CES ENERGY SOLUTIONS CORP. ANNOUNCES STRONG Q3 2024 RESULTS WITH RECORD REVENUE AND ADJUSTED EBITDAC AND DECLARES CASH DIVIDEND
CALGARY, AB, Nov. 6, 2024 /CNW/ - CES Energy Solutions Corp. ("CES" or the "Company") (TSX:CEU) (OTC:CESDF) is pleased to announce strong financial results for the three and nine months ended September 30, 2024, with record quarterly revenue and Adjusted EBITDAC. The Company's Board of Directors also approved a quarterly dividend of $0.030 per share, which will be paid on January 15, 2025, to the shareholders of record at the close of business on December 31, 2024. Third quarter highlights include:
Record quarterly revenue of $606.5 million, increased 13% year over year
Record quarterly Adjusted EBITDAC of $102.5 million at a 16.9% margin, increased 28% year over year
Cash Flow from Operations of $72.9 million and Free Cash Flow of $40.1 million
Conservative leverage of 1.14x Total Debt/Adjusted EBITDAC
Returned $53.1 million to shareholders through $7.1 million in dividends and $46.0 million in the repurchase of 6.0 million shares representing approximately 2.5% of outstanding shares
CES' third quarter, record setting results demonstrate the significant merits of its unique business model. During the quarter, CES continued to provide mission critical chemical solutions enabling our customers to succeed in an era of high service intensity levels, and increasingly complex drilling fluids and production chemical technology requirements.
CES' performance is characterized by strong levels of financial resilience, cash flow generation, and profitability inherent in its capex light, asset light, consumable chemicals business model supported by industry leading people, infrastructure, and technology. CES continues to provide valuable solutions to increasingly complicated drilling programs which require higher levels of service intensity, effectively overcoming a lower US industry rig count. Attractive growth was also achieved by delivering superior production chemical services and technology to active, results oriented, high quality customers as they continue to maximize returns on their producing wells through effective chemical treatments.
Adjusted EBITDAC margin of 16.9% resulted from continued levels of high service intensity, an attractive product mix, and adoption of innovative, technologically advanced products supported by a prudent cost structure, effective supply chain management, and vertically integrated business model.
CES remains confident in its ability to continue generating strong surplus free cash flow, supported by its financial performance, outlook, and capital structure, and furthermore, on November 6, 2024, the Company's Board of Directors approved a quarterly dividend of $0.030 per share, which will be paid on January 15, 2025, to the shareholders of record at the close of business on December 31, 2024.
Third Quarter Results
In the third quarter, CES generated record revenue of $606.5 million, representing a sequential increase of $53.3 million or 10% compared to Q2 2024, off of seasonally lower activity levels in Canada as anticipated, and an increase of $70.0 million or 13% compared to $536.5 million in Q3 2023. For the nine months ended September 30, 2024, CES generated revenue of $1.7 billion, an increase of $138.2 million or 9% relative to the nine months ended September 30, 2023. The increase from the prior year comparative periods was driven by increasing service intensity levels, higher production chemical volumes, and strong market share positions, resulting in an overall uptick in revenue despite softening industry rig counts in the US.
Revenue generated in the US during Q3 2024 set a new quarterly record at $402.6 million, representing a sequential increase of $11.7 million or 3% compared to Q2 2024, and an increase of $41.2 million or 11% compared to Q3 2023. For the nine months ended September 30, 2024, revenue generated in the US was up 7% to $1.2 billion relative to the nine months ended September 30, 2023. US revenues for both the three and nine month periods benefited from higher production levels and increased service intensity, which more than offset the impact of decreased industry drilling activity. CES continued to maintain its strong industry positioning, achieving US Drilling Fluids Market Share of 22% for both the three and nine months ended September 30, 2024, compared to 21% and 20% for the three and nine months ended September 30, 2023, respectively.
Revenue generated in Canada during Q3 2024 set a new quarterly record at $203.9 million, representing a sequential increase of $41.6 million or 26% compared to Q2 2024, as is expected on a seasonal basis, and an increase of $28.8 million or 16% compared to Q3 2023. For the nine months ended September 30, 2024, revenue generated in Canada was up 12% to $567.1 million relative to the nine months ended September 30, 2023. Canadian revenues for both the three and nine month periods benefited from higher industry activity and production chemical volumes year over year. Canadian Drilling Fluids Market Share of 35% and 33% for the three and nine months ended September 30, 2024, respectively, compared to 34% and 35% for the three and nine months ended September 30, 2023, respectively.
Adjusted EBITDAC set a quarterly record at $102.5 million, representing a sequential increase of 7% compared to Q2 2024, and an increase of 28% compared to Q3 2023. Adjusted EBITDAC as a percentage of revenue of 16.9% in Q3 2024 compares to 17.3% recorded in Q2 2024 and ahead of the 15.0% recorded in Q3 2023. For the nine months ended September 30, 2024, Adjusted EBITDAC was up 29.8% to $300.0 million from $231.2 million in the nine months ended September 30, 2023, and Adjusted EBITDAC as a percentage of revenue increased to 17.2% from 14.4% a year ago. Adjusted EBITDAC improvements for both the three and nine month periods were driven by record revenue levels combined with strong margins, resulting from increased service intensity, an attractive product mix, effective supply chain management, and continued adoption of innovative, technologically advanced products, supported by a prudent cost structure and vertically integrated business model.
Net income for the three and nine months ended September 30, 2024, increased 21% to $46.6 million, and 42% to $149.3 million, respectively, relative to prior year comparative periods, driven by strong activity levels combined with improved margins and prudent management of expenses.
During the quarter, CES returned $53.1 million to shareholders (Q3 2023 - $46.3 million), through $46.0 million in shares repurchased under its NCIB and its quarterly dividend of $7.1 million (2023 - $40.0 million and $6.3 million, respectively). For the nine months ended September 30, 2024, CES returned $83.8 million to shareholders (2023 - $68.3 million), through $63.8 million in share repurchases under its NCIB and $20.0 million in dividends paid (2023 - $51.8 million and $16.5 million, respectively).
For Q3 2024, net cash provided by operating activities totaled $72.9 million compared to $99.9 million during the three months ended September 30, 2023. For the nine months ended September 30, 2024, net cash provided by operating activities of $242.4 million compared to $262.5 million for the nine months ended September 30, 2023. The decreases in net cash provided by operating activities for both the three and nine month periods were driven by larger required investments into working capital to support record revenue levels, partially offset by improvements to the cash conversion cycle for both reference periods.
CES generated $88.5 million in Funds Flow from Operations in Q3 2024, compared to $61.6 million generated in Q2 2024 and an increase of 53% from $57.9 million generated in Q3 2023. For the nine months ended September 30, 2024, CES generated $224.2 million of Funds Flow from Operations compared to $183.5 million in 2023. Funds Flow from Operations excludes the impact of working capital, and is reflective of the continued strong surplus free cash flow generated in 2024.
CES generated $40.1 million in Free Cash Flow in Q3 2024, compared to $54.8 million generated in Q2 2024, and $75.6 million generated in Q3 2023. For the nine months ended September 30, 2024, CES generated $152.3 million of Free Cash Flow compared to $196.4 million in 2023. The decrease for both the three and nine month periods were driven by larger required investments into working capital to support record revenue levels. Free Cash Flow includes the impact of quarterly working capital variations, net of capital expenditures and lease repayments.
As at September 30, 2024, CES had a Working Capital Surplus of $633.3 million, which decreased from $639.6 million at June 30, 2024, and increased from $632.8 million as at December 31, 2023. The movement during the quarter was driven by increases in accounts receivable and inventory, partially offset by increase in accounts payable and accrued liabilities, in line with the sequential and year over year increases in activity levels. The Company continues to focus on working capital optimization benefiting from the high quality of its customers and diligent internal credit monitoring processes.
As at September 30, 2024, CES had Total Debt, inclusive of lease obligations, of $439.3 million compared to $405.1 million at June 30, 2024, and $469.6 million at December 31, 2023. Total Debt is primarily comprised of a net draw on its Senior Facility of $137.1 million (June 30, 2024 - $110.6 million and December 31, 2023 - $140.6 million), $200.0 million of Senior Notes, and lease obligations of $94.4 million (June 30, 2024 - $85.3 million and December 31, 2023 - $73.1 million). The increase in Total Debt in the quarter is driven by the increase in activity under the renewed NCIB, the completion of the Hydrolite acquisition, and larger working capital requirements associated with elevated quarterly activity levels, partially offset by continued strong financial performance and ongoing efforts to optimize working capital cycles. Working Capital Surplus exceeded Total Debt at September 30, 2024, by $193.9 million (December 31, 2023 - $163.1 million). As of the date of this MD&A, the Company had total long-term debt of approximately $375.0 million, comprised of a net draw on its Senior Facility of approximately $175.0 million and its outstanding $200.0 million Senior Notes due May 24, 2029.
On July 1, 2024, CES closed the acquisition of all of the business assets of Hydrolite Operating LLC. ("Hydrolite"). Hydrolite provides comprehensive completion fluids solutions, including advanced mixing plant services, onsite solids processing, and wholesale chemicals and kill mud, with a focus on servicing the Permian basin. Operating as AES Completion Services, the acquisition augments the full-cycle service offerings of the Company's operations by providing solutions between the drilling and production phases and will be enhanced by CES' advanced technology and supply chain capabilities, extensive customer reach in its North American platform, and vertically integrated business model. The aggregate purchase price was $15.0 million consisting of $10.2 million in cash consideration and $4.8 million in deferred consideration, which is payable in cash as an earn-out upon achieving certain EBITDA thresholds over a twenty-four month period post close.
Outlook
The demand trends of developing countries and global demand requirements to support eventual energy transition initiatives, combined with depletion of existing resources, reduced investment in the upstream oil and gas sector over recent years, and diminished available inventory quality has necessitated increased service intensity for available resources thereby resulting in continued constructive end markets for CES services which enhance drilling and production performance. This environment has led to stable commodity prices and a favorable outlook for CES' primary North American target market.
Despite economic uncertainty and ongoing global conflicts, energy industry fundamentals continue to support critical drilling and production activity for oil and natural gas. Moreover, current depressed global inventories and fewer high-quality drilling locations provide cautious optimism for suitable pricing, despite potential economic headwinds and geopolitical instability impacting customer spending plans. Currently, oil prices are sustained by increasing global demand and limited supply growth and while natural gas has demonstrated price weakness since early 2023, we anticipate a sustained period of elevated gas drilling activity in the US and Canada as projects under construction come online.
CES continues to be optimistic in its outlook for the remainder of the year as it expects to benefit from stable upstream activity, increased service intensity levels, adoption of advanced critical chemical solutions, 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 capital expenditures, net of proceeds on disposals of assets, to be approximately $85.0 million for 2024, weighted towards expansion capital to support higher activity levels and business development opportunities and expects this level to decline back to approximately $75.0 million for 2025. CES plans to continue its disciplined and prudent approach to capital expenditures and will adjust its plans as required to support prudent growth initiatives throughout divisions.
CES has proactively managed both the duration and the flexibility of its debt. In May 2024, CES successfully issued $200.0 million of Senior Notes due May 24, 2029. The net proceeds from the issuance of the Senior Notes, together with draws on the Company's Senior Facility were used to repay the $250.0 million secured Canadian Term Loan Facility on more attractive terms, and provided maturity extension to 2029. This further strengthens the Company's capital structure and reduces the cost of capital alongside its previously amended and extended Senior Facility due April 2026. The combination of the Senior Notes and the Senior Facility effectively addresses CES' near-term and foreseeable longer-term requirements. CES routinely considers its capital structure, including increasing or decreasing the capacity of its Senior Facility, issuance or redemption of 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.
Conference Call Details
With respect to the third quarter results, CES will host a conference call / webcast at 9:00 am MT (11:00 am ET) on Thursday, November 7, 2024. A recording of the live audio webcast of the conference call will also be available on our website at www.cesenergysolutions.com. The webcast will be archived for approximately 90 days.
North American toll-free: 1-(844)-763-8274International / Toronto callers: (647)-484-8814Link to Webcast: http://www.cesenergysolutions.com/
Financial Highlights
Three Months Ended September 30,
Nine Months Ended September 30,
($000s, except per share amounts)
2024
2023
% Change
2024
2023
% Change
Revenue
United States(1)
402,632
361,469
11 %
1,181,230
1,105,899
7 %
Canada(1)
203,887
175,048
16 %
567,063
504,156
12 %
Total Revenue
606,519
536,517
13 %
1,748,293
1,610,055
9 %
Net income
46,638
38,552
21 %
149,251
105,455
42 %
per share - basic
0.20
0.15
33 %
0.64
0.42
52 %
per share - diluted
0.20