Enerflex Ltd
TSX:EFX
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
5.55
11.27
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Enerflex Ltd
You don't have any saved screeners yet
Good day, ladies and gentlemen, and welcome to the Enerflex First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Blair Goertzen, President and Chief Executive Officer. You may begin, sir.
Thank you. Good morning, everyone, and thanks for joining us this morning. Here with me today, is James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer; as well as Marc Rossiter, Enerflex's newly appointed Executive Vice President and Chief Operating Officer. During this call, James and I will be providing our financial results for the 3 months ended March 31, 2018, a brief commentary on the performance of our 3 business segments and a summary of our financial position. Approximately 1 hour following the completion of this call, a recording will be available on our website under the Investors section. During this call, unless otherwise stated, we will be referring to the 3 months ended March 31, 2018, compared the same period of the 2017. I will proceed on the basis that you've all taken the opportunity to read yesterday's press release. Enerflex's first quarter financial results demonstrate the increases in activity levels and higher revenue recognized across all 3 product lines as well as the challenges faced in some regions. Bookings for the quarter continued the positive trends seen over the past 7 quarters with sustained increases in customer activity and inquiries translating into bookings of $301 million, which was predominantly from the U.S. segment. The company achieved this strong result despite Canadian bookings continuing to be negatively impacted by customers' cautious -- caution amidst uncertain economic conditions. Engineered Systems backlog was $654 million, a slight decrease compared to December 31, 2017, due to the weakness in Canadian backlog, offset by the growth in USA and Rest of World segments. Consolidated revenue for the quarter was $386 million, a 9% increase over the first quarter of 2017, which was largely driven by improved Engineered Systems revenue in Canada and Rest of World segments. Revenues have returned to more normal results when compared to the strong fourth quarter of 2017. In the Canadian region, commodity prices and growth plans remain uncertain as Canadian producers continue to be constrained by a lack of export auctions and the Western Canadian production continues to be priced at a significant discount to other North American benchmark pricing. Natural gas prices in this market declined over the last half of 2017 and are expected to remain depressed throughout 2018, which has impacted many of our customers. Although, we have a healthy bid pipeline of almost $600 million the region, we expect that the 2018 activity in Canada to be somewhat subdued compared to 2017, and will remain so until there's a recovery in natural gas prices and proper export solutions for Western Canadian production. It is important to highlight the company's strategy of geographic diversification has significantly lessened the impact of the challenges of any one region. Moving on to the USA, with improvements in commodity prices from the second half of 2016 and throughout 2017, the industry experienced a surge in activity and saw an increase in production, resulting in higher inquiry levels and bookings. Demand remains high for assets being deployed in the Permian Basin. There has been an increase in the diversity of bookings by customer and customer type, relative to previous years, and during the quarter, Enerflex sold its first cryogenic gas plant, a $200 million a day facility in northern U.S. As we look forward in this market, Enerflex remains focused on building on its successes for Engineered Systems products for liquids-rich plays in this prolific region. The company expects 2018 to be a year of continued, steady demand for our products and services, as evidenced by the strong bookings in the first quarter. The acquisition of the rental assets from Mesa Compression in the third quarter of 2017 has added an established and growing platform, which contributed to increasing recurring revenues for the segment. During the quarter, Enerflex invested $14 million in rental assets in the U.S., continuing the organic expansion of the U.S. rental fleet, which has grown 26% since the acquisition. Enerflex remains focused on growing and investing in these assets through 2018, and as production in the Permian continues to expand, the customer -- the company sees additional growth opportunities in this high demand market. Opportunities also remain strong for the Rest of World segment. Looking at the Middle East, the region continues to provide stable rental earnings with a fleet that now consists of approximately 105,000-horsepower. During the quarter, the company also executed an expansion and a 4-year extension of a rental contract with a customer in Bahrain, which will continue to contribute to the recurring revenue. Enerflex's recent success in Kuwait has served to demonstrate our capabilities and has led to additional work with key customers on further projects. The Kuwait market has significant project plans over the next 5 years and Enerflex is well-positioned to compete for these new opportunities moving forward. The company continues to explore new markets and opportunities within the diverse region in order to enhance recurring revenues as well as focusing on build-own-operate-maintain and integrated turnkey projects. The Latin American market, specifically, in Mexico, is still recovering from the crash in commodity prices and a shortfall in investment in oil and gas infrastructure and it is evident that new production is required in many of these countries. As a result, Enerflex believes there are near-term prospects within Argentina and Colombian markets and mid- to long-term prospects in Brazil and Mexico. In Argentina, the company recently completed a significant project in the Vaca Muerta shale play. Further development opportunities exist in this formation as producers expand their production, with Enerflex well-positioned to capitalize on these opportunities. During the quarter, the company commenced full operations on a 10-year build-own-operate-maintain project in Colombia, which will contribute to recurring revenue and expands our presence in the Colombian market. As capital investments increase to support Colombia's underdeveloped infrastructure, there will be further opportunities for Enerflex's products and services. Looking to Mexico, there continues to be a lack of investment. However, we did see some encouraging signs as the company did book a rental contract during the quarter with an independent producer, indicative of the market opening up under the energy reform. Enerflex expects continued opportunities as more independent producers enter that market. As we move forward, Enerflex remains very focused on delivering Engineered Systems, aftermarket service, build-own-operate-maintain and ITK solutions for customers across the Rest of the World segment. The company's balance sheet remains strong, with a net debt-to-EBITDA ratio of approximately 1:1, which allows us to pursue growth opportunities with a focus on recurring revenue. Rental revenue from the contract compression acquisition, along with recent build-own-operate-maintain project wins fit within Enerflex's strategic goal of increasing recurring revenue. Moving ahead, the company will continue to grow its revenue streams from multiple markets. Given Enerflex's positive outlook, the Board of Directors has approved a quarterly dividend of $0.095 per share, which is a $0.38 per share on an annualized basis. Now, I'll over to James Harbilas, Enerflex's Executive Vice President and Chief Financial Officer, to review the financial results.
Thank you, Blair. Revenues for the quarter increased compared to the previous period across all 3 product lines. Engineered Systems revenue was driven by the realization of strong bookings from prior periods, while service and rental revenues benefited from the company's focus on increasing recurring revenue streams. Despite higher revenues, gross margin and operating income were lower than the same period in 2017, due to margin erosion and higher SG&A costs. The company's quarterly bookings represented a 5% decrease year-over-year compared to 2017, predominantly due to the decrease in the Canadian segment. Enerflex saw a $17 million reduction in backlog compared to December 31, 2017, on the strength of the Engineered Systems revenue recognized in the quarter, and the weak Canadian bookings. However, backlog remained $654 million, which provides good visibility for Engineered Systems revenue through 2018. Adjusted EBITDA was $41 million versus $50 million and was adjusted for impairments, gains on asset sales, restructuring activities and share-based compensation. The underlying decrease in adjusted EBITDA was largely driven by lower margin and higher SG&A costs as previously mentioned. Revenue showed an improvement, with the company generating $386 million, a 9% increase, which was primarily driven by Engineered Systems revenue in Canada and the Rest of the World segment. Consolidated gross margin for the quarter was $65 million, compared to $73 million, while gross margin, as a percentage of revenue, decreased to 17%. This 4% reduction was largely due to product mix within the Engineered Systems product line, strong project pickups during 2017, combined with some margin erosion on certain large projects in the current quarter. Selling, general and administrative expenses were $45 million. This increase of $2 million was due to higher compensation costs, as a result of an increase in headcount and higher foreign-exchange expenses, partially offset by lower share-based comp and third-party costs. During the quarter, Enerflex also generated net earnings from operations of $11 million or $0.12 per share, compared to net earnings of $25 million or $0.28 per share in 2017. Moving on to our regional results. In Canada, challenging market conditions and pipeline constraints resulted in a decrease in bookings of $136 million in the first quarter over the same period in 2017. Despite these conditions, the company continues to see healthy inquiry levels. Revenue in the segment, during this period, was $99 million. This $23 million increase is primarily attributable to higher revenues from the Engineered Systems product line, driven by the depletion of backlog that was created by bookings in the last half of 2017. Service and rental revenues are down from the prior year, both being negatively impacted by lower parts and equipment sales. Operating income for the first quarter improved by $4 million as a result of increased revenues, partially offset by higher SG&A costs, primarily due to higher compensation costs with the increase in headcount. EBIT for the quarter increased slightly due to improved operational results when compared to the prior year, which included a gain on sale of property, plant and equipment. In the USA segment, Enerflex's bookings of $240 million represent an increase of $76 million when compared to the first quarter of 2017. We continue to see demand for assets that will be deployed into the Permian Basin, where we are well positioned. At the end of the period, backlog remains healthy at $449 million, which is higher than the backlog at December 31, 2017. Revenue in the USA segment during the first quarter was $192 million. The slight decrease of $2 million was attributable lower revenue recognition from some larger projects as well as the impact of the weaker U.S. dollar in the first quarter of the year. Service revenue saw an increase due to higher activity levels and rental revenues improved as a result of the acquisition of the contract compression business from Mesa and the buildout of the fleet over the last half of 2017 and into 2018. Operating income and EBIT for the first quarter were lower, compared to the prior year, by $8 million, due to lower Engineered Systems margins as a result of product mix, the inclusion of high-margin projects in 2017 and increased SG&A costs, driven by higher compensation costs, partially offset by contributions from the higher-margin service and rental product lines. Subsequent to the quarter, as part of our ongoing efforts to reduce capital employed, associated with idle facilities, the company entered into an agreement to sell an idle facility in Wyoming for approximately $4 million, and has received a letter of intent on a second idle facility in the same location, with expected proceeds of $6.4 million. In the rest of world, $44 million of bookings primarily relates to a project booked in Colombia. This segment's bookings are typically larger in nature and as a result, are less frequent. Backlog of $120 million at March 31, 2018, increased by $9 million relative to December 31, 2017. Revenue in the Rest of World segment for the first quarter was $95 million. The increase of $10 million was attributable to the continued progress on a number of large Engineered Systems jobs in the Middle East and Latin America. Service revenue increased with higher part sales and higher service levels in the Middle East and Australia. Lower rental revenue was the result of slightly decreased utilization rates in Mexico and the impact of the weaker U.S. dollar in the first quarter, partially offset by rental revenues on the new build-own-operate-maintain project in Colombia. Operating income of $3 million represents a $7 million decrease over the same period of 2017, due to margin erosion as a result of increased costs on a large project without corresponding increases in revenue. The prior year's results include recognition of some high-margin projects in the prior year. Those declines were partially offset by a decrease in SG&A costs, driven by reduced third-party costs, offset by some negative foreign-exchange impacts and the effects of restructuring activities in Australia. Turning to the balance sheet. Enerflex continues to spend capital on rental equipment to expand the fleet, consistent with our strategic objective of increasing recurring revenue. The company also remains diligent in managing working capital and repaying long-term debt to retain flexibility to pursue opportunities. In managing liquidity, the company has access to significant portion of its bank facility for future drawings to meet the company's future growth targets. As of March 31, the company held cash and cash equivalents of $209 million and had drawn $139 million against the bank facility, leaving it with access to $581 million for future drawings. The company improved net-debt-to-EBITDA ratio as compared to the prior year and continues to meet its bank facility covenant requirements with a net-debt-to-EBITDA ratio of approximately 1.14:1, as calculated for covenant purposes. Demand for natural gas is growing globally and with recent pricing gains, particularly outside of Canada, Enerflex is optimistic that customers will increase capital spending and production, translating into increased demand for Enerflex's products and services. We anticipate increases in activity levels in the USA and Rest of World segments, which will more than offset challenges faced in the Canadian market. Building off this success of adding assets, which contributed to recurring revenue, the company remains committed to this strategy in the USA and Rest of World segments in 2018 and going forward. This completes the formal component of the webcast. Additional details can be found in our May 3 press release. We'll now be happy to take any questions. Operator?
[Operator Instructions] And our first question comes from Ben Owens from RBC Capital Markets.
So when we look at the Engineered Systems' operating margins you generated in the first quarter in the U.S., are those margins a good indication of where margins are in backlog, just for the U.S. Engineering Systems business?
Yes, when we look at U.S. margins in the first quarter, we're really looking at them as probably the low watermark in terms of what we're going to accomplish going forward in the year and the reason is that if you look at where the backlog was, coming into Q1 of '18, it was heavily weighted to gas compression. If you look at the split, it was roughly 80% to 85% gas compression, versus Q1 of '17, when it was only about 25% gas compression. With the bookings that we booked -- that we achieved in Q1 of '18, that mix is starting to shift back towards gas processing and getting closer to what we've seen historically, as a 50-50 split. So, obviously, gas processing as we've said all along, has a higher gross margin associated with it because it is more highly engineered, so we would expect margins to improve in Engineered Systems in the back half of the year as we start to work through the gas processing backlog.
Okay, that's very helpful. Just last question for me. How much of the $19 million you invested in rental assets in the first quarter was for the expansion of the Mesa Compression fleet?
I would say the lion's share of it went into the Mesa Compression fleet. We've seen utilization remain strong. We like what we are seeing with respect to monthly rental rates there, so I would say it's probably north of 90% that went to Mesa.
Okay. Is that a rate that you think you guys can maintain over the next 3 quarters of the year based on the demand for compression that you see out there?
Yes, Ben, the demand that we see today, I don't see why there isn't a good opportunity to see 15% to 20% greenfield growth in that business. We're seeing a shift towards inquiries for higher horsepower as well, giving us a fleet mix that we desired from the onset when we bought that as a platform. So the answer is yes and that certainly the inquiries are robust enough that we believe that's accomplishable.
And our next question comes from Greg Colman from National Bank Financial.
On the quarter, we saw what we were expecting on the revenue side but the margins was quite a bit weaker than we thought. Blair, in your prepared remarks, you talk about a significant impact from increased cost on an international project [ without ] corresponding increases in revenue. I was wondering if you could help us understand that in a little bit more detail, quantify the impacts potentially? What the quarter would've looked like without that? And also what was the reason for the impact? Is this a delay in revenue or was it some sort of fixed-price contract where you're going to see the margins from this project be lower in the ultimate outcome? Just trying to get a bit more detail on that.
Sure. So the impact was about $7 million to $8 million. It really was a culmination of engineering expenses, supply chain issues on our part, and then there was an accelerated schedule from the customer. And so that really is the genesis of how this got to where it is today. And we have, again, as we talked about over the years, change orders or variation orders in place for that, we're not, again, as we are never certain of the timing of those but they're in place but this is what's happened in the quarter. Engineering supply chain and then an accelerated schedule for delivery.
And -- so to rephrase it and put it back at you with the $7 million to $8 million impact, if we had seen this executed, sort of what I'd call it, more normally, we would've seen EBITDA $7 million to $8 million higher than it was?
Right. That's absolutely correct.
Okay. If we look at your...
Probably, then to add in terms of Rest of World margins, obviously the Australian restructuring in the Rest of World segment was about $1 million that we don't expect to recur going forward. We downsize that business to make it more profitable, just given some of the service activity levels we're seeing, and then the other impact in the quarter was unrealized FX losses were $1.5 million higher in Q1 of '18, relative to Q1 of '17. So I think those are important data points when you're looking at margins going forward in the Rest of World segment as well.
As far as us looking at your contracts going forward, is this sort of noise the thing we should expect as a new norm, given that it's happened a couple of times over the last year? That would be the opposite of what I would expect, given that we're seeing your revenue shift more over towards sort of the recurring revenue side, which I would tend view as more volatile. But we are seeing a little bit more volatility in the results, I'm just trying to reconcile those 2 parts there.
That's a very good observation and I don't think the new normal for us is to have the volatility versus the stability that we keep talking about in recurring revenue. Obviously, the more recurring revenue and the more stability, and I think it's the selection of where we look at some of the ITK projects as well as we grow and build this organization and differentiate ourselves, that's going to be, probably, as much of this in terms of the strategy. We very much believe and support the strategy and it is around creating stability versus volatility and I really believe that as we go forward and we are evolving in this, somewhat, because it is a different channel to market in a lot of ways that our sophistication in it becomes a lot more stable and this will not be the new norm.
Just I guess, had a question a little bit more directly on the cost and margin side. The 10.5% we saw in the quarter, you got to go back pretty far to find something at that level. Do you view Q1 '18 margins of 10.5% as a local low, or are we likely to see them persist for a few more quarters until we start to get into the higher-margin processing?
Are you referring to the U.S. region?
I'm referring to the company in aggregate. Adjusted EBITDA margin.
I go back to the answer that I gave Ben to his question, if you look at the U.S., it represents 51% of our revenue, and Q1 was dominated by lower margin compression equipment versus gas processing. So we would see those margins increasing steadily throughout the year beginning in Q2 but by the time we start working through gas processing backlog, that's more a Q3, Q4 increase in -- from our margin profile. And look, at the end of the day, we are not expecting a $7 million to $8 million hit every quarter with respect to these projects either, so that's not the new normal as Blair said.
[Operator Instructions] And our next question comes from Jon Morrison from CIBC Capital.
Sorry to beat a dead horse but can you give a little bit more color on the international margin compression and talk about the degree of confidence you have that the hit is isolated to Q1? I realize these types of fluctuations are somewhat a function of large international projects, especially when there's EPC and turnkey, but there's been times where they've very obviously been one-off in nature and then we move forward but then your mind can't help but gravitate towards Oman, which was a long headwind against the company. So any color you can give on whether there's the potential for this to be a hangover into future quarters would be very helpful.
Yes, Jon, we don't expect this to be a hangover into future quarters in any way the magnitude that it is at this -- in Q1. And so from what I can say at that point, it is very, very unlikely that it has had the magnitude in Q1 in any future quarters. And we're looking more for recovery than additional or incremental expense.
Okay. So there is a potential for margins to improve over a normalized level of Q2, should something positive come out of this in terms of change?
That's correct.
In terms of the U.S. bookings, they were obviously strong in the quarter. Can you give a sense of how weighted they were to certain projects, customers or geographies? And I guess what I'm really trying to get at is, how lumpy were the orders obviously, outside of the cryo plant which we talked about last quarter?
I think we're happy -- I think it's safe to say that we are happy with the trends that we're seeing, especially, in terms of resource play. I mean we continue to see activity in the Permian, but the Permian, in terms of Q1 2018 bookings doesn't represent the lion's share. It was 25% of our Q1 bookings that went into the Permian, so we saw a little more diversity in terms of resource basins, which was nice to see and it was spread a lot across numerous customers, it wasn't concentrated just with 1 customer the way we've seen in the past.
James, recognizing that the U.S. and International look solid and should largely offset the Canadian weakness, is there any chance that Canada could lose cash in the coming year? Or is the worst case scenario that you just don't generate that much cash and that margins are largely fixed but are absorbed by your fixed costs?
Yes. Well, where we're sitting today, we've done a lot of work, and the Canadian management team has done a lot of work -- good work right sizing that business and taking out a lot of SG&A and really rationalizing the amount of idle facilities we have. So where we are today, looking out to the balance of the year, we wouldn't expect that we would retrace the steps that we took in 2016 where we lost money in Canada. We still feel that Canada's positioned to have a profitable year and generate some positive cash. Albeit, lower than where we were in 2017, just given the slow start in bookings that we've experienced in Q1 of '18.
When you have conversations with customers that were, obviously, bidding things a little bit more aggressively 6-plus months ago and they've been delayed, is the message that some of that should rule over to 2019, or it's too early to have any of those kind of primary conversations?
It's probably a little early on those conversations, and I want to go back to Canada as well because we have a lot of bookings in the U.S. and we're having conversations between the U.S. and Canada right now is there an opportunity to more fully utilize the facility in Canada with some U.S. business? So that's also an important factor in Canada in 2018 as well. And as far as those conversations with customers around delays, it's -- we've been at this place before and it really is a matter of week to week in terms of trying to understand what are the drivers for them to make decisions around their final investment decisions for some of these facilities that are being contemplated. And our risk is that we make reductions in workforce and then we're not prepared with the skilled labor that we need to go ahead and execute. So there's a balancing act right now, for sure.
Blair, in the past you've given a decent amount of qualitative comments on international opportunities and can you just give an update on line-of-sight and has bidding or order inquiry changed much in the past few months?
No, it's still very robust. I think that as far as where it's coming from, we mentioned Kuwait and Oman, the Middle East is still very active. We are seeing inquiries now come out of Brazil, obviously Argentina is still very active for us as well internationally. So it's the countries that we have put the most amount of effort in because of the types of customers and the types of geology and where we want to be in terms of build-own-operate-maintain. And so those are starting to pay dividends now in terms of our order pipeline or at least the bid pipeline. So it really hasn't changed in terms of focus, but the quantum continues to get more and more robust in terms of the inquiries in those areas.
Has there been any tenders that you would've seen Enerflex to be a frontrunner on that ultimately, were awarded to another service provider that you've seen in the last quarter?
Not really, no.
Okay. James, just on the U.S. mix, you talked about how it was going to shift away from compression as the year went on. Should we be thinking that as a step change in Q2? Or is it more of a grind higher as a product mix shift more towards higher engineered products and nonstandardized compression packages?
Yes, we see it more as a gradual increase as opposed to a step change, Jon.
Last one just for me. Around the restructuring that we saw in Australia, is it fair to assume that we should take that as a signal that near-term incremental bidding opportunities on Engineered Systems are very low and you're effectively rightsizing that business to be a service-oriented market?
It is a service market for us, first and primarily. And we will be very focused on selective Engineered Systems opportunity in the country and that's going to be, again, generated on the complexity of the equipment and, of course, the customer as well and how we view that customer. So we're very much still in the game as well as Engineered Systems in Australia but some of the other ancillary work that we were doing around projects are not in the scope any longer. So it's really about service first and then a strong focus on certain types of Engineered Systems products into the country.
And our next question comes from Elias Foscolos from Industrial Alliance.
I'd like to follow-up on aftermarket service, so I want to wait a couple of segments. In Canada, we saw a pretty steep drop for it in my view and it's one of the lowest that I can see for a while. Are we seeing some seasonality effects because of weather, are we seeing some pricing, or is there some other dynamic that's going on?
So seasonality does play a role, although, if you compare it to Q1 of '17, we obviously had a lot of inventory when we were entering '17 and the Canadian business was focused on reducing that inventory and we had a significant amount of parts sales that we were able to move in Q1 of '17 that didn't recur in Q1 of 2018, just as a result of the fact that we have lower inventory levels. So those are the 2 factors that contributed to that year-over-year decline in service. On the rental side, I think we just continue to see a decrease in utilization, steady decrease in utilization in the Canadian market, just given the fact that more customers are buying equipment in the Canadian market than they've been renting when compared to historical trends.
Okay. Focusing on aftermarket service in the U.S. Last quarter in Q4, we saw a pretty big step-up, and then we again retrenched a bit. I assume part of the increase in AMS in the U.S. in Q4 was the acquisition of Mesa. Are we looking at, maybe -- again, some factors that occurred there, was it -- and I'm not looking year-over-year on this on, but rather from Q4, sort of, I'm trying to get some goalpost on what might be occurring there?
Well, look in Q4 we had higher activity levels across most product lines in the U.S. as you saw there was a lot of catch-up work in the U.S. on the Engineered Systems side, which slipped from Q3 into Q4. Along with that when equipment starts to get delivered, the service business gets a lot busier to, to be able to commission and start up that equipment. So that's what we experienced in Q4 in both Engineered Systems and service. Going into Q1 of '18, we saw Engineered Systems revenue come off the lower levels and correspondingly, the service business wasn't as busy as it was in Q4 with startup and commissioning work.
Okay. And maybe one last thing but focusing on U.S. rentals, we are probably -- we can probably expect a bit of a ramp in that as you deploy more compression throughout the year. Would that be a fair statement?
We continue to have -- I mean Elias, Blair touched on it, continue to see healthy inquiry levels there for us to deploy new equipment, and we continue to deploy both lower horsepower wellhead units for gas-lift but we are also moving into higher horsepower opportunities on the gathering side, and we continue to see that demand playing out over the balance of 2018. So we've said that we are planning to spend about $50 million to $60 million on U.S. rentals in 2018.
[Operator Instructions] And our next question comes from Greg Colman from National Bank Financial.
Just a standard follow-up on the OOCEP arbitration. Are we still thinking end of June, early July for a wrap up on that? Or is that schedule either been accelerated or pushed out at all?
No, that's exactly what we're looking for, end of June, middle of July, according to the schedule.
Reasonable to assume that we hear from you as to what those results are either way?
It's very reasonable to assume that.
And our next question comes from Jeff Fetterly from Peters & Company.
Couple of random questions. On the rental side, did I had correctly, Blair, you said that $14 million was invested in U.S. rental assets in Q1?
Yes.
And so if I just run simplistic math, that would imply somewhere between 10,000 and 15,000 horsepower coming into the U.S. versus the 5,000 or so that you added in Q1?
Yes.
Okay. And the $50 million to $60 million, how much line of sight do you have at this point to that number?
Actually have a good line of sight to a lot of it. I would say $40 million of it.
And what -- you mentioned earlier that utilization in that business has been high and rates are good. Are you seeing improvements in rate and pricing, tied to that new capital versus the existing base?
Yes. In the existing base as well, we're seeing some improvements as they are renegotiated as well.
James, just a quick balance sheet. Working -- from a working capital standpoint, you had inventory drop pretty meaningfully in Q1 versus Q4. What are you expecting in terms of inventory carry going forward?
I think that, that would be the level that we would see going forward. I don't see us building inventory. I think whatever we're buying, we're deploying either to rental opportunities or whatever we're looking to take delivery on, on the cap side, we have earmarked for Engineered Systems bids. So I wouldn't see a massive build in there without that inventory being spoken for on opportunities that we're looking to deploy it.
And on the AR side. You've seen a pretty meaningful lift over the last couple of quarters. It's there anything that reverses itself there?
Yes, I mean, AR is obviously comprised of 2 components. One is trade receivables, which has been booked and the other is accrued AR that we recognize and haven't billed yet, just from a percentage of completion standpoint, so we would -- you would see a shift and I think the build is predominantly on the accrued AR side, so as Engineered Systems continues to increase, I would expect it to increase AR in lockstep.
And I'm showing no further questions at this time. I would now like to turn the call back to Blair Goertzen, President and Chief Executive Officer, for any further remarks.
All right. Well since there are no further questions, I would like to once again to thank you for joining us on the call. We look forward to giving you our second quarter 2018 results in August. Have a good weekend. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.