Secure Energy Services Inc

TSX:SES

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Secure Energy Q4 2020 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, March 2, 2023.

And I would like to turn the conference over to Alison Prokop. Please go ahead.

[Alison Prokop, IR]

Thank you, Sylvie. Good morning, everyone, and welcome to the Securities conference call for the fourth quarter and year-end 2022. Joining me on the call today is Rene Amirault, our Chief Executive Officer; Allen Gransch, our President; and Chad Magus, our Chief Financial Officer.

During the call today, we will be making forward-looking statements related to future performance, and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures or ratios disclosed by other companies. The forward-looking statements reflect the current views of Secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by security.

This forward-looking information address future events and conditions, by their very nature, they involve inherent assumptions, risks, uncertainties and actual results could differ material from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR as they identify risk factors applicable to secure. Factors which may cause results do differ materially from any forward-looking statements and identify and find our non-GAAP measures. Today, we will review our financial and operational results for the fourth quarter and 2022 year, followed by our outlook for 2023.

I'll now turn the call over to Rene for his opening remarks.

[Rene Amirault, CEO]

Thank you, Alison, and good morning, everyone.

We are very proud of what we were able to accomplish during 2022. It was a record year for the corporation, both operationally and financially, and we successfully executed on all our short-term objectives to establish along the Tervita merger, which closed midway through 2021.

Thanks to our exceptional employees who raised the one team mindset and work together, we were able to exceed our objectives in realizing the $75 million cumulative in synergies, integrating the acquired business units and paying down debt while continuing to provide best-in-class customer service.

In 2022, we handled record volumes across our critical infrastructure network. Helping our customers to cost effectively manage their environmental liabilities. Our facilities shipped on average over 129,000 barrels of oil every day and processed 136,000 barrels of produced water per day in 2022. Through our processes, we were able to recover over 1.6 million barrels of oil from customer waste. At our 18 industrial landfills, we safely disposed of 4.6 million tons of contaminated solid waste. Adjusted EBITDA increased by 44% over pro forma 2021 to $557 million.

The increase was a factor of stronger industry fundamentals driving increased volumes to our facilities as well as integration cost savings achieved as a result of the Tervita merger. We converted 62% of adjusted EBITDA to generate discretionary free cash flow of $348 million, which we primarily directed towards the repayment of debt, resulting in a reduction of our total debt-to-EBITDA ratio to 1.9x at December 31, 2022.

With the success in the business and a stronger financial position after paying down $308 million of debt in 2022, we are pleased to pay an increased quarterly dividend of $0.10 per common share in January of 2023, a 13x increase over previous dividend payment. We have also been active on our normal course issuer bid implemented at the end of last year. To date, we have repurchased nearly 6 million common shares at an average price of $7.78 per share for a total spend of $46 million.

We continue to progress our commitments to ESG. We are currently working on our annual sustainability report and our inaugural climate-related disclosure report for 2022, which sets out our expected governance, strategy, risk management, metrics and targets as they relate to climate impact. We look forward to sharing these with you in May of 2023.

In January, we were pleased to appoint Mick Dilger to the Board of Directors and as Chairman of the Board. Mick was formerly CEO and Director of Pembina Pipeline Corporation from 2014 to 2021, creating tremendous shareholder value during this time.

Chad will now go through the financial highlights on the fourth quarter of 2022.

[Chad Magus, CFO]

Thanks, Rene, and good morning to everyone on the call.

Our fourth quarter results continue to demonstrate the enhanced scale of our business since the merger with Tervita, our ongoing focus on managing costs and reducing debt and the strength of the underlying markets.

During the quarter, we reported net income of $32 million or $0.10 per share and generated adjusted EBITDA of $150 million or $0.48 per share, an increase of 33% from the fourth quarter of 2021. The fourth quarter of 2022 saw a full run rate of our $75 million target synergies realized in relation to the Tervita merger, the remainder of the increase due to stronger energy, environmental and industrial markets. Despite extreme cold weather during December, our infrastructure received higher production water, processing, recovery, terminalling and pipeline volumes in the fourth quarter.

We generated strong discretionary free cash flow of $74 million, the majority of which was directed towards the repayment of debt, bringing our principal debt balance down to $911 million, nearing the midpoint of our target balance of $850 million to $950 million, which represents a level that provides the stability through all business cycles.

Our impressive adjusted EBITDA margin of 37% increased from 34% in the fourth quarter of 2021 due to the positive impact from the cost savings and higher revenue, which contributed to improved fixed cost absorption. Inflation has had an impact on our costs, but we have been mostly able to offset this through operational efficiencies and price increases.

In October, we raised prices across the business to keep pace with higher input costs. In the midstream infrastructure reporting segment, our fourth quarter segment profit increased $107 million, 32% higher than Q4 of 2021 due to improved overall production levels and higher waste processing volumes.

Additionally, improved benchmark oil prices positively impacted our revenue from recovered oil. The Environmental and Fluid Management reporting segment, our fourth quarter segment profit increased 11% to $59 million as higher year-over-year drilling activity positively impacted our Fluids business and increased demand for waste services.

We're extremely pleased with our balance sheet management since completing of the merger and improvements made to our capital structure. In 2022, we repurchased US$138 million of the 11% notes assumed in the bite merger saving us approximately $10 million of interest on an annualized basis, leaving just US$162 million of the senior secured notes of at. This balance is down 67% from the US$500 million of seemed upon closing of the merger.

We also renewed and extended our $800 million credit -- revolving credit facility in the fourth quarter at more favorable terms than our previous facility. And subsequent to year-end, we increased our unsecured letter of credit facility guaranteed by Export Development Canada from $30 million to $50 million, which will improve our liquidity on the revolving credit facility.

Our capital structure consists of no near-term maturities with the first fixed note maturing in 2025. We retain a strong liquidity position with approximately $400 million of availability on our credit facilities, which also mature in 2025. As a result of our focus on debt repayment and positive operational results, we have significantly improved our overall leverage metrics.

Our total debt-to-EBITDA covenant ratio fell to 1.9x, down from 2.2x at the beginning of the quarter and down from 3.4x at the end of 2021. Our stronger financial position, along with our significant reliable cash flow provided the platform to all us begin executing on our commitment to deliver increased shareholder returns. Both through our increased dividend and share repurchases, which also -- while also allowing us to reduce to stand.

I'll now pass to Allen to provide operational highlights.

[Allen Gransch, President]

Thanks, Chad. Good morning, everyone.

As Rene and Chad has mentioned, strong industry fundamentals continue to drive increased activity in our operating areas. In the fourth quarter of 2022, overall volumes across our infrastructure network were higher than the prior year comparative period. As expected, the typical December holiday slowdown, along with some cold weather resulted in a slight lag in volumes in the third quarter of 2022.

However, we have seen volumes pick up in the start of 2023. During the fourth quarter, the midstream reporting segment saw process recovery volumes increased by 6% and 24% from the 2021 comparative period, driven by improved overall production levels and higher waste processing volumes corresponding to increased drilling and completion activity.

During the quarter, our facility network processed on average nearly 138,000 barrels of produced water each day, an increase of 2% over the prior year quarter, consistent with expectations at same-store sales on produced water volumes to trend higher over time. Our oil terminalling and pipeline volumes increased 12% in the quarter from the prior year, which also helped contribute to strong crude oil marketing results. Overall, utilization across our processing infrastructure remains at approximately 65%.

We have noted in the past, we continue to have capacity to handle additional volumes requiring processing, disposal, recycling, recovery and terminal with minimal incremental fixed costs or additional capital. In our environmental reporting segment, we also benefited from higher benchmark oil prices and increased activity levels.

During the quarter, Secure safely contained 1.2 million tons of contaminated soil on behalf of our customers across Secure's industrial landfills. We continue to see robust activity levels and increased remediation work, a trend that we expect to continue as liability management programs in British Columbia, Alberta and Saskatchewan seek to speed up the rate in which inactive wells and facilities are abandoned and reclaimed. These programs are expected to result in incremental volumes at our industrial landfills and waste facilities, metal recycling facilities and overall higher demand for environmental remediation.

In the fourth quarter, our waste transfer sludge pad facilities volumes increased compared to the same period in 2021, driven by higher norms volumes from our producers in Northern Alberta from increased activities in the lower mainland of British Columbia from the construction of Trans Mountain Pipeline and higher volumes in the Central Alberta region. Combining the expertise of Norm treatment with the establishment of the facility in the Grande Prairie area has been a direct benefit of the Tervita merger.

Our metal recycling business saw some margin compression during the quarter as fares prices moderated over the third quarter of 2022 and decrease from the prior year. The impact of reduced pricing was partially offset by a 24% increase in volumes due to the transport availability and through operational efficiencies. For nonferrous metals, pricing has not been impacted as type of material dictates pricing due to greater a variety of materials sold.

Nonferrous volumes also increased significantly by 53% through operational changes, which facilitated improved access to different markets. Turning now to our capital program. In the fourth quarter, we spent $34 million of capital comprised of $13 million of growth and $21 million of sustaining growth capital of $13 million related mainly to long lead items pertaining to 2023 projects and the expansion of existing facility, which is backstopped by a commercial agreement. Sustaining capital was primarily spent on well and facility maintenance, landfill cell expansion and asset integrity inspection programs.

In total, we spent $27 million of growth at $69 million of sustaining capital in 2022. We continue to focus our growth capital on opportunities that provide reliable volumes and reoccurring cash flows generally through customer partnerships with long-term contracts and take-or-pay minimum volume commitments.

In 2023, our planned growth expenditures are approximately $50 million and relate primarily to the construction of a new oil terminalling and pipeline infrastructure in the Clearwater oil region at Alberta, which is expected to be completed by the end of the third quarter of 2023. The significant growth in the Clearwater area, which has seen oil production grow from zero to nearly 100,000 barrels a day over the last five years has required additional infrastructure to support higher production volumes.

This new infrastructure is backstopped by three long-term commercial agreements, providing secure with reliable revenue through take-or-pay obligations to meet our investment hurdle and significant upside through production increasing in the area of dedication. We expect to incur $60 million of sustaining capital and $25 million of capital related to landfill expansions in 2023. The additional landfill expansions are in anticipation of increased abandonment spending obligations driven through government regulations.

As Rene mentioned, we are currently working on our fourth annual Sustainability Report and are excited to provide an update on this in May of this year on the progress we're making in our ESG journey. I'll just touch on a couple of our accomplishments in the areas of safety, environment, climate and community.

We continue to make progress on our journey towards a Level 5 leading safety culture. One of the ways we foster our proactive safety culture is through engagement at all levels. In 2022, we expanded our leadership safety program to include hazard hunt and safety inspections, increasing the number of interactions between leaders and frontline employees on relevant safety topics.

In total, we had over 1,000 leader safety interactions during the year. One of our short-term goals established last year was to reduce freshwater usage by 5% in 2022. We successfully exceeded this target and reduced our uses by 8.7% during the year through streamlining operations and optimizing our facility process.

During 2022, we refreshed our Every Drop Matters campaign to reinforce best practices around spill prevention, which led to a 79% reduction in spill intensity and an 85% reduction in reportable spill volume over 2021. In the last year, Secure also made advancements on our climate action plan.

The execution of this plan is already proving its value as we progress towards meeting our first short-term target of reducing greenhouse gas emissions by 15% by 2024, primarily through energy-efficiency projects at our processing facility. From a social perspective, we were honored to give back over 780,000 in 2022 to the communities where we live and work.

A highlight from our 2022 was our Annual Stampede Charity fundraiser. Secure along with our industry partners, raised $620,000 for the Calgary Food Bank, Providence, the Alex, Kids Sport and the Canadian Red Cross and supporting Ukraine. Additionally, in the fourth quarter of 2022, Secure was a proud winner at the top fundraiser across the oil and gas sector and the oil rig rumble challenge as part of the November campaign in support of men's mental health and physical health.

In total, our employees donated or raised over $170,000 for the cause, which was topped up by Secure for a total of over $345,000. In 2022, we rolled out an educational program for our employees on the history of Aboriginal peoples as we act on our commitment to play an active role in reconciliation in accordance with the Truth and Reconciliation Committee Call to Action 92. We look forward to providing a comprehensive review of our sustainability results in a couple of months.

I will now turn it back to Rene to address our outlook for the remainder of 2023.

[Rene Amirault, CEO]

Thanks, Allen.

Fourth quarter was another strong quarter for Secure capping off in primly successful year. We generated record adjusted EBITDA, and we're disciplined in our strategy of directing discretionary free cash flow towards debt reduction to strengthen our balance sheet for future flexibility.

In 2023, the corporation expects to see continued momentum across all business lines of stronger energy, environmental and industrial markets continue to drive higher volume activity levels and overall demand for Secure infrastructure. Our strategy will continue to focus on growing volumes at existing and new infrastructure with contracted or reoccurring cash flows.

We see a great cost savings and helping our customer experience with our digital transformation of the business. The energy sector continues to evaluate the supply and demand outlook as it faces macroeconomic factors such as inflationary pressures, the possibility of a near-term recession, overall demand globally and the geopolitical risk premium.

However, the current price environment continues to drive robust producer cash flows and increased energy industry activity in our operating regions. New government regulations will increase environmental cleanups and reclamation in all our business units. With our supportive outlook, the benefit from the full run rate of realized synergies from the Tervita merger and improvements made to our capital structure in 2022, we expect to see higher year-over-year discretionary free cash flow in 2023.

Given this backdrop, we remain confident in executing our previously announced capital allocation priority to return more capital to shareholders while maintaining our principal balance debt target of $850 million to $950 million, a level that provides us significant financial flexibility through all business cycles. We are excited by the future of Secure. All segments of our business continue to see strong demand, and we're making good progress on our ESG goals.

With our strong results to date, we're demonstrating that our enhanced scale better positions us to optimize existing assets in operations so that we can add more value to our customer and provide greater optionality in allocating capital through all market environments. We have the right assets and team in place to deliver cost-effective and value-added solutions to our customers who have been able to achieve some of the highest ESG standards in the world. Together with our customers, we are ensuring we create sustainable energy and environmental solutions for many decades to come.

That concludes our prepared remarks. We would now be happy to take your questions.

[Operator]

[Operator Instructions] And your first question will be from John Gibson at BMO Capital Markets. Please go ahead.

[John Gibson, BMO Capital Markets]

Good morning, Allen, congrats on another strong quarter here. When you think about return of capital moving forward, are you willing to put a percentage target in terms of discretionary free cash flow allocated to the dividend buyback, given you're now very close to your debt targets?

[Allen Gransch, President]

Yes, great question. I mean we do want the financial flexibility here that we can -- whether it's increasing the dividend, buying back shares or what we've said all along, John, that if we come across a great growth project, we'll -- that has reoccurring cash flow contracted take-or-pay volumes, then we can always have the flexibility to bump up our capital program. So no real set formula just trying to balance all three of those and making sure that we still have flexibility to make sure that it's ultimately enhancing shareholder value.

[John Gibson, BMO Capital Markets]

Got it. That kind of leads me to my next one. In terms of growth opportunities along the lines of the Clearwater announcement this morning, have these conversations picked up of late? Or do you still expect the cadence of gross bank to be in sort of that $50 million to $100 million per range you've spoken to previously?

[Allen Gransch, President]

Good morning, John, it's Allen here. Yes, there are a few opportunities in the hopper. Whenever you're dealing with longer-term contracts on infrastructure, it does take time to get everything signed up and ready to go. Clearwater is a great example of that. I think as we look into 2023, we have seen our opportunities in our hopper grow. But as we noted in the past, opportunities to place capital, we want to make sure that we get the right level of returns and there's that commitment over the long term to get your return on capital back.

So as we get contracts signed throughout the year as it heads into 2024, we'll announce if we believe it's a great project and it's backed by contracts, we'll announce that increase in our growth capital at that time. But I would say it has picked up just with activity levels and consolidation within the basin that more opportunities on, I would say, on a volume scale to create opportunities to put volumes on a pipeline exist more and more as we look out.

[John Gibson, BMO Capital Markets]

Got it. Thanks. And last one for me. Can you talk about how your facility utilization compared in Q4 versus last quarter? And then maybe how it's trended to start the year, just given the pretty strong uptick in activity levels.

[Allen Gransch, President]

Yes. I would say, if we look back to the third quarter of 2022, we were probably in the high 50s, low 60s in terms of utilization, and we definitely saw that tick up in Q4 up to kind of that mid-65% ratings on utilization. And we're continuing to optimize our facilities. And so we're not spending any capital to increase utilization. But as we optimize some processes, it does allow for increased capacity in some of these facilities.

And so we're -- our expectations is that, that 65% will continue to grow here in 2023 on a higher utilization level. We have seen the start of 2023 be very, very active. So I would expect we'll be higher than 65% as we get through 2023.

[John Gibson, BMO Capital Markets]

Great. Appreciate the color. I'll turn it back.

[Operator]

Thank you. Next question will be from Aaron MacNeil at TD Cowen. Please go ahead.

[Aaron MacNeil, TD Cowen]

Good morning, Allen. Thanks for taking my questions. Now that you've pivoted away from sort of a singular focus on debt reduction towards a more balanced capital allocation approach, can you frame what your investment hurdle rate is on your growth capital or even your sense of how it would compare from a return perspective to the NCIB?

[Allen Gransch, President]

Good morning. Good question. I think when we look at our opportunities in our hopper today, a lot of them are what I would consider brownfield expansion. So it's really building off either our customers' infrastructure and we're adding to their infrastructure or it's our only internal infrastructure that we're bolting on additional capacity via a disposal well via a pipeline -- and when you think about those type of projects, typically on the brownfield, because you already have some capital deployed, typically, the IRR after-tax return are higher on those projects, and that's what we're focused on currently are those higher brownfield expansions.

I think through the 18-month merger process and we obviously closed down facilities and we've got the capacity, we think our best use of capital is to put more towards making sure the utilization of these facilities are at the mass level, that's where you get the highest rate of return. So that's where our focus is.

In terms of the capital allocation, I think it's back to Rene's comments a few minutes ago that we want to give ourselves a little bit of flexibility here as we navigate what the 23 market and 24 market are going to look like and how we want to look at our share buyback mean currently, we feel the shares are undervalued. That's why you saw us buy back a lot of our stock. We continue to drive a lot of discretionary free cash flow. We feel like that's our -- I would say, great use of capital currently, and we'll continue to manage it here as we get through Q1 and Q2.

[Aaron MacNeil, TD Cowen]

Great. Chad, you addressed some of this in your prepared remarks, but what sort of the end goal in terms of what the debt profile should look like? And I'm not really focused on the range, which you've obviously provided, but what's kind of the ultimate split between unsecured notes, credit facility or any other debt instruments? I mean, I expect you'll continue to chip away the Tervita notes here, but just trying to get a bit more color on what we should expect on that front going forward?

[Chad Magus, CFO]

Good morning, Aaron, good question. I think we obviously going through this merger, we inherited some things that became a part of our capital structure, and we've been slowly modifying that. And I think this will continue to be an evolution over the next couple of years. But obviously, we want to eliminate 11% notes at some point. First call date is December of this year, where they we call below 105%, and we're obviously monitoring that as well as the whole right now.

We do like having unsecured debt in our structure, and we have some of that now with the 74% dose. I think we'll we fast forward into several years out, I think you'll continue to see us obviously have the revolver and that ability to repay debt along with an unsecured component. That split right now, I think that's something we're still considering. But it would be in that -- you could call it 50-50 between fixed and floating, but obviously, that could change over time and depending on what the opportunities we have in front of us.

[Aaron MacNeil, TD Cowen]

Understood. Thanks. I'll turn it over.

[Operator]

Thank you. [Operator Instructions] And your next question will be from Keith MacKey at RBC. Please go ahead.

[Keith MacKey, RBC]

Hi, thanks. And, good morning. So I just wanted to start off on the landfill ARO. There was about $25 million for 2023. Can you just talk about the run rate of that as far as what percentage or what number that should be within your capital allocation?

[Rene Amirault, CEO]

Good morning, Keith, Rene here. Yes, think of that ARO is a mixture of things. And probably a bigger chunk of that for the next couple of years will be related to the capping of our landfill cells that are full. So that's -- that just makes good sense all day long. Obviously, when the cells are open, there's more leachate that gets generated.

And so the capping of those cells actually reduces your op costs. So that's kind of a great win-win in terms of reducing your liability, but at the same time, you're reducing your op costs. We're -- we've obviously -- through this process, we have various locations that are either suspended so we'd be obviously looking once we get the decision from the tribunal looking at how we permanently shut down some of those operations. And then obviously, there's the remediation, reclamation aspect of it.

So the next couple of years, that's probably not a bad number. It will diminish over time. But obviously, what we just went through from a merger point of view, the next couple of years will be a little higher, and you'll probably start to see it reduce over time.

[Keith MacKey, RBC]

Okay. Thanks for that. And just a follow-up on the tribunal. Can you give us an indication of where you are in the process? And you mentioned maybe suspending or decommissioning some suspended facilities as part of that review. Is that the extent of what you'd expect to happen given what you know so far? Or can you just maybe run us through the latest in terms of things?

[Rene Amirault, CEO]

Yes, nothing has really changed since the hearing was completed last June. So it's really just a function of that the way the decision based on that decision, it's -- it could be many different outcomes. But right now, we still maintain and based on our legal advice that we don't expect any material impact to our EBITDA or balance sheet. So, I think a hurry up and wait. It's been almost two years since we applied to the bureau. So, this is how the government has done in Canada.

[Keith MacKey, RBC]

Thanks very much. That's it for me.

[Rene Amirault, CEO]

Thank you.

[Operator]

Thank you. And at this time, we have no other questions registered. Please proceed with your closing remarks.

[Rene Amirault, CEO]

Well, thank you for being on the conference call today. A tape broadcast of the call will be available on Secure's website. We look forward to providing you with updates on Secure's performance at the end of April after the completion of the first quarter.

Thank you, and goodbye.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.