterly revenue with $401 million. Q1 also represented a strong EBITDAC result of $42.5 million and the onset of a reversal of the margin compression discussed during our last call. Q1 represented a significant shift from historical supply chain stability. For the past decade, there has largely been stability in the supply chain for our company and for our industry. There have been very few radical changes in the availability and pricing around key inputs into our business. As mentioned on the Q4 call, I have never seen cost inflation as severe as in Q1 2022. This led to an extremely challenging time for ourselves and for our customers.
We advised investors on the Q4 call that we were experiencing severe margin erosion and that we were working towards passing on inflating costs to our customers, albeit with a lagging effect. Throughout the past 6 months through tireless efforts of all involved, we have managed to turn the tide on this issue. We have worked diligently and constructively with our vendors and our customers in order to get pricing corrections implemented.
Our Q1 results were an evolution. The margin compression persisted throughout January and February and then started to reverse in March as more and more increases were communicated, accepted and most importantly, implemented. We see these improvements continuing throughout Q2 and beyond.
Although risk exists in the market due to the macro financial situation in the world, where inflation in COVID have the ability to affect demand for energy, I believe our industry and business remains in a strong position due to the financial discipline maintained by energy producers everywhere with regard to budgets and production increases. Not to mention all the sanctions currently being implemented on a significant volume of production from certain oil and gas producing countries. I am extremely optimistic about the opportunities directly in front of us. We are aligned with our customers, and we are poised for profitable growth in 2022 and beyond.
Although initially challenging, we view the first quarter of 2022 as a tremendous success for CES. We once again -- oh.
Sorry.
I'll now move on to summarize Q1 for performance in Canada. Canadian drilling fluids continued to be a strong contributor for CES in Q1. As mentioned on our last call, we were able to hire and maintain sufficient stock throughout our peak Q1 drilling season. Today, we are providing service to 35 of the 90 jobs underway in Canada. Our Q2 rig activity appears to be on track to be the highest since 2017. With bidding season well underway in Canada, recent awards and indications from existing customers have us very confident we will maintain our historically strong Canadian market share going forward in 2022 and beyond.
PureChem, our Canadian production chemical business had a solid quarter in Q1, both financially and operationally and. Each month in the quarter was once again very near an all-time record revenue level with March setting that standard. Margins in Q1 were consistently improving as price increases were successfully realized to offset cost side pressure. We continue to see growing contributions from our frac and chemical -- from our frac chemical and stimulation groups as well. The other 3 Canadian business lines, including Sialco, Clear and Equal all continue to contribute to the financial and strategic success of the 2 primary Canadian business lines.
In the United States, AES, our drilling fluids group once again delivered very strong financial results as well as solid market share. As I always know, we are not chasing market share on either side of the border and continue to have a focus on opportunities with sustainable margins and revenues. As in Canada, we worked extensively with our customers in the U.S. to ensure we manage margins as closely as possible. Today, we are providing chemistries and service to 119 rigs in the United States. This is up from 109 during our last call. This includes a basin-leading 27% market share in the Permian, which is up slightly from 26% on our last call. With plans for a small CapEx spend to increase barite grinding capacity now approved and underway in Texas, the door is open to continue to strategically grow in the United States market.
Last up is Jacam Catalyst, our U.S. production chemical business. This division continues to post great results in a very competitive environment. Our manufacturing capabilities in Kansas make us a reliable choice for our customers. This becomes even more important in a market like this where security of supply is emphasized. As prices have ramped up over the past few quarters, our customers have focused on maximizing existing production. This has led to treatment volumes above historical levels throughout our production chemical businesses. Cost of goods fluctuations continue to be at the forefront of concerns at our manufacturing facility in Kansas. However, Vern and his team are managing the changing market with due attention in order to manufacture finished goods for all divisions that are competitive -- cost competitive and most importantly, leaders in performance.
Now for a quick update into our recent forays and international markets. We are actively pursuing several opportunities in the Middle East, and I will comment further on these should any come to fruition. We remain focused on growth prospects in this region and are spending significant time and energy evaluating multiple potential opportunities.
In Nigeria, our partner company PEARL, continues to grow their business and continues to order replacement chemistries as they spend their inventory. I will point out again that this is an early stage growth opportunity and is not yet anywhere near a meaningful contributor to the overall business at this time.
In conclusion, I want to once again extend my appreciation to each and every one of our 1,920 employees for their commitment to the business culture and success of CES. As well, I want to, of course, thank all of our customers for their trust and commitment as well.
With that, I'll turn the call over to Tony for the financial update.
Thanks a lot, Ken.
I'm very happy to report that the price increase efforts described by Ken and executed by all divisions have resulted in tangible improvements in margin and have set us on the path to normalized levels much earlier than we initially expected. We took the view last quarter to communicate an anticipated Q1 EBITDAC level that was expected to be approximately 20% lower than our Q4 level, based on January and February figures available at that time and extrapolating through the balance of the quarter. However, through a coordinated effort, we were able to achieve implementation of price increases in the latter part of the quarter that led to a quarterly EBITDAC reduction of only 11% versus the anticipated 20%.
As many of you may have already calculated, we exited the quarter with an implied EBITDAC margin in the 12.5% to 13% range versus the 9.5% range in January and February. This was all in the context of record quarterly revenue, complemented by strong activity levels and margin trends that we expect to continue in the year during the near term instead of having to wait for the second half of the year as we had previously expected.
During the quarter, CES generated revenue of $401 million and adjusted EBITDAC of $42.5 million, representing a 10.5% margin. The record quarterly revenue of $401 million represented a sequential increase of 9% from $368 million in Q4 and an increase of 54% from $261 million in Q1 2021.
Revenue generated in the U.S. was $249 million or 62% of total revenue for the company, and up from $234 million in Q4 and $169 million a year ago. I would note that AES continues to effectively operate on the right jobs and with the right customers as they've now reached pre-COVID levels and are realizing operational and financial torque in that business.
Similarly, Jacam Catalyst, our stable U.S. production chemicals business which helped carry the company through the lows of 2020 and then powered us through the growth over the past year has maintained its trajectory and has now also exceeded pre-pandemic levels through increased volumes and improved pricing.
Revenue generated in Canada was $152 million in the quarter, up from $134 million in Q4 and compared to $93 million a year ago. Canadian revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac-related chemical sales as revenue levels in production chemicals also surpassed pre-COVID levels and drilling fluids benefited from strong winter drilling activity.
Our adjusted EBITDAC of $42.5 million in Q1 represented a 24% increase from the $34 million generated in Q1 2021and compares to $47.8 million in Q4. Adjusted EBITDAC margin in the quarter was 10.6% compared to 13% in Q4. Although we established updated pricing throughout Q4 and Q1, there was a delay between the time that those price increases were agreed to and the time at which those price increases took effect in order to adequately offset increased underlying raw material costs. CES continues to expect a strong 2022, driven by elevated revenue levels and a return to more normal margins.
At CES, our main financial priority continues to be cash flow generation. I am proud to report that during Q1, our FFO was $33 million in line with Q4 and representing a significant increase over the $26 million generated in Q1 of 2021. We have maintained a prudent approach to capital spending through the quarter with a net CapEx spend of $9 million, representing 2% of revenue. We will continue to adjust plans as required to support existing business and growth throughout our divisions and at this time, we expect cash CapEx in 2022 to be approximately $40 million compared to -- comprised of $20 million for maintenance and $20 million currently earmarked for growth.
We exited the quarter with a net draw on our senior facility of $148.7 million versus $110 million on December 31. The increase was directly correlated to the working capital build associated with significant revenue growth and supply chain-driven inventory purchases, the acquisition of Proflow and the settlement of our quarterly dividend.
At CES, we are using our senior facility as a tool to support the expansion phase of the company to finance working capital increases associated with high-quality revenue growth. Conversely, as collections catch up to revenue growth and revenue growth rates taper, surplus free cash flow accelerates and the draw declines. As you will have witnessed during more acute revenue decline phases, the facility rapidly improves from drawn toward a net cash position as it did during 2020 when we went from being drawn $93 million at Q1 to a cash position of $18 million by the end of the year.
In anticipation of increasing activity levels in February, we exercised $30 million of available accordion capacity for a total facility size of approximately $265 million CAD equivalent to support the growth of the company.
Our balance sheet benefits from the attractive structuring and maturity schedules of our credit facility and senior notes. We ended Q1 with a total debt of $487 million comprised of $288 million in senior notes maturing in October 2024 and a net draw on the senior facility of $148.7 million. I would note that our Q1 working capital surplus of $506 million exceeded our total debt of $487 million.
Since quarter end, CES has continued to participate in strong activity levels and the current net draw on our senior facility grew modestly to $162 million.
We are increasingly optimistic about the industry outlook and CES's ability to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we evaluate on a quarterly basis.
In terms of capital allocation considerations, number one, we prioritize capital allocation towards supporting existing and new business through investments in working capital and modest CapEx projects that deliver IRRs above our internal hurdle rates. Number two, we remain very comfortable with our current dividend, which represents a yield of approximately 2.7% at our current share price and is supported by a very prudent payout ratio in the mid-teens. Number three, we will use surplus free cash flow to reduce draw levels as inflows offset post-working capital build outflows over the coming quarters. And lastly, throughout the year, we will buy back at least enough shares to offset our modest equity compensation-related dilution.
As we become more comfortable with our outlook and surplus free cash flow generation, we will revisit becoming more active in our NCIB program, depending on valuation levels implied by our stock price, and we will be prepared to be opportunistic.
At this time, I'd like to turn the call back to Ken for comments on our outlook.
Thank you, Tony.
As we both noted, Q1 was extremely challenging time in our industry from a margin perspective. However, from a revenue perspective, it was a huge success. As we are progressing through this recent extreme volatility on the supply chain and pricing front, we are very optimistic about margin and activity levels throughout the remainder of '22 and beyond. While this may not -- while this has not been an easy period to navigate, we are working through it and making necessary changes to our pricing structure.
Our team is laser-focused on the issue at hand, and we already see early indications of moving past this very temporary issue. We anticipate continuing a relatively rapid recovery to more normal margins in the coming months. I am very confident that 2022 is going to be a great year for CES Energy Solutions.
Thank you all for your time. I will now pass the call over to the operator for questions.
[Operator Instructions] The first question comes from Andrew Bradford with Raymond James.
So I was just wondering if you could help us get our arms a bit more around the question of working capital and inventories. Because over the last 2 or 3 quarters now, you've been -- I want to say padding, but you've been adding into your inventories in order to secure supply for key product. And where are we -- like as we look at the quarter ending inventory levels, like where are we in that sense? Is this sort of a normalized level now or a new normal? Or do you anticipate that security supply is becoming -- could become less of an issue as the year progresses and therefore, you see a bit more flow out of inventories.
I'll start off with that last part, and Ken elaborate afterwards as well.
We -- what I am hearing from the team is that rapid, unexpected, unprecedented level of increases in pricing for inventory have subsided. It hasn't disappeared, but it's now subsided. Ken may have some other comments on that. But just to back up to the more of the financial lens on your question.
We've gone through an unprecedented growth rate in revenue quarter-to-quarter over the last 5 to 6 quarters. And that's really what's driven the large buildup in working capital, not just for inventory build, but also very importantly, from an AR perspective, where it takes time to collect that revenue from couple of months ago and sometimes longer than that, where we can offset and catch up with AR collections to catch up to the increasing levels of revenue. So as that revenue quarter-over-quarter revenue growth rate starts to taper as I mentioned, that will also bring working capital levels down to a more normalized level, and more importantly, bring quarter-over-quarter increases in working capital investment to a more normalized level. And that's when you'll see working capital start to stabilize. And you'll see surplus free cash flow after working capital investment start to go positive in a big way.
Ken, any other comments on the inventory question?
Yes. I mean, I think the -- overall, the -- what we saw in Q1 in January, February -- December, January, February was unprecedented. It hit every -- we didn't have a single product in our product line that didn't get touched by inflation and most in an extreme way. So we work through that. But within that, you've got Chinese port closure still persisting because of the COVID stuff that's going on. And you've still got backlogs in the shipping industry where ships can't get into ports to load and unload, containers are sitting their full, which is all causing us -- for 10 years, we've run just-in-time inventory. I'm speaking to inventory only. For 10 years, we run just-in-time inventory, and that's just simply not possible anymore. So we're carrying more inventory than we have in the past.
There's inflation on all the inventory we have, including the liquid invert base oils in Canada, all that stuff that's affecting working capital as well. But overall, I think the worst is behind us. We're just trying to get our feet on the ground again here, figure out the new -- not figure out, we have a new plan to go forward and see how that plan is working because things are changing all the time.
Shifting gears a bit. Kind of like what happened in March? Because a lot of oilfield service companies that we talk to, for sure, have been struggling to kind of keep up with cost input increases. And you're arguably the most product heavy oilfield service company that probably most people on this call deal with. And with a lot of different inputs coming at you with cost increases in the quarter, I imagine that created its own challenges. And I think that's what you were talking about on your last call. But sort of how did you get in front of it from either a cost side or a customer side to get those margins to kind of start working for you, while costs were going up as rapidly as they were even through March.
Yes. I don't think it was -- I don't think it was possible to do anything about the cost side. It was more dealing with customers in a productive way. And it wasn't -- it didn't suddenly happen in March. I'll point that out that we were talking about this in Q4. We were giving smaller price increases because historically in the industry, a few products, 1, 2, 3 kind of get hit in the -- can get hit because of a temporary problem, the Texas ice storm, whatever. You can have a couple of things to go up. And you can deal with those kinds of price increases relatively quickly. You can get them past quickly.
But when you're going to a customer for the first time in 10 years with an entire price list in the middle of a project and telling them that you have to get increases in a significant way on every single one. I mean, their natural tendency is to go to a bid to check the market to make sure you're not just taking advantage of the situation.
So that takes time to get, first of all, to convince them. We -- I personally sat in somewhere. I lost track, and I'm trying to put it out of my mind because none of them are fun, but somewhere between 50 and 100 meetings with customers, explaining to them when we came up with presentations showing them worldwide shipping costs, showing them inflation everywhere, container costs, shortage of supply, all the problems that we were seeing and showing them the delta that was creating on our cost of goods. And then from there, it just became kind of a trust thing to get them to understand that we weren't trying to rob them.
We were just trying to get our margins back. And a lot of the -- those discussions that we had in December and January before the call started to take effect either in January or February, a lot took until March or April. But it just took time to get them in. I mean the cadence there is a slow one, right? You have the meetings, you educate them, you get them first of all, to commit to not going to an RFP and rebidding and all the work and get them to understand the increase and then you all agree on what that increase is. And that's a couple of weeks.
And then from there, like on the drilling side, it's -- you've got to finish the well you're on because you don't -- they never allow you to do an increase in the middle of an AFE or a well. So you finish the well you're on, which can take anywhere from a day to 3 weeks, call it, of more time before it gets implemented and then you implement it on the next price list, which is great. But that just goes into that well that's getting drilled, and that's another 3 weeks of delay. And then you invoice that well and then you realize those -- that increase.
So it's a 6- to 8-week kind of thing best case. You've got to be ahead of it before you start seeing results. And then in that time frame, you got to have the right conversations early, and we got lucky on some and some we had to revisit because we went in and asked for something for an increase, and then it turned out that during the 2 months to take to get that increase actually to come to the books, we were wrong and things went up even more than that. So we had to go back to them again and go through that whole process again.
So it's not a quick or easy transition and didn't suddenly happen in March. We just suddenly started to see the effect on the books in March and then again in April. So we're confident we've caught up. It's not to say that there's not still a risk in the marketplace because there is. But I would view or I would -- I mean no one has a crystal ball. But at this point, it looks like things are more -- they're going to be more related to individual products or geographies where we're getting products from.
So I think it's going to be a little easier to manage us, but we're not going to have to do these entire price list changes. It's going to be more 1, 2, 3, 4 products kind of thing.
I guess the long answer to a short question. The short answer is we were on it a long time before March, and that's why we saw the effect in March.
Yes. I don't think the question wanted us all to a short answer anyway. So thanks a lot for that. And then maybe just on staffing, you sort of mentioned growth. And then even if you just sort of keep your market share within different geographies, and it sounds like you're growing it in some. I know that your experience matters in the field for you guys. And so how do you -- and we're also hearing from a lot of other service companies how staffing levels or even finding labor is extraordinarily challenging now. Wonder if you could just sort of speak to your experiences and how you're dealing with that.
Yes. I mean we're experiencing the same thing. It's tough. We're finding people. I mean we have a great culture. We have great people that work here that try and recruit others. We've been able to find people that have experience in the industry, which probably is causing part of that problem that some of those other service lines you're talking about are having. Because we -- I mean, typically, we hire guys off drilling rigs. So that's -- it's -- we have -- our guys get to go home every night. The drilling rig guys generally don't. So we don't pay as much as they do, but we get -- the guys have a better lifestyle. So we end up having an ability to get guys from rigs, and that probably causes the rig guys problems recruiting all the time.
As far as experience goes, if they've worked on a rig for a while, they've got enough experience to have a baseline knowledge and then we just spread our -- we've got a lot of staff field hands and a lot of longtime guys that we can spread around to help out.
So we haven't had a lag or a pushback from customers in this market yet on staffing -- our experience. But we did back in 2013, 2014 and 2012, I mean, there was years back there where it just got so busy and so crazy, you had guys running their own all over the place that didn't have experience. So that could be tough. But we do have hotspots where we struggle to get people. In Canada, it's places like Edson and even Grande Prairie. And in the United States, the Permian Basin, obviously, with all the activity that's happening there. It's -- it can be tough to find people. But I wouldn't say we're thriving, but we're getting by.
Okay. And just last one for me is that is if you think about how you're growing within your existing geographies and customer base, is there -- are you closing in on capacity in any of your facilities that might require some additional -- we call it growth capital or expansion capital over the next, say, as far as you can see forward, say, until the end of the year.
No. We saw that last summer in Nisku. So we did the expansion there. We saw that earlier this year and maybe we're even a little bit late on the barite because we saw that coming. And we've already -- we're already producing that thing at capacity and selling every drop coming out of it. So we're actually pushing pretty hard to get the new Texas facility put together so we can be -- have excess supply again. But those are the 2 -- those were the 2 pinch points. Those have been covered. Beyond that, no, I'm a sales guy, so I'm very optimistic that we're going to do really well in this market. And I'm comfortable that we have the backbone to support it.
The next question is from Aaron MacNeil with TD Securities.
You mentioned the changes to your pricing structure in your prepared remarks. And I guess I'm just wondering, does that indicate that your contract structure has changed? And if it has, could you maybe elaborate on it? And I guess what I'm really wondering is, are you able to now pass on more operational or inflationary price risk on to your customers in the form of different or improved contract terms?
Well, I would say -- I mean, in the U.S., we have much more formal contracting than we do in Canada. In the U.S., there is openings to have discussions with customers about anything, including price increases. We've done a lot of -- we've always had a portion of our business where customers are interested in small quick pay discounts or buying some inventory to hedge some cost and those opportunities still exist on both sides of the border. So I don't think there's been a step change there or anything. It's just -- it's always been there.
Okay. And then as a follow-up, are you at the point where you're actually able to improve your margins with pricing? Or are you really just focused on maintaining your preexisting margin structure?
Well, I think back in 2014, when things were really smoking, we had some good margin numbers back then, 2013 as well, and it got closer to 15%. So it's not unattainable. This market has got some work to do to get to where we were as far as activity and shortage of supply. But for sure, when there's an opportunity to differentiate yourself from your competitors, there's an opportunity to get better pricing. I don't know that we're there today. Right now, we're focused on getting back into our historical range.
But is there an opportunity later this year if some of these numbers we're seeing, and if -- as far as activity goes, if some of them come to fruition, then yes, I think -- some of our competitors will struggle. Like we compete against a lot of small companies that don't have the same capacity to get inventory that we do. They don't have the same training capabilities that we do. They don't have the same lab capabilities to bring solutions to the table that we do. And as things get really busy, all those things become really important and start to really differentiate ourselves. So yes, I think there's an opportunity, but we're not focused on that at this time.
Understood. Tony, I've got one for you, too. The 12.5% to 13% margin that you discussed in terms of exiting the first quarter. I guess I'm wondering, are you suggesting that you can realize that type of margin in Q2 given the seasonal slowdown in Canada?
So other than the seasonality that we experience always in Q2, the answer would be no. We would expect margins and EBITDAC to be lower in Q2 than in Q1. But I think in this case, it's a different thing. We're not going to promise anything. But let's just be clear, we were in the 12.5% to 13% range in March, and we expect to try to continue that into Q2, that margin.
The next question is from Tim Monachello with ATB Capital Markets.
Follow-up on Bradford's question. Talking a little bit about the risk around inventories. My calculation, DSI would have probably been in the low 80s range for some time here and historically, maybe in the 55- to 60-day range with the norm probably speaks to the inability to do just-in-time inventory. But presumably, as most -- the most acute friction in the supply chain subside, costs could deflate over time, at least for some key inputs. Is there a risk that there could be cash losses on inventory balances at some point in the cycle if cost pressures are alleviated rapidly? Or there are contractual pricing commitments or other factors that might smooth that out and allow you to potentially pass higher cost inventory through to customers?
Yes. Look, the fact of the matter is there are always risks. What I would say to help you understand what we've been doing is that carte blanche that we provided procurement groups with starting in the fall of 2020, and that started to tighten up. And that started to tighten up towards the end of last year. And it's pretty tight now where we still are looking at strategic surplus inventory purchases, just like we did significantly in 2021. But they're put underway more scrutiny, and they're way more rare. So there's always that risk, Tim. But just so you know, you'll see us doing less of the big bulky inventory purchases unless we're very, very comfortable, and we'll do the risk assessment on what would happen if things went down. But again, the levels of surplus inventories that we're going to be carrying from here on in are going to be lower than what we have seen over the past year.
Yes. I'll add to that -- I don't think there's any new risk in that profile. That's -- those risks have always existed, and they continue to exist. I know we're carrying a little more inventory than we historically have, but we've always had that risk in the market.
It is the lesson from this that you'll be carrying more inventory going forward and building like more storage capacity and stuff like that, just in case you see shocks in the market, which seem more likely on a go-forward basis? Or do you think you'll get back to where you were in terms of base inventory?
I think we're going to be somewhere in between for the balance for the next couple of quarters and get back to the normal level towards the end of the year.
The next question is from John Bereznicki with Canaccord Genuity.
Just switching gears here to production chemicals. There was some commentary in the MD&A about U.S. treatment points obviously being flat year-on-year, but volume and revenue per treatment point increase. Can you give us a little bit more color about that dynamic?
For sure. So a couple of things. Just factually, and you know us well. There's a seasonality effect. We're especially in Canada, let's talk about Canada first, where there is breakup. And in a lot of cases, the customers are motivated to take on significant production chemical levels in their tanks before breakup. And you see some of that. So what that means mathematically, John, as we deliver a lot more stuff for each of those times or those treatment points where you go deliver that customer in Canada. So that explains the divergence of way more revenue even with flat treatment points in a place like Canada.
And in the U.S., it's been a confluence of factors. Number one is that for the last several years, the magnitude of the wells and the production levels have gotten higher and higher, especially with multi-well pads. And the number of times you're going to each of those locations decreases because you're providing more volumes every single time. And then the other thing that's sort of working in our favor, is the price that you're getting for that same volume every time you're going to that treatment point, or that visit, is higher. Therefore, your revenue per treatment point is going to be higher.
Got it. And then just thinking about drilling fluids, inventories at the industry level, any insights there in terms of how that's progressing? And what that could mean as we roll through the balance of the year?
I think that there's a -- the pricing increases that we've seen in a lot of ways on some of the commodity products are being driven by shortages in the market. And those shortages exist at the manufacturers. They exist because the products that we've been buying are getting shifted to other industries. And in order to get them, we got to pay the price levels that are -- the other industries are paying. And in some cases, we can't even get them because they're contracted. So the potential for shortages in the industry, I think, is real. I don't have a weighting to put on that. But definitely, with the commodities, things like barite there's been a massive shift in barite pricing and availability internationally and locally.
So that there's risk there if you don't have adequate supply. And I don't think it's a risk that anybody can offset. We do our best on barite, we buy ship loads at a time, and we're sitting on inventory all the time. So we're as well-prepared as anybody can be, but nobody can take 6 months on 1 of those kinds of shortages. So it's just going to depend sort of how busy we get. And I guess, yes, there's going to be a risk to the industry that they may have to switch things like diesel, like diesel right now is in short supply in the U.S., it's a major component of the invert. In the U.S., 90% of our drilling is done with invert drilling fluids. If we end up with some sort of diversion where diesel gets shifted to something else, and we can't get it as a makeup product or it gets so expensive that it becomes uneconomic, then companies are going to have to look at drilling with something else like a water-based fluid of some kind.
So all those risks exist. Maybe they're a little more exasperated right now, but it's -- they've always been there, I guess. But right now, they're definitely under pressure, and that's part of the reason we're carrying a little more inventory is we're not going to get probably anybody any -- through any kind of a long-term shortfall, but we'll do our best to be the last one standing.
Great color. Appreciate it. One last one. Just the Proflow tuck-in in the quarter. Can you give us a little more color around that transaction?
We actually bought that in February. And we bought it -- it was more of a reputational acquisition than anything. I mean strong business, strong technology. They have a presence in deepwater Gulf, which is something that's extremely hard to get as a small company. It's something that we've tried to do in a small way or taking step towards over a couple of years, but the barriers to entry are so great. We were just -- it was going to take a long time to ever get there. So we knew of these guys, we knew of the success they were having. They needed a bigger partner. They were using wholesalers largely to supply their chemistry. So they needed some R&D help and some supply chain help, and we needed entrance help.
So we went together and found a deal that worked for both of us. And now we're -- when it comes to doing bids for the majors like the Exxons and the Chevrons, they want -- in order to do a bid for them, you can't do it regionally. You've got to be able to supply them chemical everywhere that they drill. And now we can -- that was the one hole that when they consider North America, they consider North America being Canada, United States, including the Gulf of Mexico. So it didn't help us internationally, obviously, but it does help us with the big bids for North America. That's strategic, it is, I guess.
The next question is from Jonathan Goldman with Scotiabank.
The first one, is there any way you can frame how much of the sales growth in the quarter was driven by volumes or price realization any way you want to talk about it and maybe how those dynamics have played out so far in the second quarter?
It's tough to bifurcate those two. So in terms of quarter-over-quarter, let's think about it in Canada, very similar in terms of activity levels. So a good part of the Canadian growth would have been priced-related. And when you look at the U.S. and you look at the underlying drivers in the quarter-over-quarter comparison in the number of rigs we were on, in the drilling fluids business. And you look at the increased activity levels that were experienced in production chemicals, then I'd say that in the U.S., it may have been driven a bit more by volumetric drivers as well as price. And in Canada, it was probably pretty even with both of them.
That's great. And then just one more for me. Just given all the macro and geopolitical developments over the past few months, can you share any insights from conversations with your customers in terms of increasing activity levels, and longer-term plans on increasing production? Have those conversations shifted at all just given everything that's been happening?
We don't -- at the level we're talking to guys, I wouldn't say that we're getting the inner strategy of any big oil and gas producers. But from the drilling manager group. Yes, there's plans to incrementally grow this year. I don't think there's any plan for massive growth. And I think that's driven by the fact that there's no rigs to do that with. So in the context of getting people and getting equipment, I think they'll continue to try and maximize that as long as they can be efficient with it. But we haven't -- I haven't heard of anybody sort of -- I don't want to say -- I haven't heard of any of the mid to big guys talking about doubling plans. Everyone has been pretty consistent with slight growth is what we're seeing. That's -- and we've had a couple of wins. So we're anticipating that or more.
The next question is from Keith MacKey with RBC Capital Markets.
Just this first one. So you've got about, I think, 27% market share in the Permian, which maybe implies 90-ish jobs. Just curious how that equates to a utilization of your facility number? So like how many jobs do you think the Kermit plant and surrounding plants can handle overall?
Great question. So the way the plant is currently constructed with the sort of ability it has today as it sits, we're probably about 75% of the way to full there. However, the mode to expansion on that is pretty simple. So it's people and some tanks. So it's not a long-term planning kind of upgrade on that plant. It's not a -- we don't have reactors there. It's just invert blending. We have enough mixing capacity there just to put more storage in. And with more shifts and more people, we can make a significant difference in the output.
So it's unlike the barite plant that we're putting in, in Texas, I mean, that one takes long-term planning. You have to do a bunch of site work and you have to buy the equipment, which takes a long time to get in this market. It just so happened that we were -- we had some equipment still left over from when we built Corpus. So we didn't have to go through that long-term lag. But the invert blending plant is a pretty short term in a month, we could upgrade that whenever we're ready to do it.
Got it. That's helpful. So as far as capacity goes then like you're getting tighter, but with some potential to expand if needed. But with the current number being at 75% in the blending side, does that enter into the pricing discussions at all as far as industry capacity goes? Are you able to move pricing based on that at all? Or is it -- or does that not really enter into the discussion?
That's not something we discuss with our clients. I don't think -- we don't try and use it as leverage, but we do internally discuss as we get to higher utilization levels and then look at our internal cost of doing that, we make sure and pass that through to the new customers as we pick them up if we need to.
And I guess the other thing to consider, Keith, is related to that the higher level of utilization we have in places like Kermit and even our Corpus Christi barite grinding facility and the new one that's coming on in Texas. That actually lowers our operating cost per unit, which maintains or improves profitability because of that increased efficiency.
Got it. And just finally to follow up on the Proflow. I understand that it makes you more eligible to bid on some -- for some of these larger super majors. Have you had any discussions with those companies related to that yet? Do you think this will materially impact your ability to gain share with those companies? Or have you already been making headway and there's maybe a little bit more to go, but it's not a big driver? So how would you characterize that?
I think it's -- I would -- I'll go first on this one. I think like 25% of the reason for doing it was that, 75% was because of the people at Proflow and the success they're having there and accelerating our own growth in that area. So I mean, it may -- it will help us get on the bids. I don't know if it helps us win them, but it helps us get on them. And -- but in the meanwhile, we're Proflow has got a profitable business that's going great with a whole bunch of good people and they have area expertise, and they have a couple of customers that trust them that we are going to do our best to support them on to help them get all the business from those guys and find others.
And, so just to add on to that, Ken, that is 25% plus 75%. They got to squeeze in a little bit as well. The fact of the matter is that the transaction when we talked about it with Vern and with Richard and with the Board and Ken. It stands on its own from an accretion perspective. So when we looked at their financial performance, historical, year-to-date, most recent quarter and looking into 2022, we very deliberately structured that deal. So that had met what we always talked about, which are our IRR targets, and it was accretive even at that small size.
The next question is from Michael Robertson with National Bank Financial.
Congrats on a solid quarter. I just had just one follow-up as you guys have touched on a lot of this already, but good to hear that the rapid price increases are subsiding on the cost side. I was just wondering what you guys are seeing from a shipping standpoint, and whether there's been some cooling moderation there as well? Just wondering given all the -- some of the lockdowns in China right now.
Yes. I think we talked -- think a bit about it before, where we went from -- in 2020, I think it was, we were paying $2,000, $2,500 for a container out of China, that got to be like $30,000. The peak $32,000. I think, was a big number I heard. That number is backed off now. It's not nowhere near back down to $2000, but depending on the day and the shipper, you can find them in the kind of halfway in between those 2 numbers now. But there is risk that it's going to go back up because right now, they're shortages, right? With the ports being closed, there's getting to be a backlog again, there's getting to be backlogs in the U.S. So we're preparing for prices to go to start chasing back up to those higher numbers again.
Got it. So not exactly a stable profile there yet.
[Operator Instructions] The next question is from Josef Schachter with Schachter Energy Research.
I'm wondering, do you get -- do you guys get any product that goes through your system into your product line from Europe, given the problems we're seeing now in Germany, where there may be cut off from Ukraine of natural gas, and they may have to shut down some of their chemical manufacturing businesses. Does that impact you at all? Or is Asia more of a sourcing price for you than Europe and Germany?
Now I'll start off with that one, Josef. So just to answer the question, it's going to be twofold answer. So no, we do not buy product from Germany or from Europe. However, yes, we are affected because some of the markets that are served by countries in Europe, including the Ukraine, do manufacture and sell product into competing end markets that we get those same chemicals or raw materials from other places. But because certain items that are used in, for example, agricultural as well as our industry have come off the market from places like the Ukraine that has affected the price that we pay for that same type of product that we're getting from Asia. So directly, no, we don't, but indirectly, yes, absolutely. We do get affected for some products.
There's definitely been a shift in a couple of product lines where because of the lack of the cost of manufacturing in Europe, they've shut down or slowed down some plants. And so those products are still required in Europe. So now they're pulling them from North American plants where we have agreements and we buy product from and it's stealing available production from us and putting pricing pressure on us. So once again, indirect, but it's having a direct effect on us.
So when you end up -- in the last call, you guys were talking about having to have multiple conversations a month with your customers about the prices coming in barite and others that you're talking about, are those kinds of conversations now happening once a month, once every 2 months related to costs that are inputs? And is there a possibility where companies, let's say, accelerate their programs later in the year? And we go from 700 rigs to 750 or 800 in the States and from 200 to 250 in Canada, where they may want to do more long-term contracting, and where you can have a kind of short-term escalators built in on a pass-through basis but not pushing margin. But they just say, if you get a 15% bump in a product, they immediately accept it because you've got a long-term contract. And they see that, that -- and they're willing to accept it on that kind of basis because they know they're going to get what they need when they need it?
Yes. I mean we've talked about that and we've had that discussion with customers. We have a couple of pricing arrangements like that. I mean the risk in arrangements like that is you've got to show them your cost of goods generally to get them to buy into the whole process. And then your -- once they have that, then they use it to beat you over the head. So we typically don't -- we try not to disclose that. So we put some surcharge, call it, on a couple of products where it's tied to an indice. And if those products -- that indice increases those products have increased by that same percentage. But we try not to get too deeply embed with cost of goods and supply chain.
Okay. So if there's a pickup, the EIA, I think, put out a report saying they thought that we're going to get to $13 million from the $11.8 million. Does that really impact you in terms of -- the staffing, as you mentioned, is better because you get people from rigs, you've got capacity in your plants. Are there any bottlenecks that you need to kind of open up if there's going to be that aggressive maybe security supply move where companies increase their budgets 10%, 20% to increase production by 10%, 15%?
Well, I'll tell you, we're going to -- it's going to cause -- we're punch shrunk now for everything that's happened over the last year. So we're used to it, and we'll manage it when it comes. We do a good job. We've gone to talking to customers monthly if you're asking about a cadence, customers who will accept it. We're trying to go into the monthly with the presentation, showing them just general industry information on cost of goods. And when guys come to us with plans for -- we just picked up some new work here in Canada, that's a significant piece of business, and they laid out their plans for us for the year. And it's all obviously in addition to what we had already planned and built into our forecast. So it's just more that kind of thing, getting together with them early, finding out what their plans are and then figuring out the way to solve it. Our procurement people are the best in the business, I think. And we'll find a way to do it, but we have to know about it. The last second stuff is what kills us.
Yes. And are those kinds of conversations happening more in Canada? Or are you seeing them also happening in the States?
Canada and the U.S. It's been a strategy. I mean it's -- not every operator wants to be hassled or bothered with it. But I would say, half or maybe even a little more or after everything that's happened in the last 3 months are open to it. I'm sure it will fade away if there's some stability in the market again, and it gets boring. But we've got them as quick a cadence as every couple of weeks on some of the business and generally once a month, in worst case once a quarter, just some kind of an update talking about where prices are, where they're going.
This concludes the question-and-answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks.
Well, thank you, everybody, for joining us for the call today. As I've mentioned a few times, we're very optimistic about where the quarter took us and where the coming quarters are going to take us. We're in a very good position and we're optimistic about our future. We look forward to speaking with you again during our Q2 update in August. Thanks for your time.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.