Secure Energy Services Inc

TSX:SES

Earnings Call Transcript 2021-Q3

[Rene E. Amirault, President, CEO & Director]

Thank you, Delphi. Welcome to Secure Energy's conference call for the third quarter of 2021. Joining me on the call today is Allen Gransch, our Chief Operating Officer; Chad Magus, our Chief Financial Officer; and Anil Aggarwala, our VP of IR and Treasury. During the call today, we will make forward-looking statements, and we will refer to certain financial measures that do not have any standardized meaning prescribed by GAAP. The forward-looking statements reflect the current views of Secure with respect to future events and are based on certain key expectation assumptions considered reasonable by Secure.Since forward-looking information address future events and conditions, by their very nature, they involve inherent risks and uncertainties, and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our forward-looking statement disclaimers in our corporate presentation, in our third quarter MD&A, and in our continuous disclosure documents, including our AIF Joint Information Circular relating to our transaction with Tervita Corporation, as they identify the risks and other factors, which may cause actual results to differ materially from any forward-looking statements and define our non-GAAP measures.Before I begin, I just wanted to say how great it is to see the vaccination rates continue to rise in Alberta and across Canada. However, we know that COVID-19 hasn't gone away, and I assure you, at Secure, we are not letting our guard down. The health and well-being of our workforce and our communities remain the company's priority.This morning, we will review our financial and operational results for Q3 2021, followed by an update on the integration of the Tervita merger and our outlook for the remainder of '21 and 2022.We are extremely pleased with the strong results for the third quarter of 2021. Our first quarter, as a combined company demonstrates that. As expected, our increased size and scope is generating significant EBITDA and free cash flow, which are -- which we are using to improve our overall leverage, and enhancing our ability to deliver strong returns to our shareholders.Our Q3 results reflect strong performance in both our Midstream Infrastructure business and Environmental & Fluid Management, in line with the increased activity levels in our markets.Our discipline focused on executing on operational excellence, managing costs and achieving business efficiencies helped drive a 184% year-on-year increase in Q3, adjusted EBITDA to $105 million, and up 47% on a per share basis. We're encouraged by this strong momentum throughout the company.With increased free cash flow generation capabilities and a strengthened balance sheet, we're well positioned to meet our debt reduction targets, and at the same time able to capitalize on growth and the positive continuing trend of our industry.Chad will now walk us through the key highlights of our Q3 results, then Allen will review our integration plan update and operational highlights. And finally, I will move into our synergies update and outlook for the remainder of the year and next year.

[Chad William Magus, Executive VP & CFO]

Thanks, Rene, and good morning, everyone. As Rene noted, our Q3 results demonstrate the strength of our combined business, as the underlying markets continue to improve. The acquisition and strong margins in both the Midstream Infrastructure and Environmental & Fluid Management segments, drove record adjusted EBITDA and discretionary free cash flow. Adjusted EBITDA of $105 million, increased an 184% from the prior year, as higher oil prices drove increased activity levels in areas where we operate, which led to higher processing and disposal volumes at our Midstream Infrastructure facilities, higher disposable volumes at our landfills, and increased demand for drilling and completion services.On a pro forma basis, Tervita and Secure combined, earned $93 million of adjusted EBITDA last year in Q3, which also included $19 million of waste subsidy support. Our most recent quarter represents a 13% increase over 2020's pro forma results, and an impressive 42% year-over-year increase when you exclude the waste subsidies.Secure generated $149 million of discretionary free cash flow over the last 12 months, which includes $76 million in the recent third quarter. Our primary use of free cash flow we'll generate going forward in Q4, and throughout 2022, will be on debt repayment. Once our leverage has been reduced over the medium term, our capital allocation priorities will be continuing to pay down debt, increasing returns to shareholders, spending on growth capital or balance thereof.In Midstream Infrastructure, Q3 segment profit margin increased 166% compared to the prior year and was a strong 64% of revenue. The increase is largely due to our expanded facility footprints as well as higher crude oil pricing and more stable market dynamic, which led to increased drilling completion and production volumes.In Environmental & Fluid Management, Q3 segment profit margin increased 240% compared to last year, driven largely by our expanded asset base, as well as drilling fluids business, which was positively impacted by a substantial increase in drilling activity compared to 2020.Higher activity levels also resulted in increased drilling waste volumes at Corporation's landfills, and dry summer and fall resulted in lower leachate handling costs compared to the prior year. Segment profit margin as a percentage of revenue of 26% was in line with our expectations.With respect to our capital structure, in the last few months, we've issued $340 million, up 7 1/4% December 2026 unsecured notes, that allowed us to redeem USD 200 million of the 11% Tervita notes, resulting in interest savings of approximately $9 million per year. The $9 million of interest savings is in addition to the $31 million of addition -- annualized operational synergies, which benefit adjusted EBITDA, and that we have realized at the end of the third quarter.Our debt structure consists of no near-term maturities, with the first fixed note maturing in December 2025. In addition, we have approximately $280 million of availability on our revolving credit facility, providing ample liquidity to the company and not maturing until 2024.I will now pass it to Allen to discuss an update on the integration of the Tervita and operational highlights.

[Allen Gransch]

Thanks, Chad. Good morning, everyone. With regards to the update on our integration with Tervita, we're extremely pleased with the progress of our integration since closing the transaction on July 2. And to-date, we've realized approximately $31 million to be annualized -- $31 million on an annualized basis of our $75 million target.We expect to end the year with approximately $35 million to $38 million of realized synergies, and remain confident on being able to reach $75 million of synergies or more by the end of 2022. We see no change in our cost targets of approximately $30 million to achieve these synergies.Our business is uniquely positioned to deliver economic and environmental benefits that make the oil and gas industry more efficient and sustainable. We will continue to be focused in 2022, on projects that both reduce our customers' cost and lower emission, as we work with our customers on additional oil and water and gathering pipeline.Looking at our operational highlights. In Q3, our Midstream Infrastructure segment saw improved oil prices and higher drilling and completion activity. In line with our expectations, midstream processing facilities are experiencing increased utilization of higher drilling, completion and production volume from increased activity levels that require more treating, processing and disposal.Our water disposal volumes increased 139% from Q3 2020, due to the impact of the merger as well as the combination of higher activity in 2021, and production shut-ins 2020, that have since been reversed. In addition, processing volumes have increased 223%, and recovery volumes have increased 256% from 2020 as a result of increased production levels, higher waste processing volumes due to increased drilling and completion activity.In our Environmental & Fluid Management business, it's also benefiting from higher commodity prices and increased activity levels. The merger greatly enhanced the scale of this business segment as we respond to increased activity levels.Project work remained strong as customers look to complete work before winter, and we're also continuing to see increased demand for drilling completion and production services within our Fluid Management segment.Our waste metals and rail service businesses all performed well in Q3. Ferrous metal prices were strong, which helped drive volumes in our metal recycling business. We're also pleased with the progress made on increased abandonment, remediation and reclamation activity work in the government stimulus packages, to help fund the closure and reclamation of orphan and inactive wells.We are seeing the impact of inflation on our cost structure and supply chain disruptions, but we are trying to find ways to offset these costs and supply challenges. We have seen the highest cost pressures in areas such as production chemicals, drilling fluids, electricity and fuel. Some of these inflationary cost increases we have been able to pass on to our customers.Labor availability for our mobile crews in Environmental & Fluid Management business has been challenging. Fortunately, in our larger midstream segment, labor is less of an issue due to the nature of our fixed facility network.We expect to increase abandonment, remediation and reclamation activity to positively impact our Canadian operations over the term of the program, particularly with the environmental management group as a result of higher demand for environmental site assessment, on-site abandonment, remediation and reclamation management and decommissioning work.Waste volumes resulting from these activities will also require additional disposal. With the addition of the merged network, Secure's broad geographic coverage of facilities across Western Canada are capable of handling those waste.In Q3, we spent $13 million of capital, which included $10 million of sustaining, in line with our expectations. We expect to spend approximately $7 million to $10 million for the remainder of 2021, comprised primarily of sustaining capital.In terms of 2022 capital spending, we're currently undertaking a full evaluation of capital project opportunities and expect to finalize this in Q4, along with our customers, as they determine their plans for the coming year.Our growth budget will primarily focus on opportunities to connect producers to existing Midstream Infrastructure, to further increase volumes and utilization on a long term contracted basis.We expect sustaining capital in 2022 to be approximately $40 million, though we do anticipate, we'll need to spend an additional $15 million of sustaining capital on landfill expansion, as a result of significant increase in activity levels and the need for additional landfill cell capacity.Finally, we have set a 2022 Scope 1 greenhouse gas emissions reduction target of 5%.I'll now turn it back to Rene to provide some additional highlights and comments on the outlook for the remainder of 2021 and into 2022.

[Rene E. Amirault, President, CEO & Director]

Thanks, Chad. Now, we are extremely pleased with the results in Q3 and the progress made to date with the Tervita merger. The integration is going very well and delivering exactly the kind of incremental benefits we had envisioned, with a strength in Midstream Infrastructure and environmental asset base, that provides for enhanced scale and geographic coverage.Company has a strong deleveraging plan in place that will reduce the combined debt balance over time. Our enhanced scale better positions us to optimize existing assets and operations so that we can add more value to our customers, and provides greater optionality in allocating capital through all market environments.With regards to the Competition Bureau process, we understand that work on the review is continuing. We believe that this merger does not substantially lessen competition in our market, and delivers significant efficiencies that benefit the Canadian economy. The Tribunal has recently set the dates of the competition hearing for the second quarter of next year. After the Tribunal is complete, and based on recent cases, we expect that a decision will be forthcoming closer to the end of 2022.Turning to our outlook. Over the next year, we expect that higher crude oil and natural gas prices should continue to provide significant improvement in overall industry activity in Q4 and into 2022. Oil and gas-producing countries, including Canada, have underspent on developing oil and gas resources since 2014.For the remainder of 2021 and into 2022, we expect to see in our operating areas, producer capital spend on both maintaining and growing production levels. We anticipate higher year-over-year discretionary free cash flow for the remainder of 2021 and into 2022, based on the following expectations.First, increased drilling and completion activity is expected to continue for the remainder of the year. Since April, the monthly active rig counts in the Western Canadian Sedimentary Basin has been trending relatively in line with 2019 levels. We expect producers will continue to add production to offset natural declines that occurred in 2020, to maintain flat production levels.Second, we also expect to see contributions to our adjusted EBITDA from the realization of $35 million to $38 million in annualized synergies by the end of 2021 and $75 million by the end of 2022. Third, we anticipate increased utilization of midstream processing facilities and landfills, as higher drilling, completion and production volumes from the increased activity levels require treating, processing and disposal.And finally, higher abandonment, remediation, reclamation activity from the government stimulus package, to help fund the closure and reclamation of orphan and inactive wells.Overall, we remain focused on operational excellence, progressing our ESG initiatives, deleveraging our balance sheet and disciplined cost management, while leveraging opportunities to grow our business and provide value for our shareholders and customers.In closing, we are extremely happy about the progress already made in these first few months post close, and bringing the company together and making the combined company stronger.I would like to thank our employees for all their continued hard work, energy and enthusiasm. I would also like to thank all our customers and stakeholders for their continued support and partnerships.That concludes our prepared remarks. We would now be happy to take your questions.

[Operator]

[Operator Instructions] First question does come from Aaron MacNeil from TD Securities.

[Aaron MacNeil, Equity Research Analyst]

I know you reiterated the $75 million synergy guidance, but now that you've sort of had a chance to look under the hood, could you share with us any updated thoughts on operational optimization or maybe revenue focused opportunities rather than what I assume are mostly cost based synergies that would make up that $75 million?

[Allen Gransch]

Its Allen here. Yes. We took our time in planning which areas we thought we were going to get the most benefit of the $75 million synergies. And I would say, we have roughly about 50% of that number in our G&A, and that's in terms of employees and public corporate costs. I think when we look at operational synergies, we do -- or we have identified a number of facilities where we believe we can rationalize some of the service lines and really take a look at optimizing those facilities if it's -- whether or not it's a service line that we want to get higher utilization, and we can get that from a facility that's in close proximity. That's what we're going to do.I think what we are identifying is, when we do shut down these service lines, over and above just the operational cost savings that we're going to achieve, we're also going to have some redundant equipment, something like a centrifuge, for example, that we now can place at another location. And so we are going to get savings beyond just the G&A and the operational costs, we'll get the savings from having that redundant equipment.And so we did a great job in Q3 of getting a lot of the synergies right out of the gate. And those are the G&A corporate ones, the one you can execute very quickly. We're now turning our focus to the operational side, where we can get transportation savings and look at some of these facility rationalizations. But I do believe, as we get into 2022, we will achieve the $75 million. And I believe there are going to be other areas where I think we can get additional benefits as we get through all assets of our operation.

[Aaron MacNeil, Equity Research Analyst]

And maybe another high-level question. But at least what I would consider some early successes and public, shareholder feedback on the back of the acquisition, do you think Secure should continue to be a consolidator of companies that maybe don't have the market relevance that you now have. And if so, what type of assets or businesses might you be interested in?

[Rene E. Amirault, President, CEO & Director]

Well, the great thing about this merger with Tervita was, we truly have a network now from Fort Nelson to [ Southeast ] into North Dakota. And so there's been great geographic coverage both on the midstream and the environmental side of our business. Obviously, some of that environmental business goes into the lower Mainland in British Columbia and also into Ontario. So I think our strategy on a go-forward basis -- there's not too many business units out there that we're missing in terms of our toolbox. I think it's more of a focus on debt repayment, really optimizing what we've got. And part of what you just asked earlier was really understanding all the different business units and where can we get the overlap between various business units to get more out of them. So I would say for right now, it's just pure focus on getting more out of what we've done.

[Aaron MacNeil, Equity Research Analyst]

And maybe on the flip side -- last question for me -- can you also give us an update on your view of potential disposition opportunities, now that we've started to see a sector recovery? And I'm thinking the non-core assets you'd identified for sale a few years back, anything non-core from Tervita or anything that might relate to the Competition Bureau?

[Rene E. Amirault, President, CEO & Director]

Great question. And obviously, the next 6 months is really -- again, just understanding how we're going to exist together, because we just don't want to automatically say 2 years ago our view this was non-core, and today its non-core. We're going to take the time to really understand all the different operational G&A, corporate synergies as well as how do we help our customers. So it's going to take us 6 months really just to understand how these all fit together and how do we ultimately enhance the customer solution. So we don't -- we really don't want to prejudge that at this time, Aaron, so we've had time to really understand what we have.

[Operator]

Next question comes from Patrick Kenny with National Bank.

[Patrick Kenny, Managing Director]

So, obviously, a lot has changed on the macro front since you announced the deal back in early March. And as you pointed out, producers appear to be adopting a much more prudent capital allocation strategy this time around. I was just curious, how do you think that this might impact the dynamic between you guys and your customers who now have much cleaner balance sheets, a lot more excess free cash flow that may not be going directly back into the ground.Are you seeing any increase in competition from your own customers, looking to invest more of their own capital into processing and infrastructure needs? Or you still see opportunities to increase your overall market share relative to what's currently owned by the producers?

[Rene E. Amirault, President, CEO & Director]

Great question, and Allen and his team are all over this, because if you think about what went wrong in the last 10 years, then we had lots of free cash flow back in '13 and '14. What went wrong was this idea that you go out and spend, whether you're Secure, the producer, go to spend a lot of capital and not get that utilization, or not have the economies of scale. So I'm really, really impressed on how the CEOs of the oil and gas companies are thinking these days in terms of if we're going to go spend capital -- whether it's their capital or coming to us to spend our capital, how do we get the most of it? And what you're seeing is really us combining 2 or 3 anchor tenants together for a facility or a pipeline as opposed to in the past it was a one-off -- one customer, one project. And Allen, if you want to elaborate on that? You're talking to the customers every day on this aspect.

[Allen Gransch]

Yes. I think when you look at our infrastructure and where a lot of the activity is happening in the Montney, Duvernay, Deep Basin, we're in the heart of where that activity is happening. And when we locate our infrastructure as close to where the producer is -- and a lot of our discussions is around how do we get that fluid, whether it's production water, completion water, whether it's oil that needs to be treated and handled -- how do we get that to our facilities in the most efficient way? And a lot of our discussions have been around these water pipelines and oil pipeline, where they can save 50% of their transportation costs. So you know the economics make a lot of sense for these producers to tie in. And in some cases, we do have to tie in one or 2 other anchor tenants, but the other -- on the flip side of that, we're also saving on the GHG emissions, because you're taking hundreds of trucks off the road that are there every day burning diesel, and you're moving it a lot more efficiently by putting these pipelines in place.

[Patrick Kenny, Managing Director]

My second question just relates to the marketing side of the business. Wondering if you can comment on -- I mean, I know spreads have been relatively tight here for some time, but perhaps there are some tailwinds simply from benchmark prices trending higher. And then as maybe a follow-on to that, now that your operations that are a much larger scale, how are you thinking about expanding your horizon, so to speak, on the marketing front with respect to accessing new international markets or potentially becoming a long term shipper on the Mainline or TMX? Just curious how you might be able to take advantage of your increased size and scale from a marketing perspective?

[Rene E. Amirault, President, CEO & Director]

You're absolutely right. I mean, if you think about today, we're -- we have 32 pipeline connections. And really, it's optimizing, whether it's a condi or light sweet, light sour, some of the heavies, trying to help the customer get the best netback. So if you think back a couple of years ago where we kind of dipped our toe in the water down at Cushing, we still believe that there's a model here where the juniors and mid-caps we can help them consolidate their volumes and get a better net price, whether that's ex-Cushing or ex-Gulf Coast. That's still going to, I think, be part of our long term 5-year vision, because the reality is that the Suncors and CRLs will do this on their own, but for the junior to mid-cap, I think there's a value play for us to help them out. And it's not something that we're going to go open and spend a lot of money doing. But we're looking at unique, innovative ways to get that barrel from Grand Prairie to the Gulf Coast and try to ultimately give them a better netback. So stay tuned for that. It's certainly something that is part of our 5-year vision, and certainly something that I think -- as we touch more barrels, I think it's just -- it's a natural evolution.

[Operator]

Next question comes from Cole Pereira with Stifel.

[Cole J. Pereira, Associate]

So about halfway through the synergies by the end of this year. I'm just wondering, how should we be thinking about the pace of realizations through 2022?

[Chad William Magus, Executive VP & CFO]

Good question. Most or a good portion of the synergies that we've already realized -- and I'll do a few more on the corporate overhead side. So a lot of those were done that we could do day one. Now the next phase with respect to those synergies will be really through and into Q1 once we move the 2 accounting systems onto one and align some other IT infrastructure. So there will be a little -- there'll be some more changes at that point in time. But then really the bigger piece is the operational synergies. We're going to start to recognize those in a larger manner as well in Q1, and those will be fairly ratable throughout 2022.

[Cole J. Pereira, Associate]

So pretty strong results across the board, but in particular, quite a bit of incremental EBITDA in the EFS segment as well from the Tervita assets. I mean, a bit of a silly question, but would it be fair to say that a lot of that incremental earnings power is stemming from the landfill assets as opposed to some of the other environmental businesses from Tervita?

[Rene E. Amirault, President, CEO & Director]

Well, it kind of go hand-in-hand. So you have that project management where our teams are out there, helping remediate, reclaim those various sites and facilities, decommissioning some of the old gas plants and flare pits, and then the residual, some of the contaminated soil making the way in the landfills. And so it's -- a great thing about that business model is, when the landfills are busy, the projects side of it is quite busy as well. So I think that trend will continue for a long, long time. I know, Allen, with the recent changes -- there's government incentives right now, but with the recent changes with the Alberta government, maybe elaborate on that why we think it's a 20 year to --

[Chad William Magus, Executive VP & CFO]

Yes. There has been a recent announcement. The Alberta energy regulator came out, and the official guidance is really around 4% to 5% of their ARO. They're looking at non-producing assets and having those producers clean up 4% to 5% of that balance every year on a recurring basis. And so that's something that our regulatory standard is going to mandate that they do. And I think the fact that oil is sitting at $80, these guys have the cash flow to be able to do this work. I mean, obviously, I think they're going to pay attention to the site relocation program that end -- at the end of 2022, but I think we will have this reoccurring cleanup that, as Rene mentioned, is going to occur over the next 20 years. So great tailwinds in that business to continue to clean up some of these older sites.

[Operator]

Next question comes from Matthew Weekes from iA Capital.

[Matthew Weekes]

I think I'm just going to ask, first of all, with sort of inflation rising and kind of supply chain concerns here, what sort of impact are you seeing so far? And do you see going forward? And how -- where do you think you'll be able to sort of pass those through a little bit? And how are you seeing those conversations go with customers so far?

[Rene E. Amirault, President, CEO & Director]

Well, the -- definitely, anything to do with chemicals these days -- and some of our specialty chemicals come from Asia, and obviously, there's some not only cost pressure there, but there's also just -- I think all chemical companies and drilling fluids companies, production chemical companies are having a time getting some of the specialty chemicals out of Asia. So that -- I don't see any easing of inflationary pressures there.Certainly, the -- Allen alluded to the labor side of it. I think the drillers and the frackers are going to be increasing wages to attract the people, so they have enough crews on a go-forward basis, and that will ripple into some of our other -- some of our business units. And then, obviously, we're processing and recycling business. So, I guess, we use a lot of natural gas in Tower, and we all know what has happened there. So we're certainly well aware of -- we need to get more efficient just generally, so some of that's offset by efficiencies. And then going into the new year, we'll look at any type of inflationary costs and just sitting down with the various types of customers. But it's probably more prevalent on the drilling fluid side and the production chemical right now. So that's really been the focus.

[Matthew Weekes]

My second question is going to be about the Competition Bureau. And do you see a possibility [ delaying ] there? Or do we assume at this stage that it might be go through a hearing?

[Rene E. Amirault, President, CEO & Director]

Well, the way it works, and just looking at other cases over the last 10 years is, the Bureau typically sets the schedule as we outlined. And then, as they have a chance to do more work and there's more evidence that gets shown to them, There are situations where we've seen it halfway through -- 3 quarters away through and on the door, on the day of the hearing, settlement. So that's why we just didn't want to try to give you any fault expectations here and say that for now, we don't think there'll be decision, one way and another, until the end of 2022. But we have seen other cases where as the information -- the Bureau gets more and more information, they're able to better assess what the true efficiencies are, and some of the other aspects of the case. So never say never that something might happen before the end of 2022. But for now, we're just focused on that end date.

[Operator]

Next question comes from Keith MacKey from RBC.

[Keith MacKey, Analyst]

Just wanted to start off on capital spending for next year. So targeting mostly sustaining type investments, talked about some landfill expansion. Just curious, how are you thinking about the return metrics and criteria for new growth capital projects beyond the internal sustaining projects? Are you thinking about increased IRRs maybe relative to the past or increased take-or-pay type commitments? Or just curious where your thoughts are on that right now?

[Allen Gransch]

Keith, it's Allen here. Yes, I think in terms of 2022 capital, we're right now in our budgeting process. We're going to take the next month, 1.5 months here to see where our expectations are going to be into 2022. And we're waiting on a lot of producer conversations on what their plans are. But I'd say we're very confident in what we need to deliver on the maintenance side. As I mentioned, $40 million in maintenance capital on our facilities and some of our equipment. And then, as we're seeing more volumes coming into our landfill, we do have to expand these cells as well.But when we think about growth capital, we said this numerous times, our focus right now is integration, paydown debt, paydown debt. And so, any sort of capital we look to spend, has to have a high rate of return, and we have been looking at opportunities where there are simple tie-ins into our existing infrastructure. And this is where our East Kaybob pipeline that you have a few anchor tenants and you add an additional anchor tenant, that is a great IRR. You're adding volume and you're making sure that utilization is at its highest level, because ultimately time value of money is going to drive your returns to the highest level.And so, they're low dollar capital spends, I would say, for the most part in 2022, where we're saving the customer money, we're getting good returns. But as I said, our main focus here is going to be paying down debt throughout 2022. But we'll come back to you on clear guidance as we get through our budgeting process.

[Keith MacKey, Analyst]

Just wanted to follow-up on the line in the press release as well. Talking about longer term opportunities such as CO2 sequestration infrastructure, just curious if any of those types of conversations have started yet, if you've done any internal analysis on maybe the amenability of your reservoirs or infrastructure, to handle that type of book as well. Any color you can provide on that would be helpful, please.

[Rene E. Amirault, President, CEO & Director]

Yes, Keith, great question, and we did want to elaborate on that in the press release, because we've both -- we've been doing a lot of evaluation internally, but we've also had customers coming to us looking for that type of solution. And if you think about it, what do we bring to the table? We have, obviously, a lot of engineering, construction, reservoir, disposal, pipeline, facility processing background. So we align that up with the whole CO2 solution, it's a pretty good solution. And so now, it's really a case of working with your customers to figure out where is the most CO2 kind of density per square mile being generated, and how does that overlap with our network. And so, that's what's going to take us some time to figure out.And then you can come up with some project parameters and preliminary economics to say, yes, this makes sense for both us and our customer. But it's pretty exciting, and it's certainly in its early days, but there's great potential there. And certainly, it's being driven by both us and our customers, which is always a good place to be in when you're trying to come up with new solutions. So we should have some more color for you over the next 12 months, but it's definitely in the first inning and certainly not in the fourth inning.

[Operator]

Next question comes from John Gibson, BMO Capital Markets.

[John Gibson, Analyst]

Congrats on what I thought was a pretty strong start to the Tribunal integration. Just first off, I was wondering if you can give a sense of what utilization is on your midstream facility infrastructure currently? And I guess, where do you think you could go with some facility optimization? Obviously, understanding, utilization probably varies quite significantly across your asset base?

[Allen Gransch]

Yes, our utilization across our network has been increasing throughout the early 2021 here and into the third quarter. I would say, with the first half of 2021, we would have been in that high 40s percent of utilization, and now we've moved into the low 50s percent. And so I think when you look across our infrastructure, we've got lots of room to accept a lot of the by-product that we're seeing, and a lot of the terminalling and the disposal. So we don't need to spend a lot of capital there.What I think we'll end up doing is, we're really trying to figure out where our customers are going to be spending money, because as we look at these facility rationalizations, we don't want to impact our customer to the point where it's going to cost them more money. So we'll look across our facilities and be very methodical about how we're going to -- we'll shut down and get higher utilization in some of our locations that are going to be demure. And we do have -- I'm giving you averages here. There are facilities that have slightly higher utilization and some of that are lower. But we're going to take our time and work with our customers here, over the next few months, and make sure that we're optimizing the utilization at these locations. And where we do rationalize, we're getting the efficiencies, that we can help with the overall cost structure of handling all these products.

[Rene E. Amirault, President, CEO & Director]

And just I would add to that, anything that we're looking at doing in regards to facilities around efficiencies, thinking of them as really temporary suspension, because we really don't know what the activity level is going to do over the next 2 years. So the idea being that we can temporarily mothball them, but they can be -- if it's just to say, the waste processing component, we can restart that in 2 to 4 weeks. And the whole idea here is everything is -- over the next 24 months, would be in a situation where we can reopen very quickly and respond to customer demand.

[John Gibson, Analyst]

And then I guess just following on that. With the utilization uptick you talked about, is that mostly just been driven by increasing production and drilling activity? Or is it -- have you started that rationalization at all yet?

[Rene E. Amirault, President, CEO & Director]

Just getting into that side of it, as the guys alluded too. So that's why, when you look at our synergies rolling out into 2022, we're just getting into that what makes sense. Good part of this process was sitting down with your customers and just trying to forecast what are they going to do over the next 24 months. So we didn't really want to do anything until we talk to our customers.

[John Gibson, Analyst]

Second one, just around pricing. You touched on it a little bit. I'm just wondering if you could maybe talk about pricing pressure across your service lines. I realize you're a pretty diversified company. So if you could maybe just highlight any areas of strength or weakness right now?

[Rene E. Amirault, President, CEO & Director]

Well, it's really -- the pricing question is really around -- the core goal -- the core vision with us and our customers is, we want, as an industry -- this isn't just Secure, as an industry, we want the lowest cost structure with the highest ESG stand in the world. So for us, it's just blindly say that prices should do this or do that. I think it's the wrong thing for Canada and I think it's the wrong thing for the industry. And I think we have to look out 5, 10, 15 years that we have to be the lowest cost structure.So a lot of what we're trying to do right now is how do we get more efficient. And let's just use one example that Allen alluded to. So if you have X amount of volume coming to our facility and its truck, and we're able to put some small gathering line that takes those trucks off the road, well, you've just reduced your carbon intensity, but you've also probably saved the customer anywhere from 30% to 40% in terms of their cost. So that's a big part of that midstream world.Obviously, I alluded to -- earlier on the drilling fluids and production chemicals, that's a little tougher, because you've got a basic chemical block that's your cost of goods sold -- even your oil-based muds, guess what? So the customers have been very understanding. It's almost what -- when it comes to the chemical side of the world, it's kind of flow-through. It's sitting down with your customers and say, look, our base cost for, whether it's an invert mud to bear rates to whatever, have gone up X percentage. So I think the customers are quite understanding when you actually show them the cost pressures of what the chemicals and how that fits into your cost of goods sold. So you are right, every business unit is different. There's a little bit different strategy with midstream where we're just trying to get that lowest cost structure for our customer. And then on the production chemical, drilling fluid side, a little bit of a flow-through situation where the chemicals and even your cost of an oil-based mud is it more of a fluid --

[John Gibson, Analyst]

And last one for me, it's pretty high level. I'm not even sure you can answer this. But it's obviously nice to see you set specific carbon intensity targets, and I think it kind of sets you apart from your competition. I'm wondering if you could put a financial cost on achieving these goals as you look out into 2030 and 2050, even? And I guess, also, do you expect to realize the economic benefits from the capital that you're going to put into achieving these goals?

[Allen Gransch]

Yes, that is a difficult. Right now, we're looking at Scope 1, and Scope 1 is really all the emissions out of our facilities and the leach vehicles that we have. And there are things that we can do operationally with minimal cost to achieve that 5% reduction target. And I think what everyone wants to see is not that you set a target and don't address it every year. They want to see the fact that every year you're progressing towards that target, and you're taking steps toward it.And so I don't think we've done enough assessment beyond the next couple of years as we look to our internal operations. We're going to look externally on, is there additional capital that we need to spend, that will help us achieve that target? I think we need more time to assess it. But I do think industry, in general, is moving in the right direction and just looking internally, how can we do things more efficiently with our operations.

[Operator]

Next question comes from John Bereznicki from Canaccord.

[John Mark Bereznicki, Analyst of Oil and Gas]

Just want to pick up on one of the previous questions. With heavy oil, light oil and even natural gas, all catching some tailwinds, curious if there's parts of the portfolio now that are -- maybe you're seeing some green shoots that you haven't seen in a while?

[Rene E. Amirault, President, CEO & Director]

Yes. Definitely, I was quite worried about heavy oil especially, there's 3 types of the heavy oil in question. One is, obviously, the coal production, then there's SAGD, and then there's obviously the mines. And so, obviously, we're -- as a combined entity, now we're big time into heavy oil. And I'm really, really pleased how the pricing has turned around, i.e., tighter differentials. And, obviously, the free cash flow that is coming out of the -- that sector. So I think that's a tailwind for us. I think all those -- a lot of the -- obviously, not CRL or Suncor, but the customers below that level are all being cautious about how they grow production and how they spend their capital and what not. But I -- that's probably one area that surprised me to the upside, and I think the best is yet to come in that sector. I think that would be more of a 2022 story.

[John Mark Bereznicki, Analyst of Oil and Gas]

And maybe just to pick up on that. Obviously, the caverns are pretty unique assets. I know you're very familiar with those, Rene, Just curious how you think about those heading into 2022?

[Rene E. Amirault, President, CEO & Director]

The caverns are a great option in terms of letting mother nature recover that oil, and certainly, they're a very safe and environmental solution. The good news is that Tervita has some fabulous assets and had spent big capital for the last 15 years, having spare capacity. So there's a lot of spare capacity there. So we don't see having to spend a whole lot of capital in any of those -- in any of our caverns, because there is spare capacity. So that's -- and again, it just gives you that flexibility with the customers when they have upsets and what not. Then you can help them out. It's not a case where -- sorry, we're full, we have the cavern that is really that governor in terms of being able to take whatever the customer throws at us.

[John Mark Bereznicki, Analyst of Oil and Gas]

North Dakota, kind of what are you seeing there? And how do you view those assets strategically longer term?

[Rene E. Amirault, President, CEO & Director]

Yes. In North Dakota, we've seen a similar situation where activity has started to pick up. I'd say, when you look at our infrastructure, we've got a number of locations that provide waste processing services. And I would say we are one of the top providers in those service lines in North Dakota. And as Rene said, we're looking across the entire network as we look at where do we see the most optimal benefits from our core operations and what does it look like once we've integrated.And I think North Dakota is one where when we looked at it back -- when we started building facilities in 2013, it was very close in proximity with the Bakken and Saskatchewan, and we were able to look at those locations in proximity wise, and be able to be there operationally and work with our guys, both across the border. And it's one of those areas where I think we will continue to look, as we get through the next few months here of integration, and see what we want to do.

[Operator]

There are no further questions at this time. Mr. Amirault, please proceed.

[Rene E. Amirault, President, CEO & Director]

All right. Well, thank you, everybody. I think it's been a while since I did an investor conference call, so I appreciate the support of my team here and pulling this all together. Neil and his team did a fabulous job. There will be a tapped broadcast of the call. That will be available on Secure's website. And as always, we're going to look forward to providing you with updates on Secure's performance. Obviously, our next quarter is coming in March, and we look forward to continuing with this format as we go forward. And that's it.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.