CES Energy Solutions Corp

TSX:CEU

Earnings Call Transcript

[Operator]

Good day, and welcome to the CES Energy Solutions Corp. Fourth Quarter 2024 Results Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Tony Allaino, Chief Financial Officer. Please go ahead, sir.

[Anthony Aulicino, executive]

Thank you, operator. Good morning, everyone, and thank you for attending today's call. I'd like to note that in our commentary today, there will be forward-looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our annual information form, fourth quarter MD&A and press release dated March 6, 2025.

In addition, certain financial measures that we will refer to today are not recognized under current general accepted accounting policies. And for a description and definition of these, please see our fourth quarter MD&A. At this time, I'd like to turn the call over to Ken Zinger, our President and CEO.

[Kenneth Zinger, executive]

Thank you, Tony. Welcome, everyone, and thank you for joining us for our fourth quarter and year-end '24 earnings call. On today's call, I will provide a brief summary of our strong financial results released yesterday, followed by an update on capital allocation and then our divisional updates for Canada and the U.S. as well as our outlook for the remainder of 2025.

I will then pass the call back over to Tony to provide a detailed financial update. We will take questions, and then we'll wrap up the call. As always, I will start my comments today by highlighting some of the major financial accomplishments we achieved in Q4 of 2024. These highlights include our second best quarterly revenue ever of $605.4 million, which was 9.5% higher than Q4 of last year and just $1 million lower than our quarterly record from last quarter.

All-time record quarterly EBITDA of $103.2 million, which was ahead of last year's Q4 by 22% EBITDA margin of 17.1%, which was well ahead of the 15.3% in Q4 of 2023. By year-end, we had repurchased 10.6 million shares of the 19.2 million shares allowed under our current NCIB plan at an average price of $7.90. This represents 55% of the current program in just over 5 months.

Free cash flow of $34.6 million during the quarter and $186.9 million during 2024. Total debt to trailing 12 months EBITDA was at 1.12x at the end of Q4 2024, well below the 1.49x reported at the end of the year last year and at the lower end of our targeted range of 1 to 1.5x. Cash conversion cycle days came in at 111 days at the lower end of our targeted range of 110 to 115 days. By way of an update on our capital allocation plans, I am happy to report the following.

Consistent with our prior messaging of addressing the dividend once per year in Q4 or Q1 of each year and due to our confidence in the cash-generating capability of CES even in the current market environment, we will increase our quarterly dividend by 42.5% to $0.0425 per share from $0.03 per share. At today's share count, this will increase our dividend spend by about $11 million per year. We will continue to support the business with the necessary investments required to provide acceptable growth and returns.

This includes anticipated CapEx in 2025 of $80 million. This is a little higher than prior guidance due almost entirely to the unexpected increase in FX over the past 4 months and its mathematical effect on our U.S. CapEx. We will continue to look for strategic tuck-in acquisition opportunities into related business lines or geographies where we believe we can add value and grow returns. Based upon our current outlook versus the current share price, we intend to ramp up our NCIB as soon as we are out of blackout next week. With the current share price of CEU, we plan to aggressively repurchase as many shares as possible under our NCIB of 19.2 million shares.

We will continue to target a debt level in the 1 to 1.5x debt to trailing 12 months EBITDAC range. I'll now move on to summarize Q4 performance by division. Today, our rig count in North America stands at 233 rigs out of the 840 listed as running, representing an industry-leading North American rig market share of over 27.7%.

This is our highest market share ever in the North American land market. Due to the large number of rigs moving and firing up on both sides of the border after January 1, we have noted noise in our numbers as a higher proportion of the rigs were drilling with non-specialty or drilling on non-specialty portions of the wells, namely surface holes and vertical sections at the same time.

This led to some margin degradation in our January numbers from the drilling fluids divisions. We have noted this effect was transitory, and we are moving back to more historical levels of profitability in February and are hoping for the same in March. We anticipate this phenomenon may present itself in slightly lower margins for Q1, but not revenue. This rather sudden 33 rig or 17% increase in our rig count since November, combined with strategic purchasing in anticipation of tariffs has led to some working capital build within the business during the past few months.

We expect all of this noise to level out back to historical levels in the coming months and quarters. In Canada, the Canadian Drilling Fluids division continues to lead the WCSB in market share. Today, we are providing service to 92 of the 236 rigs listed as working in Canada or a 40% market share. This is our highest market share by percentage in Canada since January of 2020. The active drilling rig count in Canada so far in Q1 of 2025 has been trending consistently higher by approximately 5% year-over-year.

We remain optimistic about the prospects for 2025 due to the completion and full start-up of infrastructure projects and their associated takeaway capacity. Although we are aware tariffs may impact profitability of our customers in Canada, we currently have seen no signs of a drastic slowdown in activity for 2025. PureChem, our Canadian production chemical business had very strong results once again in Q4. Like JACAM Catalyst, PureChem continues its outsized growth versus the general activity increases.

All of the business lines within PureChem continue to grow significantly as we continue to take market share, win bids and optimize formulations. The revenue and earnings from our primary business production treating continues to drive the growth in Canada as we consistently strive to deliver superior products and service, combined with competitive market pricing. We believe all these positive results make us the clear #1 provider of production chemistry to the Canadian conventional market, and we are now participating in meaningful business in the heavy oil market as well.

In the United States, AES, our U.S. Drilling Fluids group, is providing chemistries and service to 138 of the 593 rigs listed as active on U.S.A. land market today. for continued #1 market share of U.S.A. land rigs at 23.2%. This marks the highest ever market share by AES of the U.S. land market. The number of rigs drilling in the U.S.A. is up by about 6% since we reported in November. We continue to anticipate a slow but steady uptick in rig count in the U.S.A. for the remainder of 2025, and we look forward to focusing on turning that into a higher rig count and market share for AES.

We're also currently enjoying a basin leading 100 rigs out of the 316 listed as working in the Permian Basin or 31.6%. The Permian industry rig count is up slightly quarter-over-quarter by approximately 4%. As well, service intensity continues to demonstrate its presence in our numbers for drilling fluids throughout North America. Finally, the integration of our recent acquisition, Hydralyte, into AES Completion Services is now fully complete and utilizing the full AES team and infrastructure to support the business in every possible way.

Last but definitely not least, the JACAM Catalyst division continues its trend of strong growth throughout 2024 and into 2025. We are consistently winning more business, growing revenue and taking market share at JACAM Catalyst. We remain confident that we are not only the #1 provider by market share in the Permian Basin, but also have strong presence in the Rockies, the Bakken, South Texas and to a lesser degree, Gulf of America. We are focused on growth in the division, and that means everywhere in the U.S.

Our eyes are keenly focused on becoming the #1 production chemical company in the United States as well as North America. I would like to now reiterate the resilience of our business model in the current tariff environment and touch on implications from associated exchange rate pressure on the Canadian dollar. Our current outlook does not anticipate a meaningful impact on our business from tariffs. The most immediate impact we can clearly identify revolves around exchange rate and the depressed Canadian dollar.

In our Canadian businesses, starting with currency, the roughly 8% decline over the past few months in the value of Canadian dollar versus the U.S. dollar is causing us to have to revisit pricing with customers on certain product lines. These are for products sourced in the U.S. and abroad in U.S. dollars. Due to the increased cost of goods, due to the increased cost of goods. However, our view is that this pressure is not unique to CES and that all of our competitors in Canada are feeling the same pressure. Therefore, we have been adjusting pricing as is possible since this became an issue a few months ago. Like in 2022, the impact lies primarily during Q1 due to the timing lag from requesting increases to implementing increases.

Unlike in 2022, the overall increases are much smaller and less widespread by comparison. I will also note that Canada accounts for approximately 1/3 of our overall corporate revenue. With regard to Canadian counter tariffs, I will just broadly state that so far of the counter tariffs imposed by the Canadian government on March 4, the impact was insignificant. Based on our early assessment of the Phase 2 list scheduled for March 25, the tariff exposure to CES would be higher than the Phase 1 impact, but still insignificant. Regardless, we and our peers will provide the Canadian government with input in order to attempt to support the exclusion of some of these items.

If certain items remain on the list, price increases will have to be implemented by ourselves and our competitors to the operators in order to counter the effect. I will also state that we believe we will have an advantage should this take place because we do have reacting and production capabilities at Sialco in Vancouver that none of our competitors in Canada have.

We are currently looking at switching more production of products for Canadian consumption from the U.S. to Canada as it is possible. I will note that this is not a flip-to-switch type transition, though. It is complicated and will take time. Now for our U.S. businesses. Since we report in Canadian dollars, the obvious currency impact we anticipate would be slightly elevated financial reporting, including CapEx spending in Canadian dollars on the U.S. businesses. When it comes to exchange rates on products going from Canada to the U.S.A., insignificant volumes are currently bought or manufactured in Canada for U.S. consumption.

Therefore, we currently see this risk as almost 0. With regard to U.S.A. tariffs, these may have a small effect on a handful of specialty chemicals, which we produce in Vancouver for use in the U.S.A. We are currently rearranging some production schedules in order to free up some Kansas reactors to take over this production due to the U.S.A. tariffs already announced. But I will state again, the impact is expected to be insignificant. Throughout this explanation of tariff challenges, I have consistently used the word insignificant when describing the impact on our revenues and profitability.

To make my definition of insignificant clear to you all, this means less than 0.5% of revenue exposure total. However, we can reduce this exposure to 0 as we are able to adjust our manufacturing schedules to producing as much as possible for consumption within the same country as it is manufactured. Once again, the risk on this correction is simply the timing lag. I would like to reiterate that our business has never been stronger or healthier than it is today and that we are uniquely positioned to not only weather this tariff environment, but potentially benefit from it.

We are extremely confident in our teams across North America as we believe all are best-in-class and battle hardened from challenges the industry has faced over the past dozen years. We will strategically navigate this latest challenge and use this opportunity to our advantage to continue to reorganize the supply chains, grow the business, take market share and reward shareholders.

As always, I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success of CES. It is rewarding to note that due to the growth that we are experiencing and anticipating -- in all parts of our business, we have increased our total number of employees at CES from 2,236 on January 1, 2024, to 2,530 at the end of 2024. This represents an annual increase of 294 employees or approximately 13%. With that, I'll pass the call to Tony for the financial update.

[Anthony Aulicino, executive]

Thank you, Ken. CES' financial results for 2024 set record levels of revenue and adjusted EBITDAC while demonstrating continued strong free cash flow and earnings despite muted rig counts in the U.S. These results underpin the unique resilience of CS' consumable chemicals business model. CS continued to effectively deploy strong surplus free cash flow to aggressively return capital to shareholders while investing in strategic CapEx and working capital to support our record revenue and position the company for identified growth opportunities.

Revenue for 2024 of $2.4 billion represented an all-time high and a 9% increase over $2.2 billion in 2023. Adjusted EBITDAC of $403 million reached record levels and represented a 28% increase over $316 million in 2023. And importantly, adjusted EBITDAC margin of 17.1% was up from 14.6% in 2023. Adjusted EBITDAC margins continue to come in above our guided 15.5% to 16.5% range in this operating environment.

These impressive results have been achieved through strong contributions across all parts of the business and a confluence of increasing levels of service intensity, new product introductions and adoptions, attractive product mix, vertically integrated supply chains and leading market share positions. These achievements were underscored by strong annual free cash flow of $187 million, enabling CES to continue its track record of consistent returns to shareholders through $27 million in dividends, $101 million in share repurchases, $10 million in strategic tuck-in M&A activity and $45 million in long-term debt repayment.

Focusing on the fourth quarter, CES generated revenue of $605 million, representing a 9% increase over prior year's $553 million. Revenue generated in the U.S. was $390 million and represented 64% of total revenue. This revenue figure compared to $403 million in Q3 and increased 8% over $361 million last year. Revenue generated in Canada achieved a record high of $215 million, up from $203 million in Q3 and 12% ahead of the $192 million a year ago. Adjusted EBITDAC in Q4 of $103 million set an all-time high, representing a 22% increase from $85 million in Q4 2023 and a 1% increase from the recent Q3 results.

Q4's adjusted EBITDAC margin of 17.0% was 1.7% ahead of prior year margins of 15.3% and in line with 16.9% in Q3. Including investments in working capital, CS generated $62 million in cash flow from operations in the quarter compared to $73 million in Q3 and $39 million in Q4 2023. For the year, CS generated $305 million compared to $302 million during 2023. The continued strong cash flow from operations resulted from record financial performance with higher contribution margins on associated activity levels, partially offset by increases to working capital heading into the Canadian winter drilling season to support record revenue levels. Funds flow from operations, or FFO, which isolates the effect of seasonal working capital builds was $69 million in Q4 compared to $89 million in Q3 and $68 million in Q4 2023.

For the year, FFO totaled $293 million compared to $252 million in 2023. The year-over-year improvements were driven by strong financial performance with higher contribution margins on associated activity levels relative to comparable periods. Free cash flow was $35 million for Q4 compared to $15 million a year ago. For the full year, CES generated $187 million of free cash flow compared to $212 million in 2023. This continues to demonstrate CES' high-quality earnings as measured by a free cash flow to adjusted EBITDAC conversion rate of 46% for the year. CES maintained a prudent approach to capital spending through the quarter with CapEx spend net of disposal proceeds of $18 million, representing 3% of revenue for an aggregate spend of $81 million in 2024.

We will continue to adjust plans as required to support existing business and attractive growth throughout our divisions. For 2025, we expect cash CapEx to be approximately $80 million, split evenly between maintenance and expansion capital to support incremental accretive business development opportunities and current record revenue levels. During the fourth quarter, we were active in our NCIB program, purchasing 4.6 million common shares at an average price of $8.19 per share for a total cash outlay of $37.7 million. For 2024, CES repurchased 15.2 million shares at an average price of $6.69 per share for a total cash outlay of $101.5 million and representing 6% of outstanding shares at January 1, 2024.

We have repurchased approximately $11 million of the 19.2 million available shares under our current NCIB at an average price of $7.98 per share. And since inception of the NCIB program in July of 2018, CES has repurchased 70 million shares, representing 26% of the outstanding shares at that time for an average price of $3.51 per share. So far in 2025, our NCIB activity has been deliberately more muted during our extended blackout period, buying back only 900,000 shares at an average price of $8.97 per share. We intend to revisit NCIB activity and repurchase opportunities at current share price levels once we exit our blackout period on Tuesday, March 11.

We ended the quarter with $453 million in total debt, representing an increase of $13 million from the prior quarter and a decrease of $17 million year-over-year. Total debt is primarily comprised of $200 million in senior notes, a net draw on the senior facility of $149 million and $92 million in lease obligations. Total debt to adjusted EBITDAC of 1.12x at the end of the quarter compared to 1.14x at September 30 and approximately 1.5x at December 31, 2023, demonstrating our continued commitment to maintaining prudent leverage levels.

This prudent capital structure is further illustrated by our current net draw of $160 million which has increased by $11 million from the end of the quarter, primarily as a result of our quarterly dividend payment and NCIB spending. We are very comfortable with our current debt level maturity schedule and leverage at the lower end of the 1 to 1.5 range, thereby enabling strong return of capital to shareholders and prioritizing a sustainable dividend and opportunistic share buybacks. In accordance with that view, I am pleased to announce that on March 6, the company's Board of Directors approved a 42% increase to the quarterly dividend from $0.03 per share to $0.0425 per share.

This represents a dividend yield of 2.4% on an annualized basis at yesterday's closing price and a conservative annual payout ratio of approximately 16%. On an annualized basis, the 42% increase to the quarterly dividend will only cost the company an additional 11 million, underscoring another ancillary benefit of share buybacks by reducing the share count and mathematically increasing returns to shareholders. Our continued focus on working capital optimization has led to sustained improvements in cash conversion cycle, which ended the quarter at 111 days.

This also translates to a reduction in operating working capital as a percentage of annualized quarterly revenue to 28% from 29% a year ago. Each percentage improvement at these revenue levels represents approximately $24 million on our balance sheet. Internally, we have continued to focus on return on average capital employed metrics at the divisional levels. This approach has led to a cultural adoption of key ROCE maximizing factors such as profitable growth, strong margins, working capital optimization and prudent capital expenditures.

I am proud to report that the resulting consolidated trailing 12-month ROCE is now 24% compared to 22% a year ago. I would like to emphasize that from a financial perspective, -- our business model and financial management philosophy provides structural resilience to potential tariff implications. As a reminder, 2/3 of our business operates in the U.S. and 1/3 in Canada, and each country possesses domestic manufacturing capabilities through independent vertical integration. Current intercompany cross-border sales are negligible with identified potential to move to local domestic production and our U.S. operations procure very little input products from tariff-affected countries such as Canada, Mexico and China.

Our Canadian operations purchased some U.S. third-party inputs that may be included in future tariff lists. However, a significant component of Canadian revenue is relatively insulated through index pricing and cost plus pricing and the impact of relevant proposed tariff items is very minor as articulated by Ken. From a financial management perspective, the tariff threat induced Canadian dollar devaluation prompted CS to proactively hedge a significant portion of U.S. dollar requirements related to input purchases by Canadian operations at attractive rates compared to current spot levels.

As demonstrated through our record results, CS is bigger, stronger and more resilient than ever before, enabling strong surplus free cash flow generation and providing valuable optionality for return of capital. At this time, I'd like to turn the call back to the operator to allow for questions.

[Operator]

And your first question today will come from Aaron MacNeil with TD Cowen.

[Aaron MacNeil, analyst]

In the prepared remarks, you mentioned the potential for M&A, and you also said you were comfortable with leverage. To the extent that you exhaust the buyback this year before you can renew, do you think an SIB could be on the table if you don't see the share price improve?

And then just bringing it back to M&A or comparing with M&A, what do you think would be a more attractive risk-adjusted return an SIB or one of the potential transactions in your pipeline?

[Anthony Aulicino, executive]

Yes, I can start with that. On the SIB, as we've said before, we're the business model is demonstrating its resilience. Our current leverage level is at a very comfortable level to be able to withstand any fluctuations in end markets as we've seen during downturns in the past where working capital is harvested. So we're very comfortable with where we are and our ability to tap into available funds for something like an SIB.

But as we've said before, we would only seriously consider an SIB in an event where there was a very logical dislocation in the value of the shares in the company and what the driving factors are that are causing the share price to decline or stay at low levels. And that sounds like a fancy narrative, but we had this discussion once before. And it was a few years ago when Silicon Valley Bank was failing, and there was a downdraft on all stocks right across the board.

And we determined that the biggest exposure was to the regional banks in the U.S. And we got together with our partners in the U.S. to confirm that we did not have exposure to those potential losses or failures. And our U.S. presidents confirmed that they're very comfortable with our customers that are bigger and don't use those sources of funding.

And during the month after that failure, we basically did a very large set of NCIB purchases by maximizing our daily -- sorry, our weekly block exemption. If that had continued for a much longer time, and we saw more devaluation and we knew that we were going to put up the big cash flow numbers that we thought we would and we ultimately did, we would consider it.

But Aaron, we're not in that environment right now. If you saw the stock continue to decline below the current 5.2 level well into the 4s or below for no apparent reason, you could see us stepping in. So that's the SIB. On the M&A front, we don't look at it in terms of comparing M&A strategy versus things like SIB. When we find or come across significant M&A opportunities, we ask ourselves 2 questions. Number one is, could we do it? And number two is should we do it? Up until about a year ago, 1.5 years ago, the answer was no to the could for bigger M&A because we didn't have the balance sheet.

We didn't have our bonds refinanced. We didn't have the consistent free cash flow generation. And then the next question is, should we do it? We always talk about it strategically, but I will emphasize and underscore that we have no intention even now that things are a bit better and our valuation is a bit better and our capital structure is very solid. We have no intention in swing for the fences, large M&A just to become much bigger where it's not very strategic and extremely accretive. Does that help, Aaron?

[Aaron MacNeil, analyst]

Yes, that's great. Maybe switching gears a bit. Can you speak to some of the business development opportunities sort of on your plate? Like I'm thinking offshore, international, stepping into the Haynesville or any other initiatives that you may want to flag? Just any updates you could provide there would be helpful.

[Kenneth Zinger, executive]

Yes. I mean the ones you just listed, Aaron, I think cover it. The offshore market, we've spoken about quite a bit. We're actively pursuing other customers there. We're involved in some testing. I can't get too deep into it, but we're doing everything we can to try and grow that piece of business down in the Gulf of America.

We've recently picked up some business for a specialty product that we're selling into Argentina. So we're -- it's not meaningful revenue, but it's a first step that way. So every opportunity that comes along, we look at it for sure. And if the margins are right and the risk is right, we'll take a shot at it. And then over the past couple of years, we've spoken a lot about Middle East and South America as potential spots where we may want to grow to.

And we're looking at something right now in the Middle East. We have a JV partner in Kuwait, and we're actively involved with an RFP process over there. So who knows what comes out of that, but we're taking our first real shot at one as we speak. And then there's just opportunity all over the place in North America, honestly.

I mean that's -- it's -- we talk about these things that are outside of the scope of what we're doing right now as being growth, but the growth for us or the opportunities for us is in every basin, like we just -- we're constantly winning more and more work, and that's really what the day-to-day focus is. It's just continuing to grow within the basins we're already playing in.

[Anthony Aulicino, executive]

Just to follow up on that. The sale that we're doing that ultimately gets to Argentina is not in Argentina. So there's not -- there's no risk of repatriation or any noise along those lines.

[Kenneth Zinger, executive]

It's the same as what we've been doing when we do these single product kind of sales. Same thing we're doing in Africa. We sell the containers at the port before they leave the country.

[Operator]

And your next question today will come from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

Ken, maybe just to start off with a question for you. Have you noticed any change in the competitive dynamics in the Permian Basin recently?

[Kenneth Zinger, executive]

No, I would say not. I mean it's always been really competitive and everybody has always been really focused on it. And there's a stable number of rigs there. I think the biggest thing that's changed there is all the amalgamation and acquisitions that have happened have really concentrated the business and the number of rigs. There's not as many privates to go chase after.

So maybe some of the -- we're noticing that we have a bigger -- us and Halliburton have a bigger share of that than the privates did. So there seems to be -- as we move to having more majors involved in that drilling and more public companies involved in that drilling, it's trending well for us and Halliburton. On the production chemical side, it's the same. Like we're #1 there on the production chem side. And honestly, with our facility in Gardendale, it just continues to be the highest growth business we have in the company.

[Jonathan Goldman, analyst]

Okay. That's great color. And then I guess another one, could you just go over your margin comments for Q1 again? I'm not sure if I caught it. And if you can tease out the sort of level of compression you're expecting? And then I have a follow-up.

[Kenneth Zinger, executive]

Yes. I mean we've been talking about this 15.5% to 16.5% range being our range for quite a while. And for the last bunch of quarters, we've been at or near 17%. So I think guys keep thinking we're sandbagging a bit, but we really mean the 15.5% to 16.5%.

That's -- there always seems to be something coming up every quarter that pushes us up over 17%. And I would say this -- in Q1, we think with the exchange rate softness starting in Q4, we have inventory, so it doesn't hit the books immediately, but it's going to bear -- it's going to make itself obvious in Q1. And I think we're talking somewhere in the upper half of that range we gave in the 15.5% to 16.5% range.

[Jonathan Goldman, analyst]

Okay. Interesting. And then maybe one more, I guess, in the same vein on the working capital. I'm not sure if I got the comments, but I think you mentioned a build. Is that sort of safety stock tariff related? Or is there an FX component there as well?

[Kenneth Zinger, executive]

Primarily, what I was referring to is the tariff-related stuff. We're just trying to get ahead of it. And yes, that's primarily what I was talking about. There was also an other effect, like when I was talking about margin, Jonathan, also on the large number of drilling rigs that moved, that also had an impact on working capital, and it had a little bit of an impact on margin because the sections of the wells that they're drilling, when they start on a pad or all the easier -- they still have decent revenue, but it's non-specialty products.

So the margins aren't quite as good. But as those rigs get into the production line and start drilling horizontals, then it all catches up. So there was a bit of a lag there in January from that as well. So all those things, big confluence of things happening that pretty sure we're not going to see a 17% margin in Q1. But that doesn't mean we don't get back there later.

[Operator]

Your next question today will come from Keith MacKey with RBC Capital Markets.

[Keith MacKey, analyst]

We have some pretty clear numbers on your market share in drilling fluids, but production chemicals, of course, is a little bit less clear. Can you maybe just talk to us how much market share do you think you've gained in production chemicals over the last year? And how much more do you think you could gain over the next year if things keep going in the direction they're going?

[Anthony Aulicino, executive]

Yes. We -- when we found in meetings with investors and even reading some research, especially in the U.S., many people quote market share figures from a third-party research firm called Kimberlite. So take it for what it's worth. We know Kimberlite. They do very good work. We subscribe to their publications as well.

But we've seen quoted in reports having our U.S. production chemicals business at 21% of the land production chemical market with ChampionX at 24% and Baker would be in the high teens. We would estimate that, that 21% was probably closer to 17%, 18% over the last couple of years.

And in Canada, similarly, using that as a reference point, we would be tied for #1 or probably more likely #1 with a market share for production chemicals in Canada of north of 30% and Champion and Champion would be right beside us or right below us and Baker would be below. In terms of going forward, that question about ADS drilling fluids when they were in the mid-teens 5 years ago, and they're now pushing 22%, 23%, we wouldn't have been able to predict that significant increase.

And similarly, for our production chemicals businesses, as we've said publicly before, that division, both of those divisions in the U.S. and Canada are taking their outsized share of growth CapEx, and they're putting it to good use to support the market share growth that they've seen. I think the jury is out on how the dust settles through the Schlumberger acquisition of ChampionX.

But even besides that, our divisional presidents on both sides of the country are going full steam ahead, and they're putting up the growth results as I've just quoted, and we expect more of the same.

[Keith MacKey, analyst]

Got it. And just to follow up on that. What would you estimate is your approximate facility utilization in some of your key facilities, whether it's Gardendale or Sterling or some of the Canadian facilities? Like is there lots of capacity in your current footprint to support the realistic growth you might expect through '25 and potentially '26?

[Kenneth Zinger, executive]

Yes. I mean when we talk about outsized CapEx and production chems, production chems are the homes in our financials, production chems covers the manufacturing facilities as well. And a lot of the CapEx is just constantly evolving those buildings, reactors, equipment.

And we are always ahead of it. I'd say we're always running at about 75%, call it, at any one facility. But whenever a product line or a specific chemistry needs approaches capacity.

We just -- it's just a matter of buying another reactor or buying some storage or blending tanks or adding a piece on to the facility. So the reacting facility in Vancouver is a little bit different in that it doesn't have a lot of room for expansion. So we don't use it as a full-blown production facility. We know we have a set volume we can work with there just due to the footprint. But in Kansas, we're sitting on 100-and-some acres down there. There's tons of room, and we just keep growing it as we need to grow it.

[Keith MacKey, analyst]

Okay. And just finally, how is the relative growth trends between the 2 segments, drilling fluids and chemicals trended over the last year? And roughly, what is the revenue split today, if you can say that as well?

[Anthony Aulicino, executive]

Yes. We'll say that because it's been a while since we've provided an update. So -- so the numbers in Q2 that represent relative percentages of revenue were 53% for production chemicals and 47% for drilling fluids. And you've seen a steady uptick from about 50-50 1.5 years ago.

[Operator]

And your next question today will come from Tim Monachello with ATB Capital Markets.

[Tim Monachello, analyst]

I missed the beginning of the call, so apologies if some of the stuff has been covered. But Part of the reason that I think that you've seen such strong margin improvement over the last couple of years has been the penetration of higher-margin specialty formulations, particularly higher specialty lubricants, rheology modifiers and other things in the production chemical space.

Can you talk a little bit about how that penetration is going currently and if there's other products that you're adding to the market that might help to continue to advance that trend?

[Kenneth Zinger, executive]

Yes. It's a treadmill, Tim. It we're constantly evolving. So let's just take a thing like a lubricant because it's easy and everybody knows what that does. I mean we're constantly finding new ones and our competitors are constantly finding new ones and one humping each other. So you can -- we have -- we find a good one that works in a specific application on a specific reservoir with a specific system. And then we'll run the table on it, and we can charge a great margin because it's the best thing that's out there.

But eventually, either us -- we don't stop working on it there, let's put it that way. Like once we get that one into production and into use, that's great. But the whole time it's in use, we're looking for the next one. The scientists, the guys in the lab, the guys in the facilities, we're trying to evolve and find the next one, but so are our competitors. So it's a treadmill and it's like that on every single product.

Like everybody is always trying to find the most efficient, best, lowest cost product because that's how you get better margins and take market share. So I don't think there's an end to it. It's just going to continue to be an evolution.

[Tim Monachello, analyst]

I guess asked another way, like how -- what percentage of your product sales on a slice of a different way, are higher-margin formulations now? And what would that have been a couple of years ago?

[Anthony Aulicino, executive]

We talk sometimes about the percentage of our product that is specialty versus more commodity based. And I'm not going to quote specific internal numbers, but suffice it to say that, that first number, the vertically integrated, more proprietary, higher-margin specialty product has grown probably about 10% over the last 3 years from where it was, so representing 10% more than it did at that time.

[Tim Monachello, analyst]

Do you think that, that has enabled market share growth? Or are there other factors that are at play there, too?

[Kenneth Zinger, executive]

It's definitely done that, Tim. Like that's the differentiator. Anything we can do that we can make ourselves that everybody can't just go buy and resell and compete with us on is a win. That's what makes us different from everybody else. And that's the whole idea is to have -- not just be different, but have products that are better.

[Anthony Aulicino, executive]

And when you saw that narrative together, Tim, it reconciles with the margin expansion. I mean we're not going to live at 17%. But up until a few years ago, we were living in the 13.5% to 14.5% margin range. And yes, we were just under right around 17% for all of last year. But what you just heard helps explain why that margin is where it is.

[Tim Monachello, analyst]

Yes, it wasn't that long ago when '17 wasn't even on the table. So certainly impressive. Second question, and maybe you covered this already, but it looks like you've got some strong activity growth in the U.S. relative to where you stood at the end of the year. What are your expectations for U.S. drilling activity and, I guess, specifically for CU through the remainder of '25?

[Kenneth Zinger, executive]

Our internal forecast based on what we know today calls for just slight growth from here through the year, maybe ending the year sort of 3% to 5% higher than we currently are.

But I will say that when you're talking to operators with all the tariff stuff going on in Canada, a more muted response here. Everyone is going to -- from what we understand, people are planning to stick with their CapEx budgets. If tariffs and Canadian dollar end up causing enough problems to maybe affect well cost by 5 or so percent, then maybe there's 5 or so percent less wells drilled in Canada next year or in 2025. But I can tell you in the U.S., it's like -- it's -- people are very optimistic in the U.S.

These gas prices have everybody looking at what's going on. We've been talking about the Haynesville. We've had some good success there on the first few wells that we've done. There hasn't been any massive amount of rigs fire up. So we haven't had an opportunity to get on a bunch more, but we did manage to get opportunity on three, and we continue to have -- one of them was a trial with a specialty system that went super well and could turn into a whole bunch of work. So we believe that there's 31 rigs going there today that could go back to 50 or 60. And that second 30 rigs, we think we're going to get a good chunk of that.

[Tim Monachello, analyst]

Can you talk about the margin profile of a Haynesville job relative to your current activity?

[Kenneth Zinger, executive]

Yes, it's good. It's -- they're like -- they'd be the same as like Montney, Duvernay, Permian. They're good. That's why we're looking there. I mean you got to be in the barite in order to make money there. You have to have barite supply. I mean there's a bunch of independents that are working there that don't have barite supply.

So their margins would be less, and that was what we were looking at 10 years ago when we kind of gave up on the Haynesville and focused on the Permian because we weren't basic enough in barite in order to make really good margins because at that time, we had to give the barite away for what we were paying for it. But today, we make a return on barite and the Haynesville is very barite intensive on top of being hot and pressured.

[Tim Monachello, analyst]

And at what level of activity in the Haynesville do you have to make a more permanent settlement there for lack of a better word?

[Kenneth Zinger, executive]

I think if we -- we can go to -- I mean, we could go as long as we want it without actually setting up a facility, but probably we would look at doing something if we got into that 10, 15, 20 rig kind of area. So if we got back to -- if the region got back to 60 rigs working on Haynesville wells and if we had a good footprint there and a few good anchor customers, we might look at spending some money, and it'd be a couple of million dollars to put in an invert blending plant and some barite storage there.

[Tim Monachello, analyst]

Are those having a facility is that pretense for getting an anchor customer?

[Kenneth Zinger, executive]

I missed that. Sorry, Jim.

[Tim Monachello, analyst]

Like having a facility in the Haynesville, do you think that's pretax for landing an anchor customer like with the negotiations, would they say, we need you to have a facility in the Haynesville to service this activity. And if you do, then we'll give you x amount of jobs.

[Kenneth Zinger, executive]

I think it helps, right? Like I think once you're there and you have footprint there, it helps. But no, it's not a prerequisite. We haven't had -- that hasn't been a major issue at all.

[Operator]

Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks.

[Kenneth Zinger, executive]

Okay. Well, thank you for everyone who took the time to join us here today. We continue to be very optimistic about the future here at CES Energy Solutions, and we look forward to speaking with you all again during our update for Q1 in May. Thank you for your time.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.