CES Energy Solutions Corp

TSX:CEU

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions Corporation Fourth Quarter 2021 Results Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Tony Aulicino, Chief Financial Officer. Please go ahead.

[Anthony Aulicino, executive]

Thank you, 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 fourth quarter MD&A and press release dated March 10th, 2022, and in our annual information form dated March 10th, 2022. In addition, certain financial measures that 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 fourth quarter MD&A.

At this time, I'd like to turn it over to Ken Zinger, our President and CEO.

[Kenneth Zinger, executive]

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. Finally, I will touch on a small, but strategic acquisition that we recently closed on. I will then pass the call over to Tony to provide a detailed financial update and an update on capital allocation. We will take questions, and then we will wrap up the call.

Before I summarize the fourth quarter and 2021 financial results, I want to start by noting how proud I am of our entire team at CES during this dynamic period in our industry. Everyone has shown great resilience and commitment through these challenging times. During my 37 years in this industry, I've never seen a market move as quickly to the upside nor as significantly as in the past 3 months. Having said that, I want to emphasize that in the 16-year history of CES, we have never been as well positioned in every way to capitalize on this potential upcoming super cycle in our industry.

The rapid pace of growth has led to constant reviews of sourcing, logistics and sales prices. I want to thank everyone for all the extra hours and energy that have been required to do our best to adapt, react and shift as quickly as possible, once again demonstrating our nimble and entrepreneurial culture. Despite the global supply chain challenges that have affected every person and business, we have been able to continue to supply our customers with the products and services they require without fail, albeit at rising prices due to inflationary pressure that is present in every part of our business and personal lives today.

The fourth quarter was a tremendous success for CES Energy Solutions. We had a record quarterly revenue of $368 million, along with near record EBITDAC of $47.7 million. We continue to achieve strong market shares in all of our major divisions and targeted geographic areas. Throughout Q4, CES was able to manage sourcing of products, as well as the associated inflation pressure occurring due to improving commodity prices and activity levels. At the same time, we were able to largely manage margins in real time through price increases and strategic planning. Overall, the fourth quarter was a great way to close out what ended up being a great year in 2021.

This brings me to the 2021 year-end results in summary. In a year that had many fits and starts, 2021 ended up being a rebound year for CES after a challenging year experienced by the entire world in 2020. 2021 was a year spent navigating supply chain headwinds through early detection and strategic investments. These investments allowed CES to service our existing customers without pause and to utilize our inventory and supply chain to win some new clients as well. Throughout the year, we continue to invest in people, technology and infrastructure through modest targeted CapEx, while once again demonstrating the CapEx-light asset-light characteristics of the business model throughout the cycle.

All of this led to revenue of $1.2 billion and EBITDAC of $156 million. Both of these metrics approached our record levels achieved back in 2018 and 2019. Notably, these results along with our future outlook, afforded us the confidence to reinstate our dividend back in August of last year and also to repurchase 3.9% of our outstanding shares. Overall, I am beyond excited about the opportunities in front of us due to the very constructive oil and gas dynamics that are shaping up for 2022 and beyond.

Having said that, there is still significant near-term headwinds facing us. Although, we have been able to push through price increases during Q4 and into Q1, the rate and scale in which these increases are impacting us has proven extremely difficult to predict and manage. Like everything, these raw material cost increases have been erratic and in some cases, extreme. We are working with our teams and our customers to pass these costs along. But like some of our competitors have noted, there is a lag between a green to price increases and returning to normal margins. In a lot of cases, we are getting fresh increases from suppliers before we are even able to get the prior increases approved by the customer.

The Russian and Beijing and the Ukraine combined with almost a decade of energy policy mismanagement by Western politicians has created the perfect storm, where everything is moving in an unpredictable manner. As some of our larger competitors have previously reported, we expect the margin pressure will likely continue to exist well into the first half of 2022. Although, this margin compression will inevitably lead to Q1, EBITDAC being lower than Q4, we believe the strategy will bear fruit, as we achieve the remaining increases in margins normalize. We continue to work diligently with our suppliers and our customers to stay on top of pricing and work together these -- during these unprecedented times.

I will now move on to summarize Q4 performance in Canada. Canadian drilling fluids made another strong contribution for CES in Q4. As mentioned in Q3, we were able to hire and maintain sufficient staff through our peak Q1 drilling season. Today, we have a 36.4% market share in Canada, providing service to 74 of the 203 jobs underway today. This is down from the Q1 peak count of 87 rigs out of 232 working during the second half of February. Rigs are steadily falling off now, as we fade into break up here in Canada.

PureChem, our Canadian production chemical business had a solid quarter in Q4, both financially and operationally. Each month in the quarter was once again at or very near an all-time record revenue level. Margins during Q4 were consistent as price increases were passed on to offset cost side pressure. We continue to see growing contributions from our frac chemical and stimulation groups. 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 U.S. Drilling Fluids Group once again delivered very strong financial results, as well as solid market share. As I always note, 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, our customers in the U.S. generally worked with us in Q4 to ensure that we kept up with the current cost of goods increases, so that we can manage margins in real time. Today, we have a market share of approximately 17% in the U.S. with 109 jobs underway. This includes a basin leading 26% market share in the Permian. I will note that while Canada is slowing down due to breakup, AES is continuing to gain momentum, as the U.S. drilling market continues to steadily climb upwards due to the high commodity price environment.

Last up is Jacam Catalyst, our U.S. production chemical business. This division had another great quarter as it continued to profitably gain market share in a very competitive environment. The Permian region continues to backstop the business. However, we have additional strong contributions from the rest of Texas as well as the Rockies. Although, we face significant supply chain challenges in this division as well, our manufacturing capabilities make us a reliable supplier to the basins we service. Overall, Jacam Catalyst was also able to control costs and pass through increases to protect the margins during Q4.

I will now move on in -- on to a quick update on the international markets. We have completed the Oman drilling project we are participating in and are currently pursuing another project there with our local provider -- partner, sorry, not provider. At the same time, we are also pursuing several other opportunities in the Middle East. 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 some potential opportunities.

In Nigeria, our partner company, PEARL, has had some market penetration and are again looking to order additional material likely in Q2. As with the Oman business, this is a growth opportunity in the early stages of a long runway to making a meaningful contribution.

Finally, I have an update on recent -- on the recent business development. During Q1, we complete -- completed a relatively small, but strategic acquisition of the assets of ProFlow Solutions. ProFlow was an offshore Gulf of Mexico production chemical company based in Southern Louisiana. The company was started and managed by veterans in the offshore Gulf of Mexico market. Josh Deshotels, John Davidson and [ Andre Clemens ] and their team have successfully penetrated into the elite deepwater market through expertise, differentiated service, unique chemistries and most importantly, hard work. We will leverage ProFlow Solutions reputation, expertise and market share with our extensive manufacturing capabilities, technical resources and infrastructure to accelerate our growth in a significant, but untapped market for CES.

The acquisition closed on February 1st, and we are confident it will be accretive to EBITDAC and cash flow. The accomplishments of ProFlow Solutions are notable due to the uniqueness in the market of a smaller drilling company actually penetrating the technically challenging offshore market, which is usually reserved for the majors. I would like to welcome the ProFlow Solutions team to the CES family, as we look forward to a bright future together.

In conclusion, I want to personally thank each and every one of our 1,840 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 to CES in good times and bad.

With that, I'll turn the call over to Tony for the financial update.

[Anthony Aulicino, executive]

Thank you, Ken. 2021 represented a pivotal year for CES, as we moved beyond the challenges of 2020 and used our established infrastructure, strong industry presence, dedicated workforce and unique culture to return to strong financial results approaching record historical levels.

Revenue of $1.2 billion represented a 35% increase over $888 million in 2020, while adjusted EBITDAC of $156 million represented a 53% increase over $102 million in 2020. These significant improvements were underscored by impressive gains in funds flow from operations, or FFO, of $117 million in 2021, up from $72 million in 2020 and market share gains throughout the company with U.S. Drilling Fluids averaging 19% in 2021 versus 16% in 2020 and 13% in 2019.

Our cash CapEx of $29.4 million in 2021 represented a level within our original $30 million guidance and consistent with our unique CapEx-light, asset-light consumable chemicals business model throughout the cycle. During 2021, CES repurchased approximately 10 million common shares for $16.2 million or $1.60 per share under our NCIB program and reinstated a dividend of $0.064 per share.

Our fourth quarter represented record revenue, exceeding the Company's previous high watermark in Q1, 2020 and another consecutive quarter of solid adjusted EBITDAC, surplus free cash flow generation continued to be strong amid an increasingly constructive supply and demand backdrop for the global North American and North American energy industry.

In Q4, CES generated revenue of $368 million and adjusted EBITDAC of approximately $48 million, representing a 13% margin. The continued positive momentum demonstrated in the quarter has been supported by improvements in rig activity, higher production volumes, selective pricing increases and strategic procurement initiatives that are expected to continue into 2022. This Q4 revenue of $368 million represents an increase of 73% from $213 million in Q4, 2020 and a sequential increase of 17% from $314 million in Q3, 2021.

Revenue generated in the U.S. was $234 million or 64% of total revenue for the company and up from $197 million in Q3. I would note that AES continues to effectively operate on the right jobs, and with the right customers, as they approach pre-COVID levels and realize operational and financial torque in that business.

Similarly, Jacam catalyst, our U.S. production chemicals business, which helped carry the company through the lows of 2020 has maintained its trajectory and has now exceeded pre-pandemic levels through increased volumes and improved pricing.

Revenue generated in Canada was $134 million in the quarter versus $76 million a year ago and $117 million in Q3. Canadian revenues benefited from increased drilling and completions activity, coupled with higher production volumes and frac-related chemical sales as revenue levels and production chemicals also surpassed pre-COVID levels and drilling fluids continued its steady upward March.

CES' adjusted EBITDAC of approximately $48 million in Q4 represented a 94% increase from the $25 million generated in Q4, 2020 and a sequential increase of $6 million or 14% from the $42 million generated in Q3. Adjusted EBITDAC margin in the quarter was 13%, representing a nice improvement from the 11.6% recorded in Q4, 2020 and in line with the 13.4% achieved in Q3, 2021 as the company benefited from stronger competitive positioning, initial pricing increases and increased drilling and production levels. This margin was accomplished despite increasing raw material costs that have accelerated over the recent months, in particular, as noted by Ken already.

Although, we have established updated pricing through Q4 and continue to do so in Q1, there is a lag between the time price increases are established and the time it takes for those price increases to take effect in order to offset increased underlying raw material cost increases. As Ken explained, this lag has become more pronounced over the past few months for CES, as well as for many of our North American peers. As a result, CES continues to expect a strong 2022. However, we expect it to be back-end loaded into the second half of the year. And based on where we stand today, we expect price increases to gain traction, as we move into Q2 and beyond. However, in the meantime, due to this extraordinary current environment, we expect and estimate that EBITDAC for Q1 could be approximately 20% lower than in Q4, 2021.

At CES, our main financial priority continues to be surplus free cash flow generation. I am proud to report that during Q4, our FFO was $34 million, in line with Q3 and representing a significant increase over the $17 million generated in Q4 of 2020. CES has continued to maintain a prudent approach to capital spending through the quarter with net CapEx spend for the quarter of $12 million, representing 3% of revenue.

We continue to adjust plants as required to support existing business and grow throughout our divisions. And for 2022, we expect cash CapEx to be approximately $40 million, of which $20 million is estimated as maintenance and $20 million is earmarked for growth.

We exited the quarter with a net draw on our senior facility of $110 million versus $51 million on September 30th and net cash of $18 million on December 31st, 2020. The increases were primarily driven by working capital builds associated with strong increases in revenue, combined with strategic surplus raw material purchases, driven by the unique global supply chain environment. Our working capital surplus of $460 million exceeded total debt net of cash of $439 million at December 31st, 2021. Since year-end, CES has continued to realize strong demand and also invest in surplus inventory and the current net draw on our senior facility is approximately $133 million.

Our balance sheet benefits from the attractive structuring and maturity schedules of our credit facility and senior notes. We ended Q4 with $439 million in total debt, net of cash, comprised primarily of $288 million in senior notes, which mature in 2024 and a net draw on the senior facility of $110 million. We used our senior facility as a shock absorber to support the growth phases of the company to finance working capital increases associated with strong revenue growth. Conversely, when revenue growth tapers, surplus free cash flow accelerates and the draw levels decline.

During more acute revenue decline phases, the facility moves from drawn to net cash very quickly, as it did during 2020 when we went from being drawn $93 million at Q1, 2020 to a cash position of $18 million by the end of that year.

In anticipation of increasing activity levels, in February, we exercised $30 million of available accordion capacity for a total new facility size of approximately $265 million in cat equivalent, providing ample liquidity versus current and anticipated draw levels. The increase supports the current growth phase of the company and provides flexibility, as we look to refinance our bond over the coming couple of years. We are increasingly optimistic about the industry outlook and CES' ability to continue its strong financial performance. This combination is key to informing our capital allocation decisions, which we revisit on a quarterly basis.

In terms of capital allocation considerations, we continue to 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. We remain very comfortable with our current dividend, which represents a yield of approximately 2.4% at our current share price and is supported by a very prudent payout ratio in the high teens.

We continue to buy back at least enough shares to offset compensation-related dilution. As we become more comfortable with our outlook and 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 if the opportunity presents itself.

We continue to use remaining surplus free cash flow to reduce leverage to further strengthen our balance sheet, opportunistically purchase our bonds and prepare to refinance our 2024 bond at an appropriate size in the coming years.

At this time, I'd like to turn the call back to Ken for comments on our outlook.

[Kenneth Zinger, executive]

Thank you, Tony. As you noted, Q1 to-date has been an extremely challenging time in our industry. While we are working through this recent extreme volatility on the supply chain and pricing front, lease activity is robust. While this has not been an easy period to navigate, we will work through it, and frankly speaking, this is a much better problem to have than the ones we were facing in March of 2020. Our team is laser-focused on the issue at hand, and we anticipate a relatively rapid recovery to more normal levels in the coming months. I'm truly excited about the remainder of 2022 and into the future.

We are facing a multitude of opportunities throughout our business lines and geographical markets to improve free cash flow for our shareholders. We are very bullish on the forecasted activity in our industry for the short and midterm. If the last 3 months has proven nothing else, it's that the oil and gas industry will continue to play a huge part in the future of energy security throughout the world for decades to come. I am very confident that our company is uniquely positioned to support this reality and prosper accordingly for the benefit of all stakeholders. And I look forward to working with our customers and dedicated employees to capitalize on this very attractive opportunity.

Thank you for your time. And I'll now pass the call over to the operator for questions.

[Operator]

[Operator Instructions] The first question comes from Aaron MacNeil with TD Securities.

[Aaron MacNeil, analyst]

Maybe I'll just start with the obvious one -- the obvious one in terms of order of magnitude on the margin pressures you're seeing in Q1. I guess what I'm wondering is, can you give us some examples of what you're seeing in terms of specific inputs? And I guess you've been building inventories previously. So I'm just wondering if this maybe took you by surprise or if this is something you saw coming?

[Kenneth Zinger, executive]

Well, I think it's a complicated answer, Aaron. It depends, which product lines we're talking about and which part of our business we're talking about. We've been building inventory, but we do burn through inventory relatively quickly. So we are seeing effects of price increases after we build inventory. But to give you some examples of the extreme nature of the increases we've seen, some of our major -- our highest used product in drilling fluids is a product called barite, which is a commodity. It's been constant at a set price for the last, I don't know, 10 years, it's kind of cost everybody the same thing. And the industry is comfortable with it, like all these products. That product has seen a 50% increase in the last 6 months, call it.

We've seen -- we have other products that are high use polymers that are used in the food industry or in other industries that have moved as much as 200%. So I mean, the increases we're talking about and the scope of what we're doing when we're talking about margin, I mean, we've been passing through significant increases to customers throughout Q4 and throughout Q1. It's just the magnitude of the increases combined with the timing on getting the increases put through is we're just having a hard time keeping up with it. In some cases, we're passing through increases or working and negotiating with customers to move through increases. And while doing that, before we even get the first increase in place, we've already received a second increase. And we're receiving these, like everybody is in the world right now, but they come through it, they just announced. We get no time to react to them. And we don't carry -- we have a large volume of products and product lines that we use every day. We don't have ample volume of every single one of them or else we'd have $1 billion of inventory.

So we get hit by a lot of these right away in real time and then try and pass them through, as quickly as we can. And we have a dedicated strategy for this for years. We've been -- our company -- the culture of our company and the people running our company and the executives in the company are mainly from private businesses. We understand that the majors move in different ways than the small guys do. And the majors have always been quick to send out pricing increases and demand increases.

But we've been the beneficiary of that for the last 25 years by working with the customers instead and helping them get through the shock of the increase. I would say, in most cases, we are able to pass everything on. Like the margin compression we've seen, it does not anywhere near represent the magnitude of the increases we've had to pass on. And to give you some rough numbers, 60% to 70% of the customers, we've been able to pass through relatively real time.

The last 20% to 30% of the customers, it's been -- we have contracts in place that we have to sit down and talk about. No one really saw I would say, what's happened in the last couple of months coming. And so getting around these contracts that we put in place for term through Q1, especially, has been a bit of a challenge with some of the operators. So we're doing what we can. We're trying to work with them. We're not demanding anything. We work for them. We appreciate the business they give us, and we're trying to find a way to get to where we need to get to, and we're getting there. We've got more increases in place right now. And frankly, with the oil price kind of settling out here or I guess, it hasn't settled out, but with the volatility going up more to the downside right now, we're starting to see some stabilization. So hopefully, that will pass through. Now having said that, I saw stabilization in Q3, so Q4 when we reported last time. So who knows like things just move so quickly and so dramatically, it's really hard to keep up with.

[Anthony Aulicino, executive]

And Aaron, I think it's important to elaborate on the other part of your question was related to inventory that we've been building and whether or not this took us by surprise. So we were able to very effectively use our balance sheet and buy more inventory that we needed at the time during the last year, frankly. And we benefited from being able to, a, have that supply on hand to meet existing customer requirements and gain new customers at a lower inventory level than what we're starting to be the prevailing market rates. And we continue to do very well right through Q3, Q4.

And then what happened, as Ken mentioned, was over the last few months,, as pricing really accelerated again for a lot of those products, what ended up happening is we had to replenish some of those inventory categories at the new prevailing market levels and because of standard costing, you end up having to adjust up your cost of goods that end up eroding your margins, and that continues until the new price increases that are underway start to take hold with new work for us to reverse that trend in margin compression.

[Aaron MacNeil, analyst]

That's a lot more detail than I was expecting. So I appreciate all the candor. Maybe, Tony, one more follow-up for you on inventories. I could appreciate the strategic nature of inventory builds, but you're at all-time highs for inventory, and it's a big use of your cash. But maybe you can just give us a sense of where we go from here under like you're optimistic, rapid growth scenario under a more moderate growth scenario or any other scenario that you think is relevant.

[Anthony Aulicino, executive]

So #1, we expect to grow in a commensurate level with the industry activity growth assumptions that you would have seen year-over-year. Again, there's a big question mark about what happens in North America and in the U.S. and in the Permian in particular, to potentially increase those activity levels further. But just parking that we see growth today, the way we did a couple of months ago, and we expect the growth levels that you've seen in inventory builds over the last 2 quarters to temper.

[Aaron MacNeil, analyst]

And maybe one -- I'll sneak one more in, a bit of a tangent. But we've seen several large cap and super majors announced Permian growth plan, specific Permian growth plans. And so I know you're not going to get into names specifically, but I seem to recall that you guys were making good inroads with that sort of customer profile in the past? And I guess, I'm just wondering how we should think about how those growth plans might impact CEU? And maybe more broadly in terms of your higher public versus private customer mix is shifting over the last little while?

[Anthony Aulicino, executive]

Yes. I'll start on that. Just high level, I read what you read from an industry perspective, and let's talk about the U.S. because most of that -- over 50% of that is in the Permian. You look at different estimates even before the current geopolitical situation. Even looking at those estimates, you're looking at 25% plus increases in activity. And as we said, as Ken said during the last call, we expect to grow in lockstep, if not better.

And in terms of private versus public, the teams did a great job. Vern at -- of JACAM Catalyst and Richard and the team at AES to grow with the guys, especially in drilling that were more active than the others, which were the privates. And the fact that we've been able to maintain strong market share indicates that we've been able to grow with those guys.

However, over the recent month and even few weeks, you've seen publicly what we started to hear privately, which is even those big public guys that we have relationships with are starting to change their tone and looking to increase activity levels higher than they were talking about literally 2 or 3 months ago. So where it was private company focused 3 months ago, it's becoming a combination of private and public, including some of the guys that you're probably thinking about.

[Operator]

The next question comes from Cole Pereira from Stifel.

[Cole Pereira, analyst]

So just wanted to build off of Aaron's question. It sounds like raw materials cost inflation is obviously the biggest culprit. But I mean, can you talk about maybe how supply chain or delivery issues, labor inflation, fuel inflation are having a material impact on margins as well?

[Kenneth Zinger, executive]

Yes. I mean, obviously, like the rest of the world, those things are going up for us as well. I would say the inventory build that we participated in last year, towards the end of last year was more directed at securing supply to make sure we didn't run short of things, and we accomplished that with the inventory, and we continue to accomplish that because it's really a whack-a-mole scenario, as we lose the ability to deliver product from overseas that we would traditionally have bought there and have to ship to more expensive North American suppliers, who are at capacity, but letting us in at a higher price.

So those thing -- is all across the board. We're getting hit. I mean, I think I can speak to container freight. I mean there's another number that's astronomical, 500% increase since January of 2021, that's like 478% is what we calculate. We're spending more now on a container coming from China than we were. So it's everything.

Fuel in the trucks. It's shortage of trucks. I mean, we are talking about this yesterday with the guys. We're having a hard time getting 1/2 ton, 3/4 ton, 1 ton trucks. We've got accelerated or we've got hyper spending on maintenance for the vehicles we have in the fleet that would normally, in a normal market have been flipped over already, and we'd be out of them, but we can't find new ones.

Labor costs, I can't tell you how many raises we've approved lately, trying to keep people working for us because everyone gets opportunities to work elsewhere or proactively to try and keep people in their chairs. Yes, fuel costs, it's -- the container cost speaks to the biggest story, which is that when I look at a price list in any part of the business, it's not the same, as it was 6 months ago. Our cost of goods has moved up on every single item that we touch. And we've been passing those on at the fastest rate we can. But I think as we get into Q1 reporting, you'll hear this more and more. I mean it's a problem across the world and across the industry. So yes, the pressure is everywhere.

[Cole Pereira, analyst]

And acknowledging there's obviously a lot of volatility and unknowns in the market right now, but as we think about the lag between pricing and cost inflation, is it fair to say that if we're thinking about margins getting back to Q4 levels by Q3, 2022 and then maybe some expansion there after that, is that sort of a reasonable time line?

[Kenneth Zinger, executive]

Yes. I think that's how -- that's how we see it. That's exactly how we're targeting it. Maybe even -- I mean, I don't want to over promise, but maybe even quicker. [ We'll have to see ]. It just depends if the increases keep happening. I mean every time we think we have it under control and when we get our next increase put through, we'll be ahead of the game, something else happens and we get behind again. So right now, looking at what we're looking at, that's how we see it as well.

[Anthony Aulicino, executive]

And just to step back on that margins are important obviously, but the even more important thing to not lose sight of is -- is activity levels are going up and revenue levels are going up. And although margins are going to be compressed during at least Q1 and get better, as Ken mentioned, towards the end of the year. The level of surplus FFO, surplus free cash flow and FFO that we're going to be generating, which is what we're focused on primarily is going to continue to grow through the year.

[Cole Pereira, analyst]

And so just going back to your comments on barite, is it fair to say then that the cost inflation is maybe worse in drilling fluids and production chemicals? Or is it fairly even between both? And is there any real material differences between Canada and the United States?

[Kenneth Zinger, executive]

There's -- I mean, there's some material difference between Canada and the United States just due to logistics and supply, like being closer to the port in Houston take some of that, that cost off. And the fact that we have barite grinding in Corpus gives us a big advantage there as well. So definitely a difference there. But no, there's -- I mean, it's across the business, I noted that. I guess, I can give you. I've got some cost impacts here.

I'll give you some on the production chem side, the big one being MEA. I mean that's a high, high use product that we have, probably our highest. And if you can get it, which has been a huge challenge that we've navigated to manage to keep up to it. I mean we're seeing a 125% increase on that product. I mean I can go down the list here on both sides of the business, and I don't see numbers that are less than kind of 20s on percentage increases. Everything is up.

Can't -- I've been -- I'm getting good at saying this because I've been having a million meetings with procurement departments and our customers, and they don't want to hear the increases, but they're everywhere. It's -- there's just no -- and there -- it's been whack-a-mole. We're just trying to keep up with them. They keep coming. And they come out of left fields a lot of time.

The food industry is a problem. I mean capacity for xanthines and specialty polymers, [ Bor ] is up, FR is up, PHPAs are up. All the chemistries in our raw materials are up. It's just -- it's -- we're just trying to keep up with it. And I would say that we do a -- I would go so far as to say that we do a better job of procurement or as good a job of procurement as anybody in the industry, and that's what we're seeing.

For the smaller customer -- or smaller suppliers, I'm sure they're having nightmares and wholesalers are probably having nightmares because I don't know how they're putting them through fast enough either. And -- but to note -- note to that, everyone is doing it, like it's across the industry. We're not the only one.

[Operator]

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

[John Gibson, analyst]

I think we've touched on the margins and cost increases enough here. But maybe I'll shift gears a little bit. Just looking at the acquisition you did in the quarter. Wondering how much of your existing business in infrastructure could overlap with the offshore space?

[Kenneth Zinger, executive]

Well, the infrastructure, we were set up in Louisiana already with a small piece there, doing some shelf work, but this acquisition gives us access to deepwater. I mean, they run 21 platforms, something that, frankly, we aspired to do, and we've been working towards. But getting in with the customers to get an opportunity on one of those things is a very, very, very rare occurrence, and that's what we like most about this acquisition. These are guys with credibility. They have a real company. They've been doing good work for a big customer, a couple of big customers offshore.

So it actually complements what we have there. And we complement them as well because they were using a wholesaler to buy their material. We now can produce -- we are working towards crossing out all the products that they are buying from the wholesaler and are almost there. So we'll be able to supply them with their own chemistry. And as they look to evolve new chemistries and new solutions, they have -- now have a big infrastructure behind them with labs and PhD chemists and all the things that the CES name brings with it. And the other thing it does, it gives us credibility.

Some of the majors when they do their RFPs in the United States, they want to be able to get serviced everywhere in North America, and that includes Gulf of Mexico. So when you can't check the box that you can service rigs or you have some existing business in the Gulf of Mexico, you can't bid on those projects or if you can, you don't get looked at with real credibility. So that was another big reason we like this because now we have credibility, and we now meet every standard required to bid on every piece of work that comes up in North America.

And on top of that, we think we can grow this. We think the companies that they work for will continue to grow. That will continue to grow our resume, and we'll be able to apply that to other customers.

[John Gibson, analyst]

Looking at your international platforms in Oman and Nigeria, how has the first few quarters gone in terms of expectations versus what you originally expected? And do you expect a maybe a material contribution from these businesses in 2022 or 2023?

[Kenneth Zinger, executive]

Yes. I mean it really depends on what -- we've got some exciting stuff going on over there. I would say, first of all, I'll start with expectation. They went -- we had high hopes for the Oman stuff continuing. But as far as how it's gone to-date, it went accordingly. It's just the project is over. And we are in between stuff now and looking for another project to get on. I think we'll get one.

We do have some big opportunities in the Middle East that we're chasing. And if one of those connects, I mean it will be immediately meaningful. It's just -- we don't have insight yet as to whether or not we're going to win those. We feel comfortable or confident, but nowhere near ready to say we're about to have a big home run in the Middle East. We'll let you guys know as soon as we hear something that is positive.

And as far as Nigeria, it's proceeding as planned. I mean it's a small company we're helping getting going. Vern and Dave Horton participated in the webcast with them and their customers to show the expertise that CES brings to Africa with the supply that we're giving the service company there, and it went really well. So they're placing more orders. They're starting to get some -- to break into some markets, but that's a very early stages of operation. So neither one is meaningful in any way, but they're the doorways to get somewhere. So we're focused on it. We're looking at every opportunity that comes along. And we think we've got a couple that look really good.

[John Gibson, analyst]

And then last one for me. Can you maybe talk about competitor bidding across North America? Are you seeing any predatory bids or is there everyone kind of onboard with the significant cost increases we're seeing.

[Kenneth Zinger, executive]

Well, as I mentioned, I've spent a lot of time in the last couple of months talking to procurement guys and managers. And if you believe everything they say, every other company is not increasing prices. And if we don't not put the increase through on our side, then we won't keep the work. But we do -- you have insight into those companies. And yes, we're seeing it everywhere. I think guys are waiting to be predatory. If you try and hammer something through with the customer, I'm sure somebody would step in and say, yes, I'll do it for less or I'll keep my prices stable. But their ability to do that will be limited to all, it means is they'll get the work and then in a month, they'll have to raise their prices, too. So the moves have been so dramatic. It's just -- it's impossible to absorb this stuff and no one is.

[Operator]

The next question comes from Andrew Bradford with Raymond James.

[Andrew Bradford, analyst]

I'm wondering -- so with all the -- like I do want to come back to margins and I'm sorry to do this. I think you've done a good job explaining the macro setting that you're in. But some of the numbers that are getting to around, it's hard to get context for this. So you talk about barite up 50%, some polymers are by a factor of 2x or 3x.

So bring it up to -- can you help me bring it up to sort of the -- to the line items that we see in the financial statements. So like it'd be possible to describe this, like how much of your unit costs moved higher, assuming a steady mix or even -- if you just want to maybe talk about in drilling fluids, for instance, the same well that you might be working on in a given play on a per day basis, like how much of a percent increase have you seen in your cost that you are trying to pass through to your customers if you think like for the last [indiscernible].

[Anthony Aulicino, executive]

So when we go to the customer with the increased letters, we also bring the backup along with us, which shows the net impact of the particular increases to the overall well cost that we charge. And generally speaking, 15% to 25% is the number that gets added.

[Andrew Bradford, analyst]

That gives good context. I appreciate that. And secondly, early in the preamble, I think, Tony, you were describing the lag, how it's a lag between these input costs and realizing on the pricing, and I think you did a good job explaining this because you're getting prices that are moving while you're in discussions about other input cost changes. But I'm just wondering, has the lag itself changed? Like is it -- the amount of time it takes to get the price increases through different like shorter or longer? Or is it just that you got this rapid fire situation of various prices moving on you, as we're trying to get price increases through.

[Kenneth Zinger, executive]

I think it's more of the latter. Like I think it's just been the rapid fire nature of it and the extreme nature of it, that's been the problem. The lag it varies by customers and by business line. We got some increases. In a lot of cases, we've given 3 price increases to customers already. Every time thinking we have corrected the problem, and then every time finding out we had not shortly thereafter because something else went up.

So on the -- I'll talk to the drilling fluids side, I mean, the lag can be significant, right? It can be 6 weeks, 2 months to get something pushed through when you bid on a pad for instance, and they go in and drill all the surface holes on a 4-well pad. And then they drill all the rest of the wells in order, intermediates and then main horse sometime or the entire thing. Anyways, when that pad starts, you've submitted a bid price. And for sure, the AFE is built off that, and the operator always asks I won't say always, but almost always ask for you to hold the prices for the pad.

Well, that pad can take you a month to drill depending on the well, sometimes 6 weeks, and that's not including the week or 2, it takes to get to them, explain the increases, get them to work it through their procurement departments and accept the increases. And then you're set up for that increase in 6 weeks. But in the meanwhile, we've got all this inventory going out the door, where we know replacement cost is much higher than that. So that's what I -- when I talk about strategy, that's our strategy is to support our customers in that fashion to help them. And I would say 90% of them are appreciative of that and that, that will pay dividends in bidding season, in the spring time in Canada and in the United States, it's paying dividends right now. And then there's that outlier 10% that you just can't make happy. So you just got to keep hammering on it and finding a solution that works for both of you.

[Andrew Bradford, analyst]

And then my last question just relates to capital spending and I noticed that you had -- your capital -- your growth capital spending, your expansion capital is quite light still compared to where it was prior to 2019, but there's still sort of a lump that came through in the fourth quarter. I think that relates to the Nisku facility. So is that correct?

[Kenneth Zinger, executive]

That is correct, yes.

[Andrew Bradford, analyst]

And is that -- sorry...

[Kenneth Zinger, executive]

I was just going to say that relates to the MEA product that I talked about. That's a high use -- that's a -- it's used in scavenger and that upgrade in Nisku was because last year, when we saw all the shortages coming, we just didn't have enough inventory on the ground to get a safety stock level beyond about 5 days, and we knew we were headed for trouble. So we put a bunch of money into the Nisku facility to get our storage level capability and blending capability up to meet the -- what we saw as an upcoming demand.

And as we talked about last quarter, there was a real problem with supply. And one of our major -- our biggest competitor in Canada was unable to supply, and we had to pick up some of their work and do some stick handling to try and support them as well as existing customers. So yes, that's what that piece of CapEx was, and that was well spent money.

[Andrew Bradford, analyst]

And any color you could provide on the $20 million plan for '22?

[Anthony Aulicino, executive]

Yes. I'll start on that. So we were very deliberate in the language. So that $20 million of growth CapEx, $20 million is earmarked for growth CapEx. And that's a little bit of a combination of catching up on some required improvements and increases to support the growth that we're seeing in general for the year. But a nice little chunk of it, in the CAD 6 million to CAD 7 million -- CAD 6 million to CAD 8 million range, is the potential expansion of our barite grinding capabilities. And we're looking to do that in Texas and being very strategic to help AES capitalize off of the growth that they've been seeing and that we expect them to see in 2022.

And every time we're able to do that and run more products through those facilities, we're able to do so more and more efficiently by putting more volume through, which we're expecting to see and which we're starting to see right now. And as we do that, we're able to spread the unit costs over a -- have a bigger volume over fixed cost, thereby reducing our unit costs. That, again, is one of our levers to improve COGS in a very important product like barite.

[Andrew Bradford, analyst]

What capacity is your Corpus Christi mill right now?

[Kenneth Zinger, executive]

Yes. I mean we've been running at max capacity here the last few months, it's about 35,000 tons. This additional facility when we get around to having it completely planned out and ready to come online, it will add about 15,000 tons. So it will add about a 50% bump to that volume.

[Andrew Bradford, analyst]

So -- and I -- is this -- are you just sort of thinking about adding an additional train to the Corpus Christi facility? Or is this going some -- in a different location?

[Kenneth Zinger, executive]

We're investigating that right now. Probably, it makes sense to do it somewhere else, but we're investigating that right now.

[Andrew Bradford, analyst]

And at one time you were thinking about putting adding barite capacity in the Northeast. And I assume that's not on the table still at this time?

[Kenneth Zinger, executive]

That's correct

[Operator]

The next question comes from Tim Monachello from ATB Capital Markets.

[Tim Monachello, analyst]

Not sure if this margin -- peripheral margin horse is dead yet, but I'll give it another kick. It seems that the reported numbers and the guidance for Q1 and perhaps Q2 being lower is both a combination of a real cash impact, as pricing for products that you're buying is outpacing that you can sell them for. But there's also an impact that has to do with the accounting around standard cost accounting and you might actually have some inventory here that is a lower cash cost and you're selling it for higher, but reporting it at a higher cost. So I'm curious what the split would be and what the comparative impact on EBITDA will be compared to cash flow.

[Anthony Aulicino, executive]

Again, it's tough to give you a specific percentage. But let me -- and again, I don't want to get into the details to provide more information than we need to. But to summarize it, the impact to the accounting or to the margin, the accounting margin and the COGS will be higher than the impact to cash flows. So cash flows won't be affected as much as EBITDA will.

[Tim Monachello, analyst]

Like is it close? Or is it like an order of magnitude, do you think?

[Anthony Aulicino, executive]

I don't think it's an order of magnitude, but it's not equal.

[Tim Monachello, analyst]

And then I just wanted to touch on the acquisition. It's the first acquisition this company has done in a long time and stepping into the offshore market. And obviously, you think that you can probably leverage the infrastructure you have behind you and the scale. So I'm curious if you could provide, I guess, some near-term boundaries around the financial impact this could have and maybe some longer-term ones, where you think they could go?

[Anthony Aulicino, executive]

Yes. So as we said, as Ken said, this is a very strategic, but small acquisition. It's not going to move the needle from a quantum perspective on revenue and EBITDA today. That's not to say that it's not generating acceptable and, frankly, accretive margins and cash flows because it is. The bigger thing is what Ken said, putting the machine behind it, and Vern and his team working with the ProFlow team to extend that business and grow into something. So it's not going to be significant from a consolidated perspective this year, but we expect it to start contributing nicely towards the end of this year and into 2023 and beyond. The offshore market is a great market, and these guys did a fantastic job developing a reputation that Vern and the current ProFlow team are going to work to improve with the support of the entire company.

[Tim Monachello, analyst]

And then I guess, as you look at the peripheries of your business and start to look at, I guess, adjacent markets or service lines, what else are you looking at or give me some ideas maybe of different markets that are attractive?

[Anthony Aulicino, executive]

So the markets that are attractive, frankly, in that ancillary -- in those ancillary spaces are ones that, frankly, we've already worked in. So Mike Hallat, who runs our Sialco division, who you know has already been manufacturing products that get sold into the cosmetics industry, fragrance industry, automotive lubricant industry. So we're starting with what we know well and how we can grow that. And so that's where we're focusing initially.

However, as we've talked about a little bit before, we are taking a very strategic and deep dive approach to take a look at the overall market opportunities in those adjacent markets. So looking at the personal care market, looking at the biosurfactant market and a few others, but these aren't flash in the pan projects. We're taking very deep dives to understand those and frankly, probably doing the same work that you've done, which is looking at some of the very big guys that are competitors, especially in Europe that serve our energy end markets, but are actually selling into some of those end markets that I mentioned. So those are the types of markets, and you've probably looked at the other end markets that guys like Clariant and Solvay are selling into, and we're doing exactly the same thing.

[Operator]

The next question comes from Keith Mackey with RBC.

[Keith MacKey, analyst]

So Ken, you mentioned that the current environment must be pretty tough on smaller providers, it's certainly challenging for all. Does the current environment, where you've got smaller competitors and you've got some customers unwilling to accept price increases and I'm sure you'll always have that. But does that dynamic have you thinking about M&A a little bit more and potentially getting on the front foot as an opportunity in the current challenge to exercise your footprint and capacity to consolidate the market a little bit more in either Canada or the U.S., drilling fluids or production chemical?

[Kenneth Zinger, executive]

Yes. I think that's something we're always looking at, and it's definitely something that's crossed our minds, as we've gone through this. But no matter what, we have to get pricing up. If this isn't -- we haven't felt pressure from anyone, I shouldn't say that.. But I -- we -- it's specifically hasn't been a problem with smaller companies or having more choices by the operator to drag our margins down. It's just been trying to get increases through, and it's the same problem all of us are facing. I mean maybe come breakup in Canada and as the bid season opens up and the summer down in the U.S., maybe there will be some pressure there, and that would be a time to take a deeper dive on it. We've always got a couple of smaller companies that we're watching that are competitors. But I don't know that it solves the problem at current. The problem at current is dramatic increases in everything.

[Keith MacKey, analyst]

And was the Q1 acquisition -- sorry, if I missed it, was that cash or shares?

[Kenneth Zinger, executive]

It was cash.

[Anthony Aulicino, executive]

Yes, yes, smaller acquisition, but it was cash.

[Keith MacKey, analyst]

And is that embedded in the $40 million? Or should we be thinking about that as a small incremental?

[Anthony Aulicino, executive]

Yes. So you should be thinking about that as a small incremental. And when you see our Q1 financials, you'll have more granularity. When we talk about CapEx, we don't include M&A in that number.

[Keith MacKey, analyst]

And Tony, you exercised the accordion feature on the bank line this quarter. As working capital has come up, I know you've talked about that leveling off potentially as the steepness in revenue and the revenue growth also levels off. But how should we read the exercise of the accordion feature? Is it nice to have necessity or just a little bit more detail there, would be helpful?

[Anthony Aulicino, executive]

I think you should read it as responsible financial management. It's my job and my team's job to make sure that the company has the liquidity that they want. And it's our job from a governance perspective to make sure that we have ample, ample liquidity, which is demonstrated by our current and anticipated draw versus the total [ 2 60 ], now -- that [ 2 62.5 ] that we have access to. And it's really being able to have that level of comfort, have the ability to support the business, i.e., if there is an opportunity to make a strategic purchase of something from an inventory perspective. We do not want to stifle the capabilities of the procurement teams across Canada and the U.S., #1.

And number 2, also, and you've asked questions before, I believe about the bond refinancing that we don't have to do for a couple of years. However, we likely will be reducing the size of that bond. And when we do, we'll be in whatever position we're going to be in from a draw perspective. And it's responsible to make sure that if we want to reduce the size of that bond, and we want to put some of that delta on to our line that we have ample opportunity to -- and capacity to do that, so that it will be at a lower level, and it's going to get repaid and whereas what the bond it's fixed. Does that answer your question, Keith. Operator, I think we may have lost Keith. If he joins back again, please move...

[Keith MacKey, analyst]

Oh, Tony, sorry, I was on mute. Just finally, what margin does that Q1 EBITDA guidance imply?

[Anthony Aulicino, executive]

Look, if I told you that, then you would know exactly what we think revenue is going to be, and I don't want to do that. But I would continue to do what you're doing in terms of assumed activity level increases in Q1 versus Q4. And I gave you -- again, it's not carved in stone, but we wanted to be transparent and tell you what we think, which is approximately a -- what could be a 20% decrease in EBITDAC level from Q4, 2021, so you could do the math on that.

And then after that, Keith, I'd encourage you to use your revenue levels to back into a margin. I don't think margins as important as cash generation and our ability to work through this current extraordinary environment that we believe is temporary, and we're going to start getting out of it in Q2 and beyond.

[Operator]

[Operator Instructions] The next question comes from Josef Schachter from Schachter Energy Research.

[Josef Schachter, analyst]

Congratulations first on a great year and great performance throughout the quarter. My first question is for Tony. We see that the receivables almost doubled in the year on a 35% increase in revenues. Are you -- are we seeing customers delaying their payment schedules? Is that one more thing that's going to require you to have a little more flexibility on working capital?

[Anthony Aulicino, executive]

Yes. Not at all. That's not happening at all. Like you nailed it. The reason for that big increase in working capital was commensurate with the big, big increase in revenue year-over-year.

[Josef Schachter, analyst]

So there's no lag in terms of payment schedules at all?

[Anthony Aulicino, executive]

No, not that we're seeing.

[Josef Schachter, analyst]

Okay. Good. 2 questions, Ken, on the macro side. With your expertise, as you mentioned, in polymers, the industry, of course, where do you find oil, it's like real estate location, location and where you have reservoirs that are performing right now and a lot of companies are talking about increasing productivity with polymer floods. Are you in that business? And with the science skills you have and your labs across the country or [ 10 ] in the states, is that a business that you see becoming significant to you in the years ahead?

[Kenneth Zinger, executive]

No, It's something that we're always looking at. We participate in a small way. The problem with that space is the big companies generally work with the big companies on that. Like we don't manufacture polymers, we buy polymers for manufacturers. So the big guys like SNF go direct on that business to the oil companies. It's hard to get in the middle of that.

[Josef Schachter, analyst]

And the next one is Biden seems to be opening doors to Iran and Venezuela and potentially moving sanctions out. There's probably going to be a lot of need there. Is that something that you might look at once the rules are out, the operating rules are out in the open? And is that something that given it could be a very high-margin business that you might look at?

[Anthony Aulicino, executive]

I think like we always talk about, we'll look at everything. Hard to believe that's the solution to this is to work with in those jurisdictions. But that's -- if the opportunities are there, we'll evaluate them, measure the risk and then make a decision.

[Operator]

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

[Kenneth Zinger, executive]

Well, thank you, everybody. I'm going to wrap up the call today by saying thank you to our customers, our employees for helping us produce another great quarter. We're really pleased to be in a strong financial position and returning cash to shareholders coming out of COVID. We look forward to speaking with you again during our Q1 update in May. Thank you, everybody.

[Operator]

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