CES Energy Solutions announces strong Q2 results

CALGARY, – CES Energy Solutions Corp. (CES), announced on Aug. 10 record second quarter financial results for Q2 2023, as quarterly revenue, Adjusted EBITDAC and cash flow generation continued to grow year over year. CES has substantial operations in Saskatchewan through its PureChem Services division. Second quarter highlights include:

• Revenue of $515.8 million, increased 19% year over year
• Adjusted EBITDAC of $73.9 million, increased 21% year over year
• Adjusted EBITDAC margin of 14.3%, increased 20 basis points year over year
• Cash Flow from Operations of $89.3 million and Free Cash Flow of $66.7 million
• Leverage declined to 1.57x Total Debt/Adjusted EBITDAC from 1.78x at March 31, 2023, and 2.17x at December 31, 2022
• Working Capital Surplus exceeded Total Debt at June 30, 2023 by $163.4 million
• Renewed NCIB permitting the repurchase for cancellation up to 10% of the public float of Common Shares, effective July 21, 2023
• Repurchased $7.6 million of common shares during the quarter and $12.2 million of common shares subsequent to June 30, 2023

The continuation of strong cash flow generation at near record levels has extended CES’ deleveraging trend, providing ample comfort to increase share buybacks, while preserving current dividend levels and supporting operational needs. Amid the current environment, CES intends to repurchase up to the maximum of 18.7 million common shares under its renewed NCIB over the coming year.

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Second Quarter Results
In the second quarter CES generated revenue of $515.8 million, representing a sequential decrease of $41.9 million or 8% compared to Q1 2023, on seasonally lower activity levels in Canada, and an increase of 19% compared to Q2 2022 as activity levels have seen a modest increase year over year. For the six months ended June 30, 2023, CES generated revenue of $1.1 billion, an increase of $238.6 million or 29% relative to the six months ended June 30, 2022. As producers’ capital spending and production levels have stabilized, improvements in US drilling market share and production chemical volumes resulted in significant uptick in revenue compared to prior year. CES continues to realize high levels of revenue underpinned by industry stabilization, and strong market share throughout the business. Industry conditions provided a supportive backdrop for the Company with balancing macro trends in supply demand, activity levels, rig counts, and production levels.

Revenue generated in the US during Q2 2023 was $375.5 million, representing a sequential increase of $6.5 million or 2% compared to Q1 2023 and an increase of 25% compared to Q2 2022. For the six months ended June 30, 2023, revenue generated in the US was up 36% to $744.4 million relative to the six months ended June 30, 2022. US revenues for both the three and six month periods were positively impacted by increased industry activity, higher production levels, and improved market share year over year. CES maintained its strong industry positioning, with a US Drilling Fluids Market Share of 20% for Q2 2023 and Q1 2023, and year over year improvement from 17% in Q2 2022.

Revenue generated in Canada during Q2 2023 was $140.4 million, representing a sequential decrease of $48.3 million or 26% compared to Q1 2023 as is expected on a seasonal basis, and an increase of 5% from Q2 2022. Canadian revenues were negatively impacted by a 42% sequential decrease in rig counts relative to Q1 2023 for spring breakup, with production levels up marginally year over year in the three month period, despite customer shut-ins due to the Canadian wildfires. Canadian Drilling Fluids Market Share for Q2 2023 of 32% was in line with Q2 2022 of 33%, but down from 38% on a sequential quarterly basis. For the six months ended June 30, 2023 revenue generated in Canada of $329.1 million was up 15% relative to the six months ended June 30, 2022, driven by higher industry activity and production levels year over year.

CES achieved Adjusted EBITDAC of $73.9 million in Q2 2023, representing a sequential decrease of 4% compared to Q1 2023, and an increase of 21% compared to Q2 2022. Adjusted EBITDAC as a percentage of revenue of 14.3% achieved in Q2 2023 compared to 13.8% recorded in Q1 2023 and 14.1% recorded in Q2 2022. For the three month period, Adjusted EBITDAC improved year over year on higher revenue levels and a comparable period that was negatively impacted by rapid inflation of product and labour costs. For the six months ended June 30, 2023 Adjusted EBITDA was up 46% to $151.0 million. The Company has continued to be effective in pricing and procurement activities while maintaining prudent G&A levels, combined with increased scale.

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Net income for the three and six months ended June 30, 2023 increased 69% to $33.9 million from $20.1 million, and 120% to $66.9 million from $30.4 million, respectively, compared to the prior year periods, driven by significantly higher industry activity levels.

CES generated $63.0 million in Funds Flow from Operations in Q2 2023, inline with the $62.6 million generated in Q1 2023 and up 37% from $46.1 million generated in Q2 2022. For the six months ended June 30, 2023 CES generated $125.6 million of Funds Flow from Operations compared to $79.3 million in 2022. Funds Flow from Operations excludes the impact of working capital, and is reflective of the continued strong surplus free cash flow generation in stable market conditions seen in the first half of 2023.

 

For Q2 2023, net cash provided by operating activities totaled $89.3 million, compared to net cash used by operating activities of $12.8 million during the three months ended June 30, 2022. For the six months ended June 30, 2023 net cash provided by operating activities of $162.6 million compared to net cash used by operating activities of $25.3 million for the six months ended June 30, 2022. The change was primarily driven by a lower required investment in working capital as activity levels remained stable during the three and six month periods of 2023, coupled with higher net income on associated activity levels relative to the comparative periods.

CES generated $66.7 million in Free Cash Flow in Q2 2023, up 23% from $54.1 million generated in Q1 2023, and compared to a use of $27.0 million in Q2 2022. For the six months ended June 30, 2023 CES generated $120.8 million of Free Cash Flow compared to a use of $50.2 million in 2022. Free Cash Flow includes the impact of net capital expenditures and lease repayments and is reflective of the Company’s surplus free cash flow generation in excess of required capital expenditures.

As at June 30, 2023, CES had a Working Capital Surplus of $641.4 million, which decreased by $37.7 million from $679.1 million at March 31, 2023 (December 31, 2022 – $691.1 million) as revenue and activity levels have stabilized and working capital investments have moderated. The reduction during the quarter was driven by a 13% reduction in accounts receivable, supported by strong cash collections, and a 6% reduction in inventory. The Company continues to focus on working capital optimization benefiting from the high quality of its customers and diligent internal credit monitoring processes.

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CES exited the quarter with a net draw on its syndicated senior facility of $120.2 million compared to $166.7 million at March 31, 2023 and $208.5 million at December 31, 2022. Total Debt of $478.0 million at June 30, 2023 compared to $518.8 million at March 31, 2023 and $557.5 million at December 31, 2022, of which $288.0 million relates to Senior Notes which mature on October 21, 2024. The decreases realized during the period were primarily driven by strong cash flow generation enhanced by the reduction in required working capital investments as described above, partly offset by $11.8 million in share repurchases and $10.2 million in dividend payments paid out in the first half of 2023. Working Capital Surplus exceeded Total Debt at June 30, 2023 by $163.4 million (December 31, 2022 – $133.6 million). Currently, the Company has a net draw on its Senior Facility of approximately $98.0 million representing a reduction of approximately $110.5 million since December 31, 2022. These reduced draw levels reflect the onset of strong free cash flow generation from sustained revenue levels supported by CES’ capex-light business model and stabilizing end market activity levels.

 

On April 25, 2023, CES entered into an amended and restated credit agreement with respect to its syndicated and operating credit facilities (the “Senior Facility”). The total size of the increased Senior Facility is approximately C$700.0 million consisting of an aggregated revolving facility of approximately C$450.0 million, and a Canadian Term Loan Facility of $250.0 million. The Canadian Term Loan Facility is undrawn and can only be used to repay and redeem the 6.375% senior unsecured notes scheduled to mature in October of 2024. The Senior Facility matures on April 25, 2026 and is secured by substantially all of the Company’s assets and includes customary terms, conditions and covenants.

On July 18, 2023, CES announced the renewal of its previous NCIB, which expired on July 20, 2023. Under the Company’s renewed NCIB, which became effective on July 21, 2023, the Company may repurchase for cancellation up to 18,719,430 common shares, being 10.0% of the public float of common shares at the time of renewal. The renewed NCIB will terminate on July 20, 2024 or such earlier date as the maximum number of common shares are purchased pursuant to the NCIB or the NCIB is completed or is terminated at the Company’s election. During Q2 2023, the Company repurchased 2,909,100 common shares at an average price of $2.61 per share for a total of $7.6 million. During the six months ended June 30, 2023, the Company repurchased 4,500,100 common shares at an average price of $2.62 per share for a total of $11.8 million. Since inception of the Company’s NCIB programs on July 17, 2018, and up to June 30, 2023, the Company has repurchased 36,758,457 common shares at an average price of $2.10 per share for a total amount of $77.1 million. Subsequent to June 30, 2023, the Company repurchased 4,551,800 additional shares at a weighted average price of $2.68 for a total amount of $12.2 million.

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Outlook
The recovery in global energy demand combined with several years of lower investment in the upstream oil and gas sector have resulted in a balanced market for oil and natural gas, higher commodity prices, and a supportive outlook for the sector in CES’ North American target market. We expect current activity levels to continue through 2023, moderated by potential challenges with availability of labour and supply chain constraints. Further, broad economic concerns exist with respect to recession risk, interest rates, and geopolitical instability, which may impact customer spending plans.

CES is optimistic in its outlook for 2023 as it expects to benefit from elevated upstream activity, increased service intensity levels, and continued strength in commodity pricing across North America by capitalizing on its established infrastructure, industry leading positioning, vertically integrated business model, and strategic procurement practices.

Commensurate with current record revenue levels, CES expects 2023 capital expenditures to be approximately $60.0 million split evenly between maintenance and expansion capital to support higher activity levels and business development opportunities. CES plans to continue its disciplined and prudent approach to capital expenditures and will adjust its plans as required to support growth throughout divisions.

CES has proactively managed both the duration and the flexibility of its debt. In April 2023, CES successfully amended and extended its Senior Facility to April 2026. The Senior Facility effectively addresses CES’ near-term and foreseeable longer-term requirements. The Canadian Term Loan Facility provides CES with the ability to repay and redeem the Senior Notes in full on its own schedule over the coming months. Thereafter, CES has the opportunity to refinance and right-size the term portion of its capital structure on suitable terms at any time up until April of 2026. CES routinely considers its capital structure, including further increasing the capacity of its Senior Facility, refinancing of the Company’s Senior Notes, and other potential financing options.

CES’ underlying business model is capex light and asset light, enabling the generation of significant surplus free cash flow. As our customers endeavor to maintain or grow production in the current environment, CES will leverage its established infrastructure, business model, and nimble customer-oriented culture to deliver superior products and services to the industry. CES sees the consumable chemical market increasing its share of the oilfield spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production volumes and water cuts from new wells.

 

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