CES Energy Solutions Corp

TSX:CEU

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions Corp. Fourth Quarter and Year-end Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Anthony Aulicino, Chief Financial Officer. Please go ahead.

[Anthony Michael Aulicino, Chief Financial Officer]

Thank you, Sharis, and 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 results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our fourth quarter MD&A, press release and annual information form, all dated March 11, 2021.In addition, certain financial measures that we will refer to today are not recognized under general accepted accounting policies. And for a description and definition of these, please see our fourth quarter MD&A.At this time, I'd like to turn the call over to Tom Simons, our President and CEO.

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

Well, good morning, everyone. Thank you, Tony. The purpose of today's call is to show how battle-tested the nature of our great company is. We've experienced 2 oil crashes just since 2015, yet here we stand again.Today, we're undrawn on our bank line. And in fact, we exited 2020 with $18 million cash in the bank. Today, CES, through its 2 mud companies, Canadian Energy Services in Canada and AES in the U.S., is the #1 drilling fluid provider on land in North America, in terms of market share and financial performance based on management's estimations of the market. We're the #3 production chemical provider on land in North America and climbing the ranks.We're on the common pipelines in stimulation. And finally, in frac and drilling out frac plugs, and when you blend that all together off a common manufacturing platform, common distribution platform, back-end platform and a committed and harmonious culture, it creates operating leverage, which is code for margin, which creates profit in an industry that typically consumes capital and never creates cash flow. So while the year has been a test for everyone on this call and everyone on our payroll and the poor folks that didn't get to stay on payroll, here we stand again battle-tested and actually better than ever.I'll move on to the next point. We have massive underutilized throughput in our infrastructure, in our manufacturing plants, and we've even been able to reduce CapEx on rolling stock because of parking trucks as we downsized headcount for reduced operations. So the business is poised as our customers' cash flow grows as commodity prices for oil and natural gas is growing, where it's economic again. I've been told anecdotally by plenty of fine customers that their natural gas, the last thing they want to do is flare it in the Permian because they can now sell it and make money. So we're poised to grow as our customers have a commercial reason to produce more oil and gas and not need to spend money to match that growth. We can just make more chemicals, sell them and then sell them more later. We have a motivated, capable, trained, hungry workforce, which we kept in place through these 2 crashes in the last 5 years. We have infrastructure in the correct places, the Permian, Western Canadian Sedimentary Basin, the Northeast U.S., the Gulf Coast, We manufacture in Kansas, not in the Gulf Coast. People may notice that things keep happening in the Gulf Coast. We've got a plant in Vancouver. So we look at supply chain of commodities coming off the water, not just out of the Gulf Coast, 2x now in 5 years, we can get supply of commodities when you can't get them elsewhere. It's pretty handy.As COVID eventually lifts, we feel very hopeful and encouraged about the future of our great company.As we're running a larger market share company with less working capital, if people could meet together in the business, I would say we'd have accountants and warehouse managers and company officers, high fiving each other at Christmas parties. We have learned somewhat with the help of change of management but really by embracing the idea that we can create permanent value for the listeners on this call by running this business with less inventory without running out. It's taken the use of AI. It's taken a change of culture in warehouses. It's taken faster invoicing. It's taken a massive effort. It's taken process change. We're running this company with low to mid-30s working capital. So we've been able to grow market share without needing to use the bank's money. And that's obviously very powerful, and we're committed to having that be a permanent change. And we think we can.I want to say to all of our employees listening or the ones that call in later and listen to this, we couldn't have done this without you. You deserve some of the benefit, and we're grateful. I'll now go into the operations report. I'm going to continue with a bit of a more muted tone like last quarter, and I'll just be plain spoken and say why. Our historical updates, I want to -- I'm an ex drilling guy. And I like to brag about the breakthroughs we have solving our customers' problems because everyone wants to know why do they hire us instead of somewhat bigger because that must be better or someone really small because they entertain them more.And we've got competitors that are either on the cusp of going brokes and they need to steal ideas or we've got unethical competitors that just steal ideas because that's cheaper than hiring great people to think of great ideas. So we're going to start being a little more guarded and protecting what everyone on this call benefits from us doing better than our competitors. But I will specifically talk about where we've grown and why and hopefully give people confidence that it's lasting.So I hope to share enough for listeners to feel confident that we have a diverse customer base across more than one segment and that the tricks of the trade can't be divulged but that there's too many -- and it's because there's too many weak competitors that we need to let fail, and we can't let the unethical one steal our ideas.The equity and bondholders that want more color from us, come see us in Midland, Calgary, Houston, Grand Prairie, it doesn't have to just be Tony or I. Vern and Gary can take people around in Midland. Richard can show people in Houston. People always ask us, what's the trick? There isn't one trick. It's the chemistry. It's the application. It's the people. It's the culture. It's the location of the infrastructure. You could almost bring a little gin pad and come up with a calculation of out of 100, how would you rate who you would pick your supplier, and it's a recipe and a picture tells a lot of words. So for people that are very curious as we meet these updates, we're available for you if you're an investor in the business.I'm going to start with Canada. For Q4 in Canada, Canadian drilling fluids continued and still continues to dominate deep drilling, SAGD, heavy oil with cold recovery, Southeast Saskatchewan. All of markets where drilling fluid technology lowers drilling AFEs, and if done properly, can lead to superior completion outcomes on the well as well. During October, we averaged 31.9 jobs. In November, 37. In December, down to 31. And for Americans unfamiliar with why us Canadians observe Christmas? So basically half the month gets lost, maybe 10 days. So both are way down from 2019. In 2019, we averaged 55.79, but we made money off that lower number. It was hard on us, and it was really hard on our poor employees. I just got to say as a Canadian, God helped the people in this industry that continue to get screwed by Ottawa, by the indifference of people in Central Canada that are on the verge of not having energy if Line 5 gets shut down and the people in Vancouver that seem to want energy for themselves, but they don't want the places that produce it to produce it. We need a break from you guys. It can't be both ways. And these people that earn these livings working for us and companies like us, this is devastating their lives. We need to come together as Canadians.Most businesses with that volatility that I mentioned, going from 56 jobs to 31, 33 jobs in a year, they wouldn't be able to make money because their assets and their cost base are fixed. Our assets are our inventory, and our costs are our people. And if we're careful and attempt to be sensitive with both, we can take them up and down and stay out of the group. And we were able to do that. Before analysts get too crazy, I'll say that we're up. It is very competitive out there, as CES continues to work way below market, trying to sell that business. In January, we averaged 65.75 jobs. In February, 63.75. In March, 47.75. We do feel confident we'll hold our position in the deep markets. Everybody is asking about the clear water. We're working on a system that we've done a lot of regained perm work around that we think could be less damaging than what people do now, which is just drill it with KCL water to prevent the hole from falling in. They don't frac those wells. So we need someone to run a trial on that system and see if it improves productivity and reduces drilling fluid costs a little bit. There's no money in buying KCL for $15 and selling it for $16. That's not our business, and that's currently how those wells are drilled. But that play, the economics are spectacular for the producer, know that we're focused on it with a science angle and trying to get into it. HDD continues to be a nice niche business for us in Canada with the odd win in the U.S. as well. I'll move on to PureChem. This has got to be the best turnaround in history. It will be the best turnaround that I've had the fortune of being around in my career. Dave Burroughs came to us, gosh, probably 7, 8 years ago from Weatherford. Dave and Ken Zinger have become an awesome team. Many of you don't know Ken, a few of you will, on our letterhead. Ken and I started this company 20 years ago, September 5, '01. I wish more people knew Ken and knew his contribution to the business. We chaired new Boards 20 years ago. My parents thought I was out of my mind to quit as a sales manager of a New York Stock Exchange-listed company that thought I was the fair hair boy and was going to be their guy in Canada.I just always wanted to work for myself. Ken was the best Mud Salesman I've never seen in my life, and I didn't want to compete with them. And so we did it together. And for some of you that know the story, we took it public to get the third guy monetized and keep our company. And 20 years later, we're bigger than that New York-listed company.What those guys have done at PureChem is nothing short of incredible. They have got supply chain dialed in. They have got sales methods and pricing dialed in. They have got culture working as one. They have lab support dialed in. They have customer experiences and problem-solving at sky-high levels. They've got us in new plays. They're helping us get in the oil sands, where the spend is mind-boggling. It's a factor higher than our sales today. We're looking at new problems in new markets because of the credibility that those guys are creating for PureChem. So the shoutout is justified.PureChem has become an accretive contribution to our company after having been a financial drag on it for a long time. We always expected it to be for a long time, but the turnaround has been fantastic and benefits everyone on this call. I'd like to thank the people in PureChem for their patience for the last few years. We know that change is tough for people. This change has been worth it guys. You guys now work in the best chemical company in Canada. We're going to continue to invest in you guys, invest in analytical capabilities. We're going to take over the Canadian market and become the #1 up here.To everyone at PureChem, again, thanks for your patience. We fixed it. We're going to kick some a**. And now we're going to have some fun, and we do something we're really proud of. And I will say that -- I've lost my place here a bit. I'll now move on to PureChem or I mean to Clear. Pardon me. I do want to go back to this, sorry. So customers are showing trust in PureChem and our brand. And without getting ahead of our skis, we see a lot of service companies coming out with things about ESG. We want to never be disingenuous. We don't want to say we will be carbon neutral 2050. I don't know that I'll be alive in 2050. I want to promise things to people on this call that later I can look to you in the eye and have made good on. So we are certainly working on ways to demonstrate how this company is pulling its weight in that fashion and finding ways for our customers to get out of -- under the black cloud, the politics is put oil and gas under. Service companies need to make their customers better and then the customer hires the service company. That's how this works. So we're doing things like that. And then as those solutions take, we will tell you about them rather than come up with some way that we won't release emissions and think that somehow satisfying shareholders is more important than satisfying customers. Our good standing at PureChem is allowing us to look at opportunities to possibly tie up carbon. It's letting us look at opportunities. The progressive customers are considering in the energy transition. So I think there's a reasonable chance over the next 5 years that this company could make some money through this transition, but it won't be with window dressing press releases. It will be doing things that relate to using natural gas as feedstock to become hydrogen. It will be doing things that relate to carbon sequestering. It will be doing things that allow fracs to be done faster so that you're using less water, less fuel, less products, less trucks on the road. Those are the things we've been talking about for 5 years already, and we're already working on initiatives like that.It will be doing things like reducing waste stream off things that are already happening by using science and finding out a way to get paid for that so that everyone on this call can see earnings per share go up a little.I'll move on to StimWrx now. StimWrx is performing well. Its financial contribution remains accretive. Really proud of the guys in the states. Trent sent a young fellow down there about a year ago. He's so busy. We're now hiring him company. And I think we're going to have success pushing StimWrx into Oklahoma, where there's lots of tired old wells. And if there's ever been a perfect storm to go find young technical petroleum engineers in the United States to build out a new business line, it's right now because all the oil companies have laid off hungry young petroleum engineers that now can't have it be too good for them to work for a service company. So we can find a couple of young kick-a** people that are willing to live in a truck and go live on location and let us brainwash them into our culture and teach them how to build these unique treatments to bring back old wells and turn a liability into a producing asset.StimWrx can be a big business for us in the U.S. It's basically small volume treatments of specialized acid, including nanoparticles, but they are not the entire solution unlike what other companies claim. And it's not one product for every rock, that makes no sense at all. But we're having great success with StimWrx on both sides of the country and want to tell people that.At Sialco, Mike and his group continue to have great success supporting our energy businesses. We're selling into cosmetics and industrial as well out of there. We always have. We're not going to segment those results. They're not material, but we're also not naive. Diversification for this business would be great. But having a $1 billion platform takes a lot of sales to say you're diversified, but we are working on it and appreciate Mike's contribution there. At Clear, market conditions are finally starting to pick up, where they're able to get enough business to make a financial contribution. So thank you, Gavin. Thank you for staying in the fight, while it was so tough. The upside for Clear is the oil sands and its water management and the energy transition. Gavin and Ken Zinger and I go back 30 years. So Gavin has 30 years of wisdom to look at what has been already tried, why it didn't work, help us avoid mistakes, look at different ways to do things. We need to do things with your money as investors that can be commercial. And in the oilfield, everything that was old becomes new again. So it helps having management that's been around the block and Grimson and Ken and I have been around the block together a lot.As this energy transition happens, all the old ideas you're going to be presented is the newest greatest idea. We're already seeing it. I think Grimson and I will probably have to resume drinking more wine together because we're going to look at ways to clean up waste that will help the industry improve its ESG rating and become more investable. I don't think industry will get funded with outside capital. But if companies can get a decent multiple, maybe we don't end up with 10 E&Ps owning all of North America, we still have a couple of hundred, which would be better for everyone involved.I'll now move on to a little bit of an update on the corporate strategy session that we held. And say that -- just touch a little bit on culture and say that we presented to our -- before I move to the U.S. that we presented to our Board a case study of 12, what I would call, failed competitor attempts to consolidate businesses that do versions of what we've done over the last 20 years. And the common thread of why, in my view, these businesses failed was culture.So as I've talked about culture and talked about the names of the people leading these businesses, we are decentralized on purpose folks. These businesses need to be run with local brands, with local nuances and cultures to match the people that buy their services have strong financial and quality controls in the back end that don't get too heavy-handed about what the customer experience is, and then they can thrive. That's how we've got to 20% in the U.S. We started at 6%. Now we're at 20%. We took the share count from what it was when we IPO-ed at 3.5%. And in good years, we do 17x that of EBITDA. It wasn't by being centralized that fails in the oilfield every single time. So I wanted to share that on today's call that we continue to have our eye on what is a difficult culture to manage for the officers, but it is the only way that the culture can work, in our opinion, in this kind of a business.I'm going to move into the U.S. AES, yes, we know it's wow, way to go be. I used to get asked when we first went into the U.S., could the U.S. ever get to 20%? You have 30%, 35% in Canada all the time. 20% would be a home run in the states and you never tell people no, but that seemed pretty high. We have it. And we've been asked how we're going to keep it.I would ask why would we lose it? We didn't get it by giving away product. We didn't get it by using our balance sheet. If we did that, we'd have had 30%. We got it by focusing on the customers that we got work from during COVID 3 or 4 years ago. These sales cycles are enormous. We went after strategic accounts, specifically to super majors, with unique strategies to each account, identified what their problems were, what was causing them to take twice as long to drill as the independents and small guys, and how could you take a solution to them that they would feel they came up with because if you give them the solution, then you think you're smarter than them and they'll throw you out. And it took a long time to have that come around. But we've had breakthroughs across the industry. Success becomes success. And today, we have 20% of the U.S. drilling fluid market. And very importantly, it's concentrated in areas so you have enough operating leverage to make money.Having 20% that's scattered everywhere wouldn't be as powerful, and you wouldn't make money. I would attribute it to the culture. Richard has built a culture of teamwork, humility and gratitude. It's really incredible. They get results by having a culture that's different than Jacam Catalyst and a different culture than in Canada. And that's going to be how we're going to continue to run the business. We're working for the super majors, the large independents, the privates, and we treat all of them as our most special. And how do you do that? By having a culture that rewards your employees for results, not for tenure. And that will be as detailed as I'll tell anyone on how we run the business.In October, AES ran 47 jobs. In November, it ran 56. In December, we got up to 69. In January, 75. In February, we hit 80. Today, we're at 88. I think there's upside with the super majors. Everyone on this call follows them as closely as we do that will come in fits and starts. I would predict that we'll just have a slow creep up. It won't be huge. But at 88, the company is doing real well. Jacam Catalyst, Vern and his team have done an incredible job there. We're formally calling it Jacam Catalyst now. We've formally merged the 2 businesses internally and to customers. That's been almost 5 years. Thanks so much to Vern and his group. Vern Disney brought his private company catalyst into us 5 years ago this summer. Vern and Trey and Lisa had the largest private company or one of the leading private chemical companies in the Permian. And he basically merged himself into us, which is not a small feat.Today, Vern is leading an 80-acre reaction chemical plant in Kansas. So we make molecules there. He blends them down in Midland or in Kansas. And then we stage them across all the appropriate basins in the U.S.As I said at the beginning of the call, we're a strong #3 across land in North America. Jacam Catalyst and PureChem work together to solve problems all the way up to the oil sands. We've got good old Curtis that works for both groups. And if we got a heavy oil problem in Canada, he's the one man on the world that can solve that problem if no one else can. Him and Curtis in Canada are probably the 2 leading guys in the world at problem-solving there. And of course, we're doing better in the oil sands because of that. So the business is focused. It's adding new customers. It's being opportunistic where it can, and it's well on its way to expanding its reach in the mighty Permian with upside and new niche opportunities. It's financially -- and it's -- pardon me for losing my way here.And basically, for Jacam Catalyst, the takeaway is maybe slightly reducing CapEx to revenue ratios because a little less treater truck requirement as new production comes back in the Lower 48, not through vertical wells, but through new horizontal wells. So watch for us to give soft guidance to that as time goes along, but as -- it's very simple. Big horizontal wells continuous injection, not a treater truck type of treatment. We don't like treater trucks, but we must have treater trucks. They're for vertical wells generally.The horizontal wells take a lot of product. They go into the well forever in high volume, clearly better for all chemical companies. As the percentage of U.S. production is more and more of that, it is better for us and Champion X and Baker. And by the way, we're rooting for Champion X's price increase that they sent out by letter this week. I will go on to Superior Weighting. Tom and the crew are running that place great. We've taken advantage of some buying opportunities to pick up ore at good price, but we are running below optimum capacity there so that does affect COGS negatively a little bit. There's just not enough takeaway out of the facility because drilling volumes are down. So we have been grinding some other products in there. We wanted to do that for years and sometimes out of crisis comes good things. So if this forces our hand to diversify that mill into other grinding things in 2 or 3 years, this might have actually been a blessing in disguise. With that, I'm going to turn it over to you, Tony, and then I'll close it up at the end.

[Anthony Michael Aulicino, Chief Financial Officer]

Thanks a lot, Tom. Although our Q4 exceeded expectations, we are even more proud of the fact that we continue to demonstrate our financial resiliency in the merits of our unique business model to withstand industry shocks and position CES to capitalize from improving industry conditions. We entered the downturn from a position of financial strength and proactively implemented measures during Q2 to provide additional protection during the downturn and ultimately support growth as industry conditions began to stabilize and improve. Our fourth quarter continued to benefit from those cash preservation and cost-reduction measures. And as a result, our overall liquidity position and balance sheet strength also continue to improve as we once again displayed our countercyclical balance sheet at low points of the cycle.While overall oil and gas industry conditions continue to be significantly impacted by a reduction in global demand during the year, the fourth quarter of 2020 saw some of those headwinds continue to subside, as Tom alluded to. As a result, through the fourth quarter and to date, CES has benefited from the general reversal of production shut-ins across major basins and an improvement in drilling and completion activity. Our established infrastructure, cost rationalization initiatives and committed high-quality employee presence in key basins have allowed CES to realize market share gains and sequential improvements in revenue and adjusted EBITDAC. CES exited the quarter with a net cash balance of $18 million compared to $93 million drawn at the end of Q1 before the downturn began. Our strong cash position was driven by a combination of increased activity levels, increased market share, effective inventory management and cost containment measures. We ended Q4 with $300 million in total debt net of cash, comprised primarily of $289 million of the company's senior notes, which don't mature until October 2024 and representing $127 million reduction from $427 million at the end of Q1. Our focus on company-wide working capital optimization in 2019 and 2020 position the company extremely well to maximize working capital, cash inflows through the second and third quarters as activity levels declined. As industry activity continued to improve in the fourth quarter, CES began to make modest investments in working capital and exited the year with a working capital surplus of $273 million, representing $144 million reduction from $417 million at the end of Q1. We experienced a similar working capital harvest during the 2015-16 downturn, where we harvested $153 million and came out of the downturn with an undrawn credit facility, net cash position and ample liquidity to support improving activity levels and market share growth. And as Tom said, we did that again. Through the pandemic, we have benefited greatly from the high quality of our customers and diligent internal credit monitoring processes. As a result, we managed to maintain a strong collection record and minimized accounts receivable losses, recording only $3.8 million in credit loss provisions in 2020. That represents less than 0.5% of revenue for the year. We continue to remain diligent and focused on strong AR collections, minimal bad debt expense and inventory management. Subsequent to December 31, CES activity levels continued to improve in both production chemicals and drilling fluids end markets, requiring the company to make modest investments in working capital. And as of today, we have a net cash balance of $8 million and continue to have a fully accessible senior credit facility.During the quarter, CES generated revenue of $213 million compared to $166 million in Q3 and down from $316 million in the fourth quarter of 2019. Revenue generated in U.S. was $137 million, representing 64% of total revenue for the company, while Canadian revenue was $76 million in the quarter. For the year, CES generated revenue of $888 million compared to $1.3 billion for 2019.Revenue generated in the U.S. for the year comprised 68% of total revenue, while Canadian revenue represented 32%. For both periods, revenue results represent a decrease over prior year comparative periods, driven primarily by the reduced activity levels across all business lines as the low commodity price environment and reduced demand resulted in temporary production shut-ins, deferred completions and significant declines in drilling activity in North America.Sequentially, the company has benefited in the fourth quarter from continued strength in all divisions. Notably, U.S. drilling fluids market share, as Tom mentioned, increased to 20% in Q4. And for context, that represents a record for the company and is up from 13% in Q4 2019 and up from the previous record of 17% in Q3 2020. CES achieved adjusted EBITDAC of $24.7 million in Q4 compared to $18.2 million in Q3 and $39.7 million in Q4 2019. Included in these results is a $2.9 million benefit recognized by CES from the federal government's Canada Emergency Wage Subsidy program, which has been instrumental in allowing CES to mitigate further Canadian personnel reductions through the downturn. Adjusted EBITDAC margin in the quarter was 11.6%, representing an increase from 11% in Q3 as the company benefited from improved competitive positioning, the reversal of those production shut-ins in both the U.S. and Canada, improving activity overall and increased market share. For the year, adjusted EBITDAC was $102 million compared to $167 million in 2019. In May of 2020, we announced that in light of deteriorating industry conditions, we were eliminating all nonessential CapEx spend and reduced projected 2020 spend by 40% from $50 million to $30 million. In the fourth quarter of 2020, CapEx spend was $2.4 million, bringing the total for 2020 to $22.9 million, well below that $30 million guidance. Our balance sheet continues to benefit from prudent structuring and maturity schedules of our credit facility and senior notes. Total debt at the end of Q4 was primarily comprised of those senior notes amounting to $288 million on our 6.375 -- with the 6.375 coupon. And again, as mentioned, those don't mature until 2024. At December 31, with that cash balance of $18.3 million and fully accessible senior credit facility, that gives us ample liquidity in excess to that to $235 million cat equivalent security, which provides us with significant availability going forward. In summary, we feel very comfortable with our strong financial position, ample liquidity and conservative maturity schedules. We continue to monitor our capital allocation options in the context of market conditions, outlook and the levels of our surplus free cash flow generation. In Q2 2020, we made a difficult-yet-calculated decision to suspend our dividend. This decision allowed us to conserve approximately $16 million in cash on an annualized basis. Given the heightened uncertainty at the time, we temporarily suspended activity under our NCIB program in the second quarter of 2020 after using $4.8 million to repurchase 2.3 million shares in Q1.On July 16, 2020, we announced the renewal of our NCIB program. And during Q4, we opportunistically repurchased 4.5 million common shares at an average price of $0.91 per share and resulting in the repurchase of 9.4 million shares at an average price of $1.19 per share for all of 2020. Subsequent to year-end, we've repurchased an additional 5.4 million shares at an average price of $1.46 per share and repurchased and canceled $1 million worth of senior notes at $9.88. We continue to assess share buybacks and bond repurchases in the context of our assessment of market conditions, market prices and certainty around our surplus free cash flow levels. We remain cautiously optimistic on our outlook for 2021 and beyond. We came into this downturn from a position of strength with a strong balance sheet and with a proven countercyclical leverage model as demonstrated in 2020 again.Our goal for this downturn has been the safety of our employees, the preservation of our strong balance sheet and the optimization of our industry-leading positions and critical employee base to withstand the downturn and maximize our potential as conditions have begun to improve. We remain committed to those financial goals and believe we are well positioned to continue to capitalize on stabilizing and improving market conditions.At this time, I'd like to turn the call back over to the operator for Q&A.

[Operator]

[Operator Instructions] The first question comes from Keith MacKey with RBC.

[Keith MacKey, Analyst]

Maybe just if we can start, I know we've had previous conversations about any kind of end market diversification, Tom, I think you mentioned it a little bit in your prepared remarks. But maybe if you can just discuss where this stands within your current set of priorities and any progress you may have had on that front?

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

It's a high priority, Keith, because it can be low volume, high-margin business. And we've got 50 chemical reactors that can make products for that. Clariant is doing the reverse. They sell into those markets and see energy as a side market because the reverse is true. Their reactors can supply energy. So we're just copying bigger, smarter people, the opposite.Sialco does as much out of energy as it does in energy. So we have a placeholder. The plant is certified -- it's terrible. I don't remember the acronym, but where I saw '14, I think, '01, Keith, for oilfield, the Sialco plant has whatever the cosmetic designation is. If you go into your medicine cabinet, we're in it. We have molecules in Chanel No. 5. They're in ChapStick. They're in medicated Gold Bond. I use London Drugs Hand Soap or I mean Dish Soap just because our stock is in it. We give a gift basket out of Christmas, and there's 50 household goods in it. We just need bigger distribution.It could be meaningful. We -- but we don't want to mislead people that it can move the needle. So it's important, but we have $1 billion enterprise. We need to sell $10 million or $20 million, not a couple of million dollars for it to be meaningful, but it's a real business. On paper, we have every opportunity in the world. And Mike and his team are focused on it, and we're kind of enhancing the team is what I would say without losing focus.What we need to do is have a team that that's their job. It is an energy people as a side job. And so far, it's been -- some of us doing it as a side job and finding enough that having a side hustle when you have a full time job, it doesn't work out all that great. So we're getting more focused on it. We already make money in it, but it isn't material.

[Keith MacKey, Analyst]

Got it. Okay. And maybe just a quick follow-up on that. So to get to that $10 million to $20 million number, that's more of a focus and potentially G&A cost-intensive initiative versus having to spend more capital?

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

It's not capital at all. It's getting sales. We've got the reactor capacity. We've got the science capacity. We even have the sales channel capacity. We just need to convince somebody to buy it.

[Keith MacKey, Analyst]

Got it. Got it. Okay. And one more question, maybe just turning back to the oil and gas market. On the consolidation of customers, I know you have mentioned it's better for the industry to have more customers than fewer. So what is your view on and your experience with the consolidation that's happened both in Canada and the U.S. to date? And what is your outlook on where the industry is going and how that might impact your business?

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

It can break both ways. Every time there's one of these, we sit down and go, as it -- look at our different business lines, who knows who's going to get the job that's going to have the power, whether it's drilling, completions, stem, production, pipeline maintenance, and who do they like. Does supply chain decide? Does engineering decide? And is it a positive, a neutral or a negative? And so I'm glad we got ISO certified in '15. It was the way we started getting into the big guys or at least could bid them and then we started getting work and then getting more work. Ideally, you want a lot of customers, but the upside of this is this is going to squeeze the mom-and-pops because they can't possibly work in any of these places. And how long can private equity guys that are just trying to stay alive, hoping someone will buy them? How long can they play that game for these big guys and sell big volume at a loss, they hit the wall at some point.We just look at them deal by deal, Keith. Nothing has happened so far that's a death blow to us. We have to give them a reason to keep us on location, just like all the other service guys. Some will break our way and some will break against us like it will for everyone. There'll be people that don't like us. It's just how it goes. But so far, none of the mergers have been a disaster. We haven't lost a big customer. We also haven't had a big win out of it, either to be clear. That's not where one of the gains came from. It's just mostly all been -- our gains have been organic. And I'll say that the big one recently in Canada is probably neutral for us. And the big one in the U.S. because we work -- so the 2 big ones recently, we work for all 4 of those operators, and they look pretty neutral.So the 2 cities in the U.S. and then the big one in Canada, I'd call it neutral. And if you know what the real win is, is if the one in Canada can borrow money at 2% instead of 6%, every person on this call benefited from that.

[Operator]

The next question comes from Cole Pereira with Stifel.

[Cole J. Pereira, Associate]

Maybe starting with the Champion X price increase, are you able to comment on how pricing has sort of performed prior, call it, in Q4 and Q1? And whether you're seeing any cost inflation on the U.S. production chemicals business as well?

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

We hope they get all of it. We could use some too. Some customers are resisting the handshake agreement that you would go back up. Some have honored it, and we are seeing some cost increases because of just inflation pressures and the storm has caused some disruptions for the whole industry. Nobody's asked this. So I'm going to tell people. We think we lost 8 to 11 days in Texas in February, a blend of drilling and production. So we were killing it. We still will have a great quarter, but the State was down for a long time. So everyone should know that. We need them to get the increased coal because everyone needs it.

[Cole J. Pereira, Associate]

Got you. That's helpful. And then so it kind of seems like we're moving towards a permanent drilling ban on U.S. federal land. I think we're all aware that a lot of operators have multiple years worth of permits. But I'm just wondering if this has created more conversations over the medium term about optimizing existing production?

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

Yes. Our StimWrx Group is hiring people because people can spend $50,000 and go juice some old stuff. Guys are, I think, going to drill that acreage soon. But you know what is really starting to come to the surface is that maybe the Midland Basin is actually better anyways. I don't -- the Permian is -- do people want assets stranded in the Delaware? Of course, not. There will be plenty of wells still drilled in the Delaware. It's not dead. There's going to be confusion over whether people can get amendments to leases so they can make a subtle change to how they drill it. They still don't know things like that. So it's causing a lot of confusion. But the rig count hasn't changed, and people will move those rigs down into the Midland Basin and keep working. I hope it doesn't become permanent. But Cole, we've seen what's happened in Canada. We know where this is going. We've had 6 years of Trudeau standing on our chest in Canada. The Americans are savvy business people. They know how to make money. They're decisive. They're going to work through this, and there are really savvy operators here. They'll just take the money that would go into those plays and take it somewhere else.

[Cole J. Pereira, Associate]

Okay. Got it. And then, Tony, the earnings power continues to improve here as well as the free cash flow profile. Obviously, you need to invest in some growth and some working capital. But how do you think about the remaining free cash flow here?

[Anthony Michael Aulicino, Chief Financial Officer]

It depends. It -- again, we've talked about capital allocation, you've seen us act. And we're not a utility, and we're not in midstream where we can tell you exactly what percentage of that surplus free cash flow will go to those different buckets of capital allocation. But what we will do is continue to...

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

Cole, we're going to sum this up at the end for everyone. Could you let us do it then?

[Cole J. Pereira, Associate]

Yes. That sounds good to me. I'll turn the call back then. That's all my questions.

[Operator]

The next question comes from John Gibson with BMO Capital Markets.

[John Gibson, Analyst]

Just first, is on activity levels. I think you talked a little bit about this new plant load. It seems like most of the additions have been on the -- our smaller cap producers or private side. It seems like commentary from the larger producers indicates that they're holding the line on activity levels now, but are sort of looking at broader oil demand and could increase them down the road in tandem with the recovery. I'm just wondering if you share this view. And if so, maybe what type of time frame we're looking at?

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

Your intel is probably is sound as ours, John. Our customers find out no sooner than you do, but -- so we don't have any greater visibility, I'd say, than you. Probably 40% of our activity in the states is privates. So the stuff you're seeing in the news about who's working, we're on those rigs. We hope that Exxon puts 20 rigs to work in a year because we'll have a lot of them. We hope that Chevron gets busy down here. We hope that Conoco and Concho keep a lot working because we'll be busy. But we're busy without them being busy anyways. So -- and in Canada, I don't know what's going to work this summer, 150 rigs. We don't know 140, 30. We're able to make money if that many work. We've got a variable cost structure. It's a little tough on people, but we'll get through it. We'll get our people through it. We'll be fair to them. So it's going to move around. It's volatile. That's why we need all these other sales lines. If you were just selling one thing, it gets awfully tough. You need to have 4 or 5 ways, you're dribbling revenue out the door coming off a common platform. Otherwise, I don't know how you make this go around.

[John Gibson, Analyst]

Okay. That's fair. Just last one for me, it's kind of leading on Cole's question, and you might just save it for the end, like you said. But inventory levels hung in there, and when you compare this to 2014, 2015 and recovery, we saw a pretty big drawdown. I'm just wondering where your supply level sit relative to expectations for incremental demand this year. And just maybe also in relation to some supply chain issues, which I'm assuming are impactful for CES?

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

Well, we -- our goal is to keep working capital, say $0.35 on the $1 or less. And there might be times where it will spike up because we might get a deal on 2 votes of ore. And maybe we'll go spend $15 million because it will save 3. So everyone should just know that, that might happen, and we're going to act like business people not running a spreadsheet people and make good decisions.We bought some inventory in the fall at a discounted rate. It threw out the ratios, but we made money for everyone. So we're going to continue to be capitalists, not accountants. I think we can stay at $0.35, John, that I think that's a reliable number. We've got systems in place. I hate those words. But we have systems in place that prevent slow invoicing, and we're working for customers that thank god didn't have oil storage fill. A year ago, I thought we might lose everything. If oil companies didn't get paid, how could they pay their vendors? And how is that going to go? And now that that's behind us, we've proven that we get paid when everything goes to 0. As long as you get paid and keep the customer, you can rebuild. And we're going to be careful with the cash we have. We're going to deploy it in ways we think create the best long-term value. We're going to frame that for everybody at the end. And as we build out more mud accounts, build out some more frac accounts, as PureChem and Jacam Catalyst expand more permanent production accounts, we can tolerate that working capital requirement and maybe ideally hardly use any of the bank's money at all.

[Operator]

[Operator Instructions] The next question comes from Matthew Weekes with IA Capital Markets.

[Matthew Weekes, Equity Research Associate]

I was just wondering, you repurchased shares in the quarter and subsequent to the quarter at varying stock prices. I was wondering if you'd be able to provide any sort of color or disclosure on what sort of prices would you consider prioritizing -- repurchasing the shares or at what point would you consider maybe doing more buybacks of the notes?

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

Tony, do you want to talk about how that worked? And then, Matthew, we're going to save capital allocation for summary. But we think we did a pretty good job going into block out, and I'm going to let Tony describe that because that was his brainchild. And I'm going to say both on the bond and the equity.

[Anthony Michael Aulicino, Chief Financial Officer]

Yes. Yes. Again, it's really predicated on 2 things. Number one is, do we have the cash and/or are we expecting to generate that surplus free cash flow based on what we know about our business. And it's not an or, it's and, do we believe those shares or bonds are trading at a discount? And that second part is a bit of a nuance where me and Tom and senior management get together and look at the information to determine. So in that case, in Q4, in a big, big way, we're buying at $0.91 per share. We knew that we were way undervalued, and we knew that we were going to have the cash in hand. So we spent it. Same thing in Q1 and same thing with the bonds.Again, we're a B rated. Be high, be flat by each of our 2 credit rating agencies, which is one of the best in the OFS sector. And we believe that if we could pick up those bonds at a discount that was accretive. And Tom will give you a summary of the company's thoughts, but those are the exact types of considerations we're going to use going forward here as well.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Tom Simons for any closing remarks.

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

So in conclusion, I'm going to talk about capital allocation and I'm just going to thank our customers and our employees. So on capital allocation, we are going to continue to dedicate excess free cash flow to buying shares. We're going to buy enough to not dilute people through compensation, and we're going to quarterback buying above that. So we're going to watch the price and buy it when we think we should. We're going to keep an eye on the bond and try and shrink the bond.But I'm just going to say that we're very mindful of the change in the U.S. government. We've had firsthand experience as a Canadian-domiciled company. Our politicians are using climate change not as a science issue, but as a political issue and galvanizing young people to vote for that. And we're a little cautious that maybe some bond buyers are going to get their hands tied and not be able to buy energy bonds.And so we're motivated to be sensitive to that. And so we're going to likely build some cash and look to shrink the bond when we refi it. We're going to look to buy it when it trades and maybe have a bit of a bias to the bond over the equity over the next while, but we aren't going to let shareholders get diluted paying ourselves and our employees. And if we think the stock is cheap, we're going to buy it. We believe in this company. Management is staying in this company. We want our employees to know we're staying. So we're going to put our money where our mouth is.And then in summary, I'd like -- and we're also going to hold some cash guys for opportunities. We're capitalists. We've got things cooking in this business that will talk about if we pull them off. And so we want some powder for that. Our customers aren't going to take what Biden's done, line down. They're going to go make money, and we're going to go with them. That's what our story is. That's why we have this great company. And so we want some money in the bank to grow with them and make use of some money. So that will be one of the other reasons why if there's a little bit of caution on share buybacks. It's not that we're afraid of our shares. It's that we want to go make you some money. So that could be one of the other uses of capital, if we have things coming down the pipe. And these aren't $50 million spend. It would be a mud plant somewhere, as an example. $4 million, $5 million or $10 million spend tops. And then I want to summarize by thanking our employees. We made it. Canada is not even close, but I'm in Houston today. I can tell everyone in Canada. It is coming. Once we get these vaccines, we'll be able to get back to having a life. It's nice to be somewhat free here, guys. It's coming for us, too. And to our customers, we're so thankful that you didn't have to make the choice not to pay us and that your oil storage didn't fill. We needed you to pay us. We're thankful you kept us on your work through this. We're thankful that we're getting some pricing back, and we just hope we can keep it rolling together.And with that, I'm going to wrap up the call.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.