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Good morning, ladies and gentlemen. Welcome to the Essential Energy Services Limited Second Quarter Results Conference Call and Webcast.I would now like to turn the meeting over to Ms. Karen Perasalo, VP, Investor Relations. Please go ahead.
Thank you, Melanie. Good morning, and thank you for joining our second quarter conference call. With me on the call today are Garnet Amundson, President and CEO; Jeff Newman, Senior VP, Business Development; and Allan Mowbray, CFO. This morning, we will give you an overview of our second quarter results, speak to the outlook and open the line for questions. In this conference call, we will be discussing financial measures, including certain non-IFRS financial measures such as EBITDA. Please see our August 8, 2018, second quarter news release for definitions of these terms. Today's call may include forward-looking statements. Such statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were used to formulate such statements. Actual results could differ materially, and there can be no assurance of future performance or market impacts. For additional information with respect to forward-looking statements, factors and assumptions, please refer to our August 8, 2018, second quarter news release. In this call, we will refer to Essential Coil Well Service as ECWS. I will now turn the call over to Allan.
Thank you, Karen. Good morning, yesterday, we reported second quarter results with revenue of $37.9 million and EBITDAS of positive $1.8 million. We were pleased to report positive EBITDAS for the second quarter as it is typically negative due to the reduced activity during spring breakup and incremental maintenance costs. Relative to Q2 '17, favorable spring weather conditions facilitated the stronger activity generating higher revenue in both ECWS and Tryton. Revenue gains were complemented by an emphasis on cost control, contributing to higher ECWS and Tryton gross margin compared to the prior year quarter.On a year-to-date basis, revenue was $98 million, and EBITDAS was $11 million, both an improvement from the first half of 2017.We reported debt of $19.1 million on June 30. As expected, debt decreased significantly from the end of Q1, as we collected customer receivables. Working capital at the end of Q2 was $54 million, exceeding debt by $35 million.I will now speak to second quarter results for each business. ECWS reported revenue of $20.8 million, a 43% increase from Q2 '17, driven by stronger coil tubing and pumping activity. Similar to recent quarters, the increase was largely due to demand from the Gen III coil tubing rigs, quintuplex pumpers and nitrogen pumpers working for customers in the Montney and Duvernay regions.Pricing was consistent with Q2 '17 and Q1 '18. So there have been no price increases for ECWS, and so was implemented during Q1 '17, despite increased operating costs. Adverse competitive conditions and sector uncertainty in Canada have made it untenable for our customers to accept service price increases.Revenue per hour can vary from period to period based on type of equipment used and nature of work performed. ECWS Q2 '18 gross margin was $2 million or 10% of revenue. An improvement from Q2 '17 gross margin of negative 2%. This was a result of increased activity, effective crew management and fixed costs representing a smaller portion of revenue. These cost savings were partially offset by higher fuel costs. On a year-to-date basis, gross margin was $8.2 million, a significant increase over the first 6 months of 2017.Tryton reported $17.2 million of revenue, 31% higher than Q2 '17. We saw a good demand for MSFS and conventional tools in Canada, and U.S. operations showed higher quarter-over-quarter activity from a broader customer base. Tryton's solid and steady performance on a quarter-over-quarter and year-to-date basis speaks for itself, as this quality operation delivered another strong quarter.Tryton's Q2 '18 gross margin quarterly and year-to-date showed an improvement from Q2 '17, driven by stronger revenue.I will now make a few comments about capital. Our 2018 capital spending estimate is $18 million, a $3 million increase from our most recent forecast. Additional spending will be for a set of high-pressure blowout preventers, long lead time components for the next Generation IV coil tubing rig retrofit and incremental maintenance capital as we prepare for improving industry conditions, bringing our estimated maintenance capital for 2018 to $11 million, slightly higher than our expected annual range.In the first half of the year, both of our new quintuplex fluid pumpers were delivered and put in service. The 1500-horsepower unit has been well received by customers. A new nitrogen pumper is nearing completion for delivery prior to the end of the third quarter. Our Generation IV coil tubing rig retrofit is nearing completion and is expected to be in service late in the third quarter for use in the upcoming winter season.Garnet, will now speak to the outlook.
Thanks Allan. Good morning. Essential finds itself in an enviable operational position as we head into a longer-term strengthening market. We do not anticipate activity in the second half of 2018 will be significantly different than 2017. Q3 activity to date has been similar to 2017. At this point, we have heard only modest indications of customers spending that might be accelerated from 2019 into 2018. Canadian oilfield service pricing pressure continues to be a problem, despite years of focusing on cost control, today's service pricing is still not sufficient to generate a proper rate of return on invested capital. Higher prices are needed to cover increased operating costs. Neither ECWS nor Tryton expect meaningful price increases for services in the near term. Stronger industry activity and responsible competition is needed to support higher pricing for this sector.In the meantime, Essential remains focused on cost control and operational efficiency. While we are pleased with Essential's 2018 year-to-date improvement in revenue and gross margin, given where the price of WTI oil is, Canadian industry activity should be stronger.Our Canadian natural gas pricing and market is weak, and we have limited ability to distribute our environmentally responsible natural gas across the country and around the world. The Canadian oil and natural gas industry is missing out on opportunities because of market access limitations and excess plus inefficient regulation. We require stronger political and regulatory support to ensure Canadian projects can compete and proceed.Unique to Canada, industry barriers are suppressing the profitability of Essential and other Canadian oilfield service companies and in turn, the returns to our shareholders.From a longer-term perspective, there is some optimism with the potential for an LNG facility and continued progress on improving takeaway pipeline capacity. A new sense of political awareness in Canada could lead to positive changes in our sector in 2019 and beyond.In closing, our fleet and crew composition, designed and trained for today's challenging deep well completions, has capacity for growth. Service pricing is expected to remain a challenge until we see further sustained growth in our sector. Due to steady activity and prudent cost management, Essential's free cash flow from operations is expected to further reduce debt as we move towards year-end.
Melanie, at this time, we would like to open it up for questions.
[Operator Instructions] The first question is from Josef Schachter of Schachter Energy.
Garnet and the team, congratulations for coming out with gross margin and positive EBITDA in a tough environment and also during that tough quarter of breakup. I have a couple of questions. Number one, you had a very significant increase in coil tubing hours, 32%; pumper hours, 39%, in the quarter. Can you walk us through, which kind of markets, and where -- which kind of clients and which basins were providing you that strong improvement?
Sure, Josef, and thank you for the compliment and the question. I think the hours are -- through the second quarter, it's an increasingly, I'll say, a smaller group of elite customers that are still spending through the second quarter, especially on the coil side, which you emphasized. We had a group of, I'm going to say, half a dozen customers that really drove that increase in hours. And as we said in the comments, I think it was a combination of positive weather events. When we went into the second quarter, if you will recall, given the significant snow pack that we had, that severe cold, we were quite afraid that it could be a really messy, prolonged breakup period. The way the warm weather came in and sort of thawed things out allowed the water to escape, and I think conditions were quite dry, and then we didn't get hit with that intense rain. So customers that either hadn't finished their spending in Q1 or were ready to go with their programs were able to proceed. So that's really the key to success. We had also -- after the experience we have in the fourth quarter of 2017, which wasn't positive, where we got caught with a sudden slowdown in work, I think great credit to our sales and operations and maintenance teams for being right on top of having the right equipment ready, at the same time not excessively preparing and [ sea-dipping ] equipment if we didn't need it for our customer work. So I think that's really what generated those hours, we had the right equipment ready, and we managed our costs effectively.
Super. Next question, how does the order book look heading into year-end? Do you see an improvement in Q4 compared to potentially Q4 of 2017?
Yes. I think the general comment we've thrown out there is that we see the second half of the year to be the same as the second half of 2017, but it could unfold differently. We had a fantastic Q3 last year that built up steadily, including a very strong month of September in Q3 2017. Right now we're on track on a similar pace, but we don't have the same, I'll say, level of clarity and confidence with our key customers for that big month of September. That being said, throughout the back half of the year, as you would recall, I just referenced, we had a pretty tough Q4. And I think there is potential, and it's starting to show up a little bit. There were a few announcements yesterday with customers either increasing their 2018 capital budgets into Q4 or the possibility of them accelerating 2019 capital into 2018. Canadian E&Ps, for all the reasons I mentioned in the formal script, are quite cautious and hesitant. They're getting pressure from shareholders to repurchase shares, put in dividends as opposed to throwing their money into capital. So we're quite content to plan for that type of an outlook. I will say that the -- some of the very optimistic outlooks that have come out from the 3 large Canadian frackers are highly encouraging to us, and if we end up being as busy as they have described, I will be very pleased.
Okay, super. Last question for me. At one point, you were looking at potentially moving some of your Generation I and IIs down to the States. Has there been any more thought process on that? And is that something likely to occur in the next 6 months or so?
I'll answer the second part first. I don't know if that is likely to occur in the next 6 months. But we are actively studying the idea. The change from, what you worded in your question, if we could send our excess, surplus shallower equipment, the Generation Is and IIs, it would be a much easier and quicker business decision. We've done some exploratory trips to the U.S. to check out the market, and the customers that we've interacted with, we think their same desire would probably be the same prized equipment that we're -- our customers want here being our big quint pumpers, our Gen III, and there's the new Gen IV retrofits. So we need to do an assessment on pricing and ability to provide that equipment to the Canadian market before we bite off more than we can chew on the U.S. market. So that is a bit of a new development, but it's still under assessment.
[Operator Instructions] There are no further questions registered at this time. I'll turn the meeting back over to Ms. Perasalo.
Thank you, Melanie, and thank you everyone for joining us today.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.