Craig Nieboer - Chief Financial Officer Tom Simons - President and CEO

Bhakti Pavani - Euro Pacific Capital Kevin Lo - FirstEnergy Elias Foscolos - Industrial Alliance

Good morning ladies and gentlemen and welcome to the Canadian Energy Services and Technology Corp's Conference Call and Webcast with respect to the recently announced third quarter 2014 results. Presenting for the company today will be Mr. Tom Simons, President and Chief Executive Officer and Mr. Craig Nieboer, Chief Financial Officer. Please be advised that this call is being recorded. A question and answer session will follow at the end of the presentation. I would now like to turn the conference call over to Mr. Craig Nieboer, Chief Financial Officer of Canadian Energy Services and Technology Corp. Please go ahead Mr. Nieboer.

Thank you. Good morning everyone and thanks for attending the call. Before we start, I'd like to note that in our commentary today, there will be forward-looking financial information and that the 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 Q3 MD&A, our Q3 press release and in our AIF dated March 13th, 2014. In addition, certain financial measures that we will refer to today are not recognized under generally-accepted accounting policies and for description and definition of these, please see our third quarter MD&A. At this time, I'll turn it over to Tom Simons, our President and CEO.

Good morning, everyone. Thank you for attending our call. Obviously, we're very pleased with the quarter. We've got record revenue, record EBITDA, we're having strong contributions from all parts of our business. I'm going to talk through what the different parts of the business we're doing for the company, why they're succeeding. We'll talk about production chemicals, specialty chemicals in both countries, drilling fluids in both countries. We'll talk about Clear and EQUAL, some plans we have to – we think grow all our business even through the oil prices. We'll have Craig talk about finance and then we'll take questions. For the quarter production and specialty chemical business was very nicely in both markets, so Canada and the U.S. As people that know the company realize we've expanded our product offering, we've increased our (inaudible) of solid chemistry. We've brought organophilic clay to the market. We're seeing nice growth in for our chemical market. We've built a good team of people to penetrate that market. Our base business, they're called production chemicals. It's growing very nicely in the U.S. and about a year ago, turned the corner in Canada and is now making a significant contribution to the bottom line. We're developing new geographic markets specifically west Texas under the leadership of Paul Stephens whose business we bought at the start of September, Southwest Treating. Paul is helping us build out to expand our position in the Eagle Ford. We see Solid Chemistry being a door opener for the Eagle Ford and we see Supercore being a big door opener and patented H2S scavenger for the Permian market. Mike Gilbert, who runs our drilling fluids group in west Texas, and Paul are working collaboratively to try to double down on our existing infrastructure and use our deep relationships in west Texas on the drilling side to help expand JACAM Southwest. We're seeing nice growth in the Deep Basin in Canada for PureChem. And as a result of small transaction we did to buy a specialty provider of H2S scavenger in the (dual) sense. We've nicely penetrated that market and are seeing some growth there. On the drilling side, we've had market share gains in the U.S. They mostly come through technology. We've expanded our position in west Texas and the expansion has largely included the addition of what was on our work. MMH is a technology that we brought into the company with services of the inventor, a Ph.D. chemist, last year around Christmas. This is a water-based mud system that cures lost circulation in what we call thief zones or fragile formations. We've had a handful of blue chip operators be able to improve their drilling results by not experiencing lost circulation of what we would call the build section. This has allowed operators to drill monobores in wells that without that technology require a string of intermediate casing so it's giving customers significant cost savings and is giving us a competitive advantage that's winning business. We've brought a system, an oil-based system to market in West Texas earlier this year called (NRH). This is an oil-based mud system or invert mud that is classified without the use of clay. It cleans the hole better than conventional oil-based muds and we're making nice gains in west Texas with that system because it cleans the whole better which allows the operator to drill longer for anyone that's looking at the results of the pumpers. It certainly looks like what the best outcome for production is for the customers to drill a longer horizontal WAG and put bigger and bigger (fracs) into more stages. So if you're the drilling fluid company that can help push that lateral out the extra thousand meters or mile, you're the guy that gets hired. We had some additional gains of a nice, new customer, I'll call it in the Eagle Ford, this is kind of an expansion of our position there with one of the leading E&Ps in the States. That's the market that we think we can grow nicely over time and we think we'll continue to seek capital from our customers. We've also increased our drop count in the northeast U.S. as natural gas has recovered a bit. That's in both the Marcellus and the Utica. And we've had some gains into what people are calling the SCOOP play in mid-continent. This is a very deep work with big operators so they're nice new wins for us. In Canada, we continue to have a very broad market penetration. We've got a lot of deep work in the Montney and the Duvernay. We have just this week ruled out what we're calling EnerClear 2. It's the use of drilling deep overpressured formations like the Montney with the brine. We've introduced with patent protection around the chemistry a new corrosion inhibitor that we believe will allow operators to use inexpensive salts to build these brines in our lab. We've been able to create a magnitude better corrosion prevention than existing technology, common metal loss rates with these calcium chloride brines as 10 to 20 (NPY) under the chemistry that we've got patent application on. In the lab, we see a result of one (NPY). We think this will allow us to get customers' confidence to use this technology to take time off their drills without creating corrosion controls or corrosion issues around drill pipe, drill rigs or the liners that they put in to complete the wells. I think it's noteworthy that we started seven months ago trying to create a new generation of chemistry for this. In a period of seven months, our scientists between Calgary and Kansas were able to go from concept to commercially mixing that product this week and we do have patent application in on that technology. In the oil sense and heavy oil for drilling, that part of the market remains very robust for us. We have the leading share in Canada in both sandy and heavy oil called recovery wells. Southeast Saskatchewan which has always historically been a strong market for us remains robust on the drilling side. Clear and EQUAL, they remained very complimentary and steady business clients for us. Clear, of course, is our environmental services group. We're seeing a real shift in that business from just disposing of drilling fluid waste during and post-drilling to water management. We are very confident in the strong leadership from Gavin Grimson that we get at Clear. It's giving us reason to look at the water part of our business. We see increase in volumes of produced water going to disposal. We see increased volumes of water for (frac) flowback. We're helping customers' source water, dispose of water. We think under Gavin's leadership, we need to look at ways to grow Clear in that area and we think we have the right horses for that and certainly macro conditions in our market tell us that that's the place to be. In 2015, as people will see from our press release, we chose not to issue guidance at this point. We don't think that's wise. We're very customer-focused as a business. We think we've got an appropriate level of confidence that we will retain the drilling work that we do for our customers. We're unsure of as how much they will do because their cash flow looks to be down 15 and probably commonsense as the people aren't going to go to market to put their equity to fund drilling with lower share prices. We think that we have to offer our customers or top ideas and technology. We have the best execution in the industry and we think we built this company for exactly times like this being vertically integrated or a self-supplier is huge. We're not a reseller of other people's products, which we think will allow us to whether proprietor drilling and completion time. I also liked to highlight the JACAM and PureChem. We believe we can grow those businesses in this environment as the operator is very focused on lifting costs so we think the people that we aren't working for will take a look at our technologies, take a look at our talent and see if we can lower their lifting cost to improve their own position. You can expect us to continue to make longer terms strategic investments in the business. Those specifically would be infrastructure that will lower our cost or create competitive advantages. All of that spending will be discretionary. It will be out of cash flow exactly like our dividend. We're going to continue to fund things for the growth of business out of cash flow and pay shareholders a dividend out of cash flow. I will now turn it over to Craig and then we'll be happy to take questions at the end of that.

Thanks, Tom. As Tom mentioned, we're very pleased to announce yesterday record results for us for quarter as our strategy, as Tom has just described, continues to unfold across North America. Gross revenue for the quarter was just under $273 million. That's in comparison to the previous Q3 of 182 million, an increase of over 50 percent from the prior year. Both Canada and the United States growing on that. In fact here at Canada, $114 million versus 65 million a year before. The U.S., 160 million versus 117 million a year before. As well, EBITDAC for the quarter was a record for us. It's just under 55 million versus 32.6 million of the previous year or an increase of 68 percent. As Tom has described, all facets of the business, both sides of the border are performing well and we see opportunities everywhere in our business today. As a result, we've (inaudible) our annual guidance for 2014, revenue range of 945 million to 965 million and an EBITDAC range of 170 to $178 million. As well, our balance sheet at this point and time has never been better. During the quarter, we raised $75 million worth of equity in order to pay for the three acquisitions of (Riotech), (inaudible) and Southwest. And we also raised an additional $75 million of senior unsecured notes which we now have a total of $300 million of unsecured notes which are termed until April 2020 and to remind investors that we talked to, that's an after-tax cost of capital on those notes for us of approximately 2.2 percent. We also reorganized our senior lending syndicate during the quarter. You know, we have up-sized it to $200 million facility with $100 million (inaudible). So we have plenty of drive power to run the balance sheet to execute our business plan. The dividend as Tom mentioned will be paid out of free cashflow after several increases in 2014. We are leaving it at this stage at $0.275 a month or $0.33 per year. We believe it's solid and safe and we believe our business model was robust and we should be able to continue to pay our dividend as mentioned early for cash flow. At this stage, I would like to turn it over to everyone on the call for questions.

Ladies and gentlemen, if you would like to ask a question at this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the tone key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of (Jason Sawatzki) with (inaudible) capital. Your line is open.

Hey, good morning guys.

Good morning, Jason.

So Tom, I will just start with the U.S., just looking at the Permian right now. You've been able to increase the number of rigs there from 40 to 50, you know, since you get the venture acquisition. Just wondering what further delays on the very facility, do you think you can still take that rig count a little bit higher or we sort of hit a ceiling here until that facility is complete?

No, we have reason to believe we can go up. Our intel tells us that people will continue to spend there.

OK.

And the reason we think we can go up is more rigs are continuing to go sideways and that lends itself to our technologies like MMH and (NRH). I think we have developed a reputation in that market which is new to going horizontal as the company to talk with if you have a tough well to drill. So as guys want to push these wells further sideways, (NRH) can create that and this MMH technology that we brought into the company a year ago. It's a water-based mud that allows you drill what drilling guys would call thief zones or lost circulation zones. We can prevent lost circulation across those sections of the hole or rock, not lose this expensive oil-based mud into it that's conventionally you drill with. We've got chemistry that inhibits (inaudible) shale that we can put in to that system. Some very blue chip operators are using this with success. We think we can go up in their shops. We've had a nice development where one of the very big independents has reshuffled their talent and put someone that we have a long history with into that market so we think we can go up in there. And then you bring (inaudible) into the market, you know, later in '15, (Jason). Overall, we're glad we went to that market and think there's a lot of upside for us.

OK. And what's the delay on the facility that's still permitting issues, et cetera?

You know, it's kind of three things. We have sort of three 6th-month delays. When we were originally given a survey by the port on the land that we took the long-term liaison, the survey showed that it was pristine land that was all fill. And it turned out that there was a sewer line that the port had not recognized was on that land. It caused us delays needing to move that line because it was exactly underneath wherever we were putting our facility. Then we ran into six months of delays on air permits. During those 12 months, the state of Texas changed regulations to hurricane-proof buildings from being able to withstand 120 mile an hour winds to 135. That forced us to go back and get new engineered drawings of the metal building that will basically be built around this mill. It also increased how deeply needed to go with pilings to put the building on so that the wind basically wouldn't tip over a building and pull the foundation out of the ground. So, it's being three times six-month delay. We are very confident that we have the best minerals people in the mud business working with us. We're very focused on supplying logistics of that important input in long-term to think that that mill is going to put money to the bottom line every month for the company. And it's going to make us a player in doing (swaps) for that important product. Our volumes of that stuff in Canada have went through the roof as guys are drilling these deep overpressured formations. So we need to be basic in that space. The mills allowing us to work with Indian, Chinese, Moroccan, and Mexican suppliers and we're looking at other countries that strategically could supply both the gulf coast and Canada by bringing stuff up to pacific side into Vancouver or maybe Portland.

OK, great. Good color. OK. And then just looking at the JACAM business right now, I think you guys have looked in the past that, you know, maybe looking at the wholesale market, you know, for production of chemicals. I'm just wondering if you're already currently selling into that market and, you know, is this something that could materially impact utilization at the JACAM plant?

I think what's going to material impact, JACAM is further used of their products in the Canadian market through PureChem. We've recently treated some significant sections of pipeline for some big mainstream operators. We're making really good headway in the Deep Basin, starting to pick up some work in the oil sense. And then the Texas market for production chemicals, (Jason), is astronomical.

Yes.

We are starting to get top talent because we're starting to be recognized as one of the few places that's basic in the chemistry and there's only now a couple of those names.

Yes.

If you believe what's on the wire, Baker Hughes might be part of Halliburton soon, and (Ecolabs) and then it goes to us and Weatherford as was basic in the chemistry. So I think what moves the needle at JACAM is expansion in the West Texas where all the oil, water comes with oil, or treating water and oil. The Eagle Ford can be a big market for us. We are working on a wholesale scenario where would supply a company that's big enough that they want to self-supply production chemistry in the Gulf Coast, but the big mover is just getting more of the right talent and they're becoming available because of consolidation of these huge companies.

OK, great – yes, go ahead.

We are (Jason) seeing some nice developments for stimulation and fracturing chemistry. We've got what we consider to be a top level theme put together in the U.S. now and we think we've got the top frac chemical guy, as our CTO of the company in Canada. So that's the place at starting to come together. We were doing pipeline training for the last 2 days hear in Calgary for our own people with the JACAM pipeline group, that's potentially a big market for us. And we've got lots of room in Kansas to make this stuff.

Perfect. OK. And then just final question in Canada, just so I'm clear. Obviously, the inner Clear products has been very successful, you know, successful for you guys, the money, is this EnerClear too, is that going to replace the original EnerClear product or is it just going to be sold over above?

What it is we will stop mixing the current corrosion inhibitor that we use and we replace it with one which we have a patent application around that in the lab test a magnitude better in prevention of metal loss. So it's just an enhancement of the way to treat corrosion. You're going to use the same salt, get the same benefit at the drill bit and have lower risk of metal loss to your drill pipe and liner or to the rig.

Perfect, OK great. Thanks for the call.

The next question comes from the line of (Steve Cammermeyer) with (Clear Security). Your line is open.

Hi guys, just looking in Canada here. So you posted this 36 percent market share. Operating days were up about 33 percent year over year, just wondering if you can give us a sense of how much of that was due to the acquisitions and how much of that would have been organic.

We picked up quite a bit of new deep work through the acquisition of Realtek. We picked up a little bit of heavy oil work. And then there is a modest amount of organic growth in that. But a lot of it's to pick up through the transactions.

And then just on the increased guidance or so, obviously, it was a great quarter in Q3, the range give – suggest a slowdown from Q3 sequentially anyway, is that, you know, just a typical, seasonal slowdown or for the holidays or there something else you're seeing a pullback in spending or was Q3 just, you know, a bit of an anomaly, maybe how good it was.

Steve, I think first of all, whenever you post a record quarter, you should be proud of it and excited about it. Our expectation is kind of grow from there overall. But as you mentioned, Q4 many times has a little bit of a pullback in the month of December as budgets run out for certain operators and/or people take an early break to Christmas. So for us, we want to be conservative in our guidance and always and be comfortable that we can meet that guidance with this stage. The reason for that call it lower sequential quarter-over-quarter is exactly what you said, the anticipation that there maybe a slowdown in December of operators as budgets dry up and/or guys decided to take maybe an earlier break to Christmas in this commodity environment.

OK. And maybe just on the clear environment expansion. Did I hear you right? Were you guys thinking of extending that and getting into the disposal well side or more the water management side.

I'd say (Steve) that we're considering all options. We can see that that's a growing market. Clear has sort of transitioned into doing a lot of water management for its customers, so we've got people with expertise. There are people that we have a long history with that we have a high degree of trust in. So we're sort of investigating ways that maybe we could create growth with that talent.

OK, that's great. Thanks, that's all I had guys, great quarter.

The next question comes from a line of Bhakti Pavani with Euro Pacific Capital. Your line is open.

Good morning guys. Great quarter.

Thank you.

Just couple of questions from my side. Just wanted to get – I mean you just you mentioned about the Clear Environmental Solutions, and last quarter, you did lose two of (inaudible), so just curious to know if you were able to replace them and what kind of outlook or what kind of strategy do you have for that business line?

Well, we've replaced one of those two people organically by advancing someone within the company. Existing management has taken on a little more customer relations and they were before those people left. And we think we're close to recruiting a high-end person that could backfill one of those roles. And then as we've talked about a little bit on the call, we think we can perhaps increase the scope of what Clear does. And perhaps grow that business by expanding how they help operators manage water. We're not looking to get into tanks but where water goes, how it's handled, whether you use chemistry to recycle and reuse frac flowback or whether you're helping get to disposal facilities, we're looking at all those options.

OK, thank you. also, I know you have provided 2015 guidance at this point of time but just kind of curious to know the given environment and commodities market and none of the (inaudible) operators here in the U.S haven't disclosed any but have express the flexibility that they might (inaudible) on the drillings. So, you know, you have been in the industry, what kind of sense of is there any sense that you are getting that there might be a slowdown in drilling and how are you planning to prepare for that.

Well, we think certainly that there will be a slowdown because cashflow for our customer is going to be down. Many of our customers have significant production head just in place but we think our customers run good businesses. They're not going to look to distress their own balance sheets. So we're anticipating that there will be some reduction in drilling and fracking. We don't know that reduction would be yet which is why we have delayed providing the guidance. We're looking for the same intel that you're looking for and we think that's not coming until OPEC meets and possibly not even until early in 15. We are confident that the people we work for will continue to be our customers. We're in a position to sharpen our pencil as they require so they can stretch their dollar further. The trends that makes them money all are in favor, longer, horizontal wells, bigger fracs, more stages of fracs, more chemistry in those fracs and of course, all the existing production in produced water, all of that needs to be treated so that kind of baseline business we have at JACAM and PureChem actually ought to grow in this environment because there's going to be a significant focus on lowering lifting cost. So we think Supercore, Solid Chemistry are patent at H2S scavenger, our ability to blend molecules that we react and build to solve new formations that are getting produced their problems, we think all of those things are going to help us in a market that we're only one or two percent of today.

OK, that's great quarter. Thank you very much.

Thanks.

Again, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Kevin Lo with FirstEnergy. Your line is open.

Good morning fellows.

Hi Kevin.

Hi. Can I elaborate on the Marcellus, I mean in your commentary, you were saying that you, you know, kind of picked up business there and gains market share. First of all, I want to make sure I heard it right in then secondary I guess Chief, you know, Craig give us sense of why that is.

Well, we picked up some work from some customers that change someone else out for us. Few more rigs working there, I think we're pushing about 30 jobs out there Kevin.

Yes.

So we, as people that have known as a long time know at one point we were almost at 50 jobs in the Northeast U.S. We went down into the low 20's and we're back up to close to 30. We've got great talent there. We have provided that marketing kind of made a market for the use of what would traditionally be considered offshore technology. So we run synthetic oils. So we run oil-based muds that are not made out of diesel of distillates but out of synthetic or benign oils that are not a threat to groundwater. So, it's a way to deliver a greener solution in an area that is tricky to drill and under a lot of scrutiny by, you know, nearby land owners and people that have a strong concern of the environment.

OK, that's great. In terms of your CAPEX, is there any update there or is it just the same as what it was before?

Yes, we're going to continue Kevin to look to spend, you know, somewhere in the range of 5 percent of revenue. We're going to be opportunistic in how we spend that. Maintenance capital remains very low in the business. What would the number for maintenance be Craig?

Yes, it's sort of 0.1 percent of the topline. It's a good parameter for that one quarter.

(Inaudible), OK and just in terms of your, you know, can you give us an update on what utilization of your barite grinding facilities right now or give us a sense of how full your facilities are?

Well the barite grinding facility is not built yet. We continue to use third party mills. They're at close to capacity. We own all of the ore that goes into them. Our facility in Kansas would be below 25 percent utilized. We are close to capacity Carlyle. Looking at possibly doing some blending out in Alberta of oil-based mud products to create a little more throughput in Carlyle so it can continue to just make, especially chemicals, that's a very modular facility. It's relatively easy for us to put more tanks to blend in there. We'd probably look to expand what's inside the buildings there. In Kansas, we continue to work towards finishing nitrile and hydrogenation. We think that's a game changer for us when that comes online. Organophilic clay which is discussed that fire for oil-based muds. That part of the Kansas plant was commissioned this summer. And we're looking to add a second shift to that to increase throughput. We've made some improvements in what I'd call our Laverne and Shirley assembly line for solid chemistry in Kansas. That's about doubled throughput and we're looking to add another shift there as well.

Great. That's a great update. Thank you very much.

Thanks.

The next question comes from the line of Elias Foscolos with Industrial Alliance, your line is open.

Good morning. I've got a question just sort of philosophical. If you make an acquisition as you did in Q3, at what level would you change your guide in terms of revenue or your EBITDA? In other words, if you make an acquisition irrelevant to the size, of what point would you do a guidance change and communicate to the market?

Elias, this is Craig, you know, under securities laws, we're required to update our guidance based on any material event that would change that guidance up or down. So we've done an acquisition that we believe has truly moved the needle. We're under requirement to change the guidance and reflect that. Obviously, in a business of our size with many different facets moving up and down all the time, hopefully mostly up and that's been our experience, you know, we have to blend that into the overall decision. So, I don't know, if I can give you a hard and fast answer but the reality is once we see numbers that make sense to us then we will communicate them to the market.

OK. So, you know, and would that be sort of a material revenue thing, EBITDA combination or?

Well, it's the combination, right. We're guiding the market right now where we have for 2014 based on revenue and EBITDA, right. So those are the two metrics that we've been guiding to. So those remain the two metrics and those will be the two metrics that we would be looking to guide the market to that when changes came.

OK. I think that gives me a bit of an idea. The next question has to do with the just the original rule in – or going to back to the rule in, in a corporation, I just want to get my head around the (North Arrow) transaction, it had approximately 100 million losses, is that correct?

So we acquired, when we did the conversion transaction, $58 million of non-capital losses.

58, OK.

Yes. And we've used all of those losses based on the, you know, profitability of the business so long ago. Since you're mentioning that and we have disclosed information in our reporting this quarter, we have received a letter from CRA challenging the merits of the conversation transaction. We are very confident of our tax filing position. To remind people of our history, we actually converted in advance of most (shift) organizations at that time and the reason for our conversion was we were limited partnership structure, not a thrust structure. We were moving into the United States doing acquisitions. We wanted to build the issue of equity to these vendors in United States and under our limited partnership structure, we could not issue one unit or share to a non-Canadian which forced us to do look at conversion transactions ahead of many of our other peers, let's call it. We converted January 1st, 2010 on March 3rd or thereabout of 2010, the federal changed the rules with respect to these conversion transactions. So we actually did all our transaction before the rule is changed based on the rules in place and the motive of the conversion was to issue equity to our U.S. vendors.

So there's no – the losses have been used, there's no future present value of any losses, it's just looking back from everything you've said.

That is correct Elias.

Thanks, OK. That's it for me.

There are no further questions at this time. Mr. Simons, I'll turn the callback over to you.

Well, we thank callers for their time. And we'd like to thank our customers for their business. We're prepared for what looks to be a lower commodity price for people. We understand what that means as a service provider that they need to stretch their drilling in completion dollar. We want to thank our employees for great work. And we're here to build a long term business. We're going to be looking to recruite more high-end talent. We're going to looking to finish out Kansas. And in time, fulfill that plant with production of product. We're happy to take calls from people individually. And we'll look forward when we have enough information, we think to present the market with 15 guidance. Thank you.

Thank you for joining us today. Just concludes today's conference call. You may now disconnect.