Thank you for standing by. This is the conference operator. Welcome to the CES Energy Solutions Third Quarter 2019 Earnings Call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Tony Aulicino, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks 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 third quarter MD&A and press release dated November 14, 2019, and in our Annual Information Form dated March 12, 2019. 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 third quarter MD&A. At this time, I'd like to turn over the call to Tom Simons, our President and CEO.

Good morning, and thank you for joining today's Q3 conference call for CES. On today's call, we'll talk about Q3 results; we'll share progress on our ED 2016 capital allocation strategy; we'll provide our customary detailed operations update and outlook for each of the business lines; we'll further share our outlook for industry, our company and our thinking around capital allocation, CapEx and growth prospects for the business. Tony will give a detailed financial update. We'll take questions, then we'll make closing remarks and conclude the call. In the quarter, we generated CAD315 million in revenue and CAD42.2 million of EBITDAC. The strong free cash flow that generated allowed us to further reduce our credit line from CAD95 million to CAD75 million. We easily funded our modest dividend and spent approximately CAD10 million cash CapEx. We further bought shares and cancelled them to the modest tune of 750,000 shares. We've since picked up the pace on share buying and have further bought almost that amount just since the quarter closed. We plan to take advantage of potential tax loss selling of the stock. We increased working capital a little through the quarter because the port of Corpus Christi will close for five months this winter, so we need to build barite ore inventory in advance of that. The company remains committed to 80/20 16 for the balance of the year. So 80% of free cash flow will be used to reduce the bank line. We want to further de-risk the company. 20% of free cash flow will be allocated to buying back shares. $16 million funds the dividends. The $16 million remains a very low percentage of EBITDAC and free cash flow. We will review the 80/20 16 allocation or free cash flow strategy in the New Year. Our priorities remain de-risking the business, creating value for our equity holders and preserving value for our bondholders. Our free cash flow capabilities makes share repurchase a compelling option at these share price levels. In our 13-year history as a public company, we've returned to shareholders approximately $325 million through dividends and distributions. Our business model supports returning capital to our shareholders while being able to sustain and grow the business. Our business model supports that. However, we will consider all options in the New Year in light of the share price. CapEx remains around $10 million cash CapEx per quarter and $2 million to $5 million at lease CapEx per quarter. Because our manufacturing and logistics infrastructure are far below full capacity, CapEx is mostly rolling stock or trucks. We have added land in Midland to allow continued growth of Catalyst, our Permian production chemical business. For context, catalyst operated on seven acres 3.5 years ago when we purchased the company. Now we operate on 30 acres. I'll move on to operations, and I'll also provide an outlook for each business line as we go through the update. U.S. drilling fluids made a great financial contribution in the quarter. We averaged 117 drilling fluid jobs through the quarter. Today we're operating 102 jobs a day. We see that as a likely activity level through Q4 and potentially right through 2020. We have capacity with our infrastructure, and possible new customer wins that could create upside to that number, but we would need to take market share to expand that job count. We see drilling activity in the U.S. for industry are around 800 rigs with us on approximately 100. We continue to target results-based customers, hoping to win new business by providing better technology and execution, leading to lower overall drilling cost for our customers. The biggest drop in activity for AES has occurred in Oklahoma. That's always been a very competitive market, so lower margins. Now, it's also very slow for the industry. The Northeast is also off a couple of jobs for us. Texas and New Mexico continue to drive the results for AES. At 100 jobs, AES can meet its targeted 15% EBITDA and generate nice amounts of free cash flow. Expansion on that job count would be very financially accretive. Just a shrinkage would reduce EBITDA percentage and free cash flow. The business relies on operating leverage. I see our competitive advantage AES in two lights. For our customers, we lower drilling days, saving the money. For investors, our previous investments in product manufacturing, infrastructure and building the best team in the U.S. mud business all adds up to an upstream service line that generates substantial free cash flow. This business line pays its way within our portfolio of companies. It's not a loss leader for bundled offerings to big oil and gas companies. The North American operators don't want to buy anyways. Baxter and his team continue to lead the U.S. drilling fluid industry in terms of innovation and being a solid business. U.S. production chemicals, Jacam Catalyst saw steady performance through the quarter. We continue to slowly expand with growth coming in the Permian and Rockies. We continue to see higher water cuts in the Rockies, which drives more chemical treatments. The Permian continues to expand for our customers and we're growing in that growing market. As the Permian's horizontals age, we expect water cuts to rise, driving increased treating. We also expect the overall production in the Permian to slowly rise, which will propel growth for us. Burn and his team are working hard to increase our profile within the market to firmly establish us as a Tier 1 chemical supplier. We need that to expand our business with the majors. Our plan for U.S. production chemicals remains to service the customer with a sense of urgency of a small company, with the science capabilities of a big company. That's really the magic formula for the entire company. We continue in the U.S. to push forward with StimWrx, our provider of novel stimulation chemistry. This is a very low capital niche business line that complements our operations and financial model and goals. I'll move on to Canada now. I'll start by expressing our dismay with what we see is terrible public policy in Canada towards oil and gas. We applaud the Alberta and Saskatchewan governments for their leadership on this critical matter. We remain committed to Canada with our business and we will be advocating as such. The path Ottawa has us on is wrong, and we're with our customers, our employees and our shareholders, and taking the fight to our opponents. Ottawa, Quebec and Victoria are not putting Canadian oil and gas on lowdown mode. Canadian drilling fluids managed to average 53 jobs for Q3. Today we're at 58. At this level, we dipped below our targeted 15% EBITDA level, but because our infrastructure is built, we can still generate free cash flow at these levels. This is a low CapEx business. We see Q4 looking like Q3 with reduced activity over Christmas, as is traditional in Canada. Q1 looks to be busier, but overall, industry likely only runs 125 to 140 drilling rigs on average in 2020. We need pipelines so our customers can get real pricing for their production. LNG and oil pipelines will be powerful catalysts for Canadian drilling fluids. Like AES, Canadian drilling fluids relies on operating leverage. I'll move on to PureChem, our Canadian production chemical business. Under new leadership, we continue to see solid top-line results, but more importantly, better EBITDA margins and free cash flow generation. Morale is up, the pipeline to win new business is strong and much improved processes around purchasing, manufacturing and pricing are all yielding solid results. Thank you to Ken and Dave Burroughs and the entire PureChem team for the great work and dedication to meeting the customers' needs while also generating acceptable financial results in a tough market. We see substantial upside for PureChem as pipelines and LNG happens. We grow as well as age, and does production expense. StimWrx in Canada continues to help customers turn underperforming wells into cash flowing assets. As production is allowed to grow in Alberta, StimWrx will benefit. Sialco continues to perform very well. It's our reaction chemistry business based in Vancouver. We in-source, so self-supply complex products through Sialco into all of our operating lines, and also continue to expand the non-energy sales Sialco generates. CLEER is focused on new technologies to clean and recycle water. It's keeping its nose above water in a very tough Canadian market. We remain committed with CLEER that need increased activity or a technology breakthrough for CLEER to be able to meaningfully financially contribute. We're in a position to play the long game with CLEER. We're convinced that money can be made around water and environmental matters. Our overall outlook remains positive because at current activity levels for industry, CES generates substantial free cash flow. We see modest production growth likely in the Permian for industry, which we can benefit from. We see drilling fluid competition needing to knock off that business practice and actually generate cash flow for themselves. We see that as a positive for CES. We see our biggest competition and production chemicals looking to spin out of its parent company next year. That's possibly a positive for us. They won't be looking for either a low share multiple or declining financial results. Our other major production chemical competition is twice stock price increases in the last 15 months. That's also positive for CES. Most importantly, our customers now spend their own money on drilling and completions and maintaining their production. We believe this will mean that only best-in-class suppliers will survive and thrive in the long term. I'll now turn it over to Tony.

Thanks, Tom. As Tom mentioned, Q3 represented another consecutive quarter of strong alignment with our financial areas of focus, including free cash flow generation, prudent CapEx, margin improvement, debt reduction, working capital optimization and improving returns. The company generated $316 million of revenue in the quarter and $42.2 million in adjusted EBITDAC, representing 13.4% of revenue and a third consecutive quarterly improvement in adjusted EBITDAC margin. U.S. revenue increased slightly in comparison to Q3 2018, generating $227 million or 72% of total revenue. U.S. results were underpinned by improving market share in our drilling fluids business, despite falling industry rig counts in the quarter, and also benefited from increased activity levels across our production chemicals business, as the company was able to capitalize on its strategic investments completed in 2018 in key infrastructure and operations and attractive markets including the Permian and the Rockies. Canadian revenue of $88 million or 28% of total revenue for the quarter represented a decrease of 21% year-over-year. This decrease is primarily attributable to the persistent industry challenges, which resulted in a decline in drilling activity as industry rig count decreased 31% and CES's operating days decreased 36%. However, year-to-date, the Canadian drilling fluids business has succeeded in maintaining very strong market share at 36%. PureChem's production chemical business model proved very resilient, despite government mandated production curtailments as Canadian treatment points decreased by only 1% year-over-year. And perhaps more importantly, operational efficiencies in that division, which commenced in Q1, continue to be realized throughout the year into Q3. During Q3, CapEx spend was $9.5 million, which represents a 64% reduction from the investments made in Q3 2018. Primary expenditures in the quarter related to supporting increasing production chemical activity levels and associated head count in the U.S. We continue to expect CapEx in 2019 to be at or below $50 million and include remaining key strategic investments, primarily in the Permian Basin. In the quarter, we also successfully completed an amendment and 2-year extension to our senior credit facility, providing us with additional availability on our U.S. facility, along with improved pricing on amounts drawn. As at September 30, we had a net draw of $75.3 million on our senior facility compared to $161.5 million on December 31, 2018 and $94.8 million on June 30, 2019. This continued decrease was driven primarily by strong operational free cash flow generation in 2019, partially offset by opportunistic share repurchases through our NCIB program. In Q3, we repurchased 764,000 shares at a weighted average price of $2.03 per share for a total amount for the quarter of $1.6 million. The company renewed its NCIB program effective July 17, 2019. Since inception of our NCIB programs, the company has repurchased a total of 9.4 million common shares and at an average price of $3.21 per share for a total amount of $30.2 million, representing approximately 3.5% of outstanding common shares as at the initial July 17, 2018 inception date. Having completed significant CapEx programs in 2018, we continue to focus on increasing free cash flow generation and improving return metrics through execution in key markets, prudent CapEx, improved working capital efficiencies and opportunistic margin expansion. Throughout 2019, we continue to expect that EBITDAC will materially exceed the sum of cash expenditures on interest, taxes and CapEx, allowing for surplus free cash flow that may be allocated to reduce debt, pay our dividend and continue our share buyback program. Operator, at this point, I'd like to turn it over to you to open up the line to potential questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Aaron MacNeil with TD Securities. Please go ahead.

Good morning, all. Tom, in your prepared remarks, you mentioned your expectation for Permian water production volumes just to show some growth in 2020 as water cuts increase over time, and even if it's just anecdotally, how are you thinking about the change in contributions from Jacam Catalyst in 2020 versus 2019? And just to understand the order of magnitude, do you think that this growth can offset your expectations for a decline in AES?

I'm reluctant, Aaron, to put too hard of the stake in the ground, but if I was a betting man, I'd say that 2020 probably is down 5% or 10% bottom line results for us over '19. Jacam Catalyst is growing; PureChem is starting to make appropriate returns against their revenue. But we probably need the rig count to be over 800 or we need some nice wins and some of the big customers we don't have rigs with today. So I think it's down a little just because the industry is a little less active. And any pick-up close is that 5% or 10% delta pretty quick.

Okay. And then I guess just moving over to U.S. drilling, you gave some guidance on expectations for the 800 average rig count, but in the context of your customer base today without winning any additional customers, do you think that AES will outperform the broader market, perform in line or underperform, based on the conversations you're having with customers today?

I think we'll outperform. We're making more money than our other mud customers because we've got a better cost of goods. We've got more efficient infrastructure, we're sized right for people and we've got innovation or technology they don't have to offer that works. Are we going to go up 5% in market share? I don't think so, Aaron. We need to lead with price. But we're still hanging in there at high 70s in the Permian. And our new wins are happening in the Delaware as people look to push that North, those wells potentially get harder to drill and that's good for the mud company. And we've got infrastructure that could easily support 20 or 30 more jobs in that market and remain very efficient for the customer. About what we expect for Jacam and Catalyst. We bought more land in Midland because we expect to park more trucks. We're not in need of more analytical equipment, but we're going to build a 10,000-square-foot lab building basically in front of our office and lab complex in Midland as part of our effort to showcase our capabilities to the majors because we do some work for them. We need to do a lot for them. And they're coming in late compared to the independents, obviously on ramping up production, and we want to be in on that. So we need to project that we are Tier 1, and then we just need to use the body of work we have as evidence that we're better than the competitor.

Okay. And you had mentioned parking some more trucks given your expectations for some growth in Jacam Catalyst. Do you expect to maintain your 2019 spending levels or do you think it'll be higher, lower? Any early glimpses of what 2020 CapEx could look like?

So Aaron, we continue to believe that we're going to track at or below the $50 million cash CapEx that we talked about this year, and we provided that in Q4 of 2018 and we'll do the same thing for next year during our Q4 MD&A in call. I think at this point, it's safe to say that that $50 million is probably the higher end of what we think we're going to spend, but as Tom said, we need to continue to monitor the end markets in Q4 and early Q1, and at that point, give you a more reasonable estimate. But I think at this point, $50 million is the number to think about. And don't be surprised if we end up with a number that's below that for our expectation next year when we come out with that estimate at Q4.

Okay. And then even with the 5% to 10% decrease in the bottom line performance, there's a good chance that you'll have paid off all or a whole bunch of the line by this time next year. And I know you had hinted at re-evaluating that 80/20 16 plan in the new year, but can you share any updated views on what you might look to prioritize even just conceptually, and is it as simple as shifting to reducing the balance of the 2024 notes or do you have something else in mind?

It's to de-risk the business against a commodity shock. It's to de-risk the business against losing a big customer. We only have one over 10%. But we owe to the business to do that. We've made a huge step that way. We've drop the line by over half. I think the next easiest way to create value for equity holders and security for bondholders is to buy shares. So we're going to look hard at that, Aaron.

And following up on some of the other elements, Aaron, we have a gift. We have a very strong free cash flow generating business and we've continued to show that Q1, Q2, Q3, we're going to continue to focus on that, and that gives us the flexibility. And with regards to paying down debt, yes, we do talk about the bank line, but absolutely if we had the opportunity to buy back some bonds, that is obviously higher cost debt. That's the way we look at deleveraging as one of the options that Tom referred to and we would absolutely look at that option if it makes sense to us as well.

Okay, great. Thanks for taking my questions. I'll turn it over.

The next question comes from Greg Colman with National Bank Financial. Please go ahead.

Morning, Greg.

Greg, your line is live.

Hey there. Do you have me?

Yes, go ahead.

Sorry, I'm still figuring out how phones work. Thanks for taking the questions. I wanted to start by poking around on margins. It's great to see them tick up in the quarter. It was a little bit, but they did tick up, and I think we're back to close to 2-year highs now. Into year-end, we anticipate a normal seasonal role for your EBITDA margins, given the U.S. Thanksgiving, Christmas budget exhaustion. Is that consistent with what you're thinking or could we see either of something outside of that, either them hold in, which I think is unlikely, or the more rural sort of more than we've seen historically just given what's going on with the US. -- let's say reluctant to spend outside of operating cash flow from a producer standpoint?

Yes, let me start off from a financials perspective, Greg. So obviously with the rig count down to where it is, we're currently on 102 rigs in the U.S. with AES versus the 117-rig average in Q3 and 128-rig average in Q2. So obviously you should expect a lower contribution in that business, which is a big part of our business. But however, it is a very strong business, and as I said and alluded to in terms of capital allocation considerations, we're going to do the same thing for the business in AES in particular. It's a great business with great people that run it, and that has always punched above its weight. We are not going to be looking at reducing costs that don't make sense in the mid- to long-term. So if we do have to realize a bit of a margin erosion in the quarter, as the company in AES figures out what the new environment looks like, we're going to keep those high quality people, and if it requires us to take it on the chin a little bit in margin in Q4, and even Q1, we will do that. But I think you're your initial comment was bang on. Quarter-over-quarter, absolutely we should see a reduction and frankly that's already -- we're starting to see that came out in initial reports from the research community.

Yes, Greg. I'll build on that. The reason to say carry 20 people at AES through the winter is the success we're having with this new mud system in the Delaware. We're dropping costs and dropping days, and then the words of our VP and BD in the Permian, he said in 40 years it's the first thing he seen that somebody can't copy and that it's real and measurable. So we're reducing incidences of loss circulation, drilling in the Delaware and intermediate section. We're reducing the need for diesel dilutions to keep the weight down to avoid the losses. And most importantly, we're able to break that system at the end and recycle the brine and the diesel. So we're going to keep people because we think that's a proposition. But some of the big operators that we're not on location with, they're going to give us a shot with that. And so we think we can put those people back to work.

Got it, that makes sense. Sticking with the margin commentary. Looking at a little bit longer term, in the past, we've had some healthy discussions and debates about sort of critical EBITDA margin levels, 15, kind of be a bit of magic number. I don't think anybody's in sustaining that level in the short term, given the challenging macro environment. But Tom, do you have an idea -- challenging macro-defining it as 800 rigs in the U.S., 125 to 140 in Canada. Tom, do you have an idea as to what we would need the market to look like for sort of that 15% to be an achievable full year average in EBITDA? What kind of operating environment do you need to have for CES to get to those levels?

1,000 rigs in the U.S. and 200 in Canada. And maybe less if we continue to have success with this mud system in the Delaware. And if get the pickup in the Canada is to support LNG, we're killing it on these deep plays, Greg, as you well know. So we don't even maybe need that much of a pick-up in Canada. There is so much operating leverage in those businesses that an extra 20 jobs for both business units can really power charge the results. And then we're going to go back to that location after its fracked and treat it. So production growth in the Permian and LNG in Canada, I don't think it takes a lot, but it does take a little or it takes some big market share gains for us.

I appreciate the frankness on those macro levels. We'll keep an eye out. Moving over a little bit to the balance sheet on working capital, I think in prior quarters you've charted net neutral working capital in the back half of 2019. Q3 was pretty close to zero. But the new factor you threw in there that I guess is new to me was the Corpus Christi port shutdown so you want to [indiscernible]. Should we be looking for Q4 working capital to be around Q3, i.e., call it not really plus, minus anything? Or should we look for a big harvester drop?

So we typically see an increase from Q3 to Q4 for couple of reasons. Number one, what we're expecting in terms of the trend and quarter-over-quarter activity, and perhaps more importantly, our focus on working capital optimization I think this year versus others, you should expect flat quarter-over-quarter. And if we continue to do what we've been able to do over the last few quarters, you could see flat to potentially down quarter-over-quarter.

That's great to hear. Okay, and then lastly from me. Just on the CapEx side, not to beat a dead horse here. I know Aaron touched on a lot of it, but just some clarity. You've got that $50 million bogie out there as a 2019 $50 million spend or less. I think based on year-to-date you're at $34 million and I think we're all kind of looking for less of that, but if we look at your CapEx net of dispositions, you sort of -- the net capital is only more like $20 million. So I just want to be clear that we're all talking about the same numbers here. When you talk about $50 million, that would be relative to $34 million year-to-date, i.e. up to a maximum of 15 in Q4 not up to a maximum of something like $30 million in Q4 because your net numbers more like 20?

That's correct.

Okay, great. And then just on that, if we're looking into next year and thinking of up to $50 million or less, you have divested of about $50 million of assets year-to-date in 2019. Is there much left there to go? Are there non-core asset sales that that could take your net number to materially below that or should we be thinking about that $50 million or a bit less?

So you should be still thinking of $50 million or a bit less until we give you the update. And again, as I told there and don't be surprised if it is a bit less in terms of an estimate. We regularly dispose of assets and that's typically us putting some of the rolling stock that we used to support our business, i.e., vehicles out for disposition or disposal and it's a regular cadence, and it's actually part of our maintenance CapEx that we use to keep those vehicles on the road, and when they're getting close to being milled out, we'll bring them in and we'll sell them. And that's where the majority comes from in terms of proceeds from disposal of assets. That number that you quoted for this year is a little bit higher than we typically see. So I wouldn't expect it to be that same size. But when you think about the amount of cash that we spend on CapEx, that number will be in that $40 million to $50 million range and we're thinking about where it's going to be for 2020 and we'll update you in Q4. But for now, use that number. And that number does not include those disposals that you saw this year, and I would argue that that number is a little bit higher this year than it will be next year.

Yes, we could be running a truck auction over here, Greg, if they were all in one place. You drive them, you depreciate them, you replace them and you sell them.

Simple as that. All right, guys. That's it for me. Thanks again.

Thanks a lot, Greg.

[Operator Instructions] The next question is from Keith MacKey with RBC. Please go ahead.

Hi, good morning, guys. Just one question for me. Tom, in your prepared remarks, you mentioned the competitive behavior of some of the larger mud companies. This is something that we think has been happening for quite some time. But have you noticed a change or intensification of that competitive behavior over the last quarter as the U.S. rig count has slid?

Well we're watching the commentaries of the big integrated service companies to see how they talk about their business offerings. And then we compete with them every day on the street. What we're seeing is that their new bids that they're putting in, they're raising their prices. And what we're hearing them say on their calls is they're not going to have loss leader business lines. They can afford to subsidize the customer. And how they got into that position in the first place is they took a sales approach where they bundled everything for the big operator, and before it became a technical service, they allowed drilling fluids to become a loss leader to help them get pumping equipment out or expensive down-hole tools. And I think that they're getting the same pressure we're getting: make money or don't be in the business. So I don't think it's changing overnight. But we see the results of the guys that segment or how big businesses, and those businesses are not making any cash flow. So we think we understand why they are behaving differently, and for the customers that think we do a better job but the premium for the value-add is too high, I think we can pick some of that work up when we cost the same as the other guy. We don't need to raise our prices to generate cash flow in these mud businesses. We just need enough volume.

Got you. Okay. So just to be clear then, in what you're seeing in the competitive space, competitors have been actually raising prices and not slashing prices and say coming after some of your key clients?

We see mom and pops working for results that if they brought their account into their office once in a while, they'd quit doing. We don't think we can prevent that ever from changing. But the bigger corporate competitors need to do what we need to do, and that is turn some cash. So we're seeing the bigger competitors raise prices or even look at divestiture of the business because they allow the people that could maybe turn it around to leave or they push them out.

Got it. And just on the divestiture side then, would it potentially makes sense or be viable to buy a competitor business as opposed to having to organically win competitors? Or how are you thinking about that currently?

I'm thinking that if they're selling it, it's because it's not paying its way and we're not issuing one share for anything that doesn't pay its way. And they're not selling it if it's higher margin business. So I don't think we're interested. Maybe there is the odd asset that could drive cost to goods down or give us some infrastructure in a good place, but we're pretty built out everywhere and we don't need to add low margin sales.

Got it. Understood. Thank you very much.

The next question is from Ian Gillies with GMP. Please go ahead.

Good morning, everyone.

Good morning, Ian.

With respect to some of the strategic initiatives in non-oil and gas I guess areas of focus, are you able to provide any goalposts of maybe come even 2021 what percentage of your business you would like that to represent or -- I mean where you'd like to be there?

If we could ever get it to 5%, it becomes interesting. Maybe you look at ways to expand that through M&A, but we're not at that point, Ian. It's a low-volume, high margin space, whether it's cosmetics or industrial or household goods. The, probably the big volume areas would be agriculture, municipal water treating, and we continue to poke around at those markets. If we get a hit on technology we can make big volumes in Kansas and we can make smaller volumes in Vancouver, where much of that stuff originates.

And the, you've kind of hit around on the last set of questions and with mine, but I mean, historically, you've been pretty active in quite successful in the M&A market. Are you may able maybe able to qualify what that market looks like right now relative to when you've been active previously and acknowledging that you have some room to grow at your Kansas facility in some of the prior comments you made?

It's I mean it's never say never. But it's not an area of focus. We think we can organically grow the business. We can organically shrink the share count and further derisk the business, and those are our priorities. We don't need infrastructure, Ian anywhere that we need to be in. We need to work on adding relationships of trust and filling these plants, because there's more margin in the second half obviously of the volume in the first half.

And with respect to adding customers in West Texas, I mean what are some of the game factors you've realized is trying to get them with these guys and where you, I guess you think you need to improve to start winning some of these larger super major customers.

We need to work for their competitors that have better drilling for completion metrics than they do. And play a hand in that which we are and then we need to advocate for that. So we got into a couple of very big independence in the last six-months in the Permian, specifically in the Delaware and we're working hard on the super majors that look to be ramping up as the independence, get a little slower. So we're going to get to work with technology and execution and what they're looking for is to be as good as the best operators with their capital and have certainty of supply of high quality products. Our mill in corpus, our reaction plants in Kansas in Vancouver, our distribution in Midland, our mega mud plant in the Delaware all of those things are the things that the super majors are evaluating when they consider you, our ISO certified in manufacturing working to have all of the lab to be that way. We think we check the boxes for them. We give them what an independent gives them in service and sense of urgency but the problem solving capabilities of a big company.

Got it. Last one for me. Tony, I just want to reconfirm but that $39 million of G&A in Q3, that's a reasonably good run rate moving forward?

Correct.

Okay, perfect. Thanks very much guys. I'll turn it back over here.

The next question comes from Elias [ph] from Industrial Alliance. Please go ahead.

Just want to focus a bit on some of the things I've heard from some other service companies that they're seeing potentially are relatively hard stop in some sort of activity in the second half of Q4. There is a number of factors that play in here versus whether they're doing work for independents versus majors and whether they're drilling related or completion related, I know it's a myopic question because it's short-term versus, I would agree your 800 rigs kind of long-term next year, but just to not be surprised, are you seeing anything along that line or not?

Traditionally, and that's not an uncommon event where people have exhaustion in their budgets. Traditionally, the hard stop is on completions, you want to drill the whole land, you want to drill the whole high-spec rig and you're not going to shut production and at the end of the year to save the drilling costs. So if you're hearing that. My guess is, it's probably completions type work, which is a very small percentage of our business. We're kind of half upstream, half production and the vast majority of the upstream drilling. So, we think there will be sort of a break in Canada at Christmas because we always observe that the US doesn't seem to shut the rigs down at Christmas. I think the 100 stays for the quarter, in the US, plus or minus. And I think 50 to 60 in Canada and a little less for 10 days in December. And I think production takes a long, I think the hard stop that people can leave a well to be completed after the New Year.

Great. That's what I was looking for. And thanks very much for that color.

The next question comes from Josef Schachter with Schachter Energy Research Services. Please go ahead, sir.

Thanks very much, and congratulation on the decent quarter in a pretty tough business.

Josef, I'm sorry, I missed your conference a month ago . I was stuck in the Toronto airport for a day.

No. Your partner did a great job, and we appreciate you being there and waving the flag and letting the story come through to the client base. The first question I've got is, on the debt. You paid down $19 million in the quarter, $85 billion year-to-debt-to-date run rate on cash flow was 130, 140. What's the target in 2020 and 2021 or you want, again to get below 2 to 1. What's your comfort zone where you get off at 80, 20 approaches that you have right now? In terms of NCIB dividends and the 80% down, what is your target to get to $250 million? Is there a number or is there a percentage that you're looking at?

And it's a good question and there as you can appreciate a whole bunch of moving pieces. But the biggest moving piece was the one that we sort of over the last three quarters, which is what level of free cash flow can this enterprise generate. So we have a really good feel for that and obviously sort of you. And you just rattled off some pretty good estimates. And then the next pieces, at what point do we get comfortable making a decision if at all to, we're away from 80-20-16. On the one hand, we can wait until we get to a certain point in time, but much more realistically, we're going to, we're going to regroup and take a look at what the free cash flow capability continues to be for the business. What we believe that will lead us to. And in terms of a metric, it's not really the debt amount. It's really the leverage level that we look at that we feel gives us a point between those two guardrails that we feel comfortable making or tweaking the 80-20-16, if we choose to. And very specifically, if I had to be put on the spot for a number, we probably be around that two times level that I think we'll get to over the next year or so. And on that the thing that makes a tricky in a good way on the low extreme of the guardrails is the fact that as you know by the very nature of our business model when things are flat year-over-year or more importantly when they soften year-over-year. We actually harvest a whole bunch of cash from working capital. So that gets us very comfortable, allowing us the flexibility to tweak that ratio that Tom talked about, that will always be revisiting. But in terms of leverage levels probably around that two times that we can see in the midterm that we're comfortable with. And then like I said, given the nature of our business, we have that additional cushion because if things are flat or down. We actually see an improvement on the debt side.

Hey, Joseph. I'll jump in here and say, we're going to meet as management and Board in January, once we see what our customers are going to do next year, what Aramco does with their IPO and OPEC does with supply, what happens with TMX and LNG Canada, the variable for the change that could lead us to be a little more debt averse is that our customers have gone from spending 130% of cash flow for 20 years to spending about 80%. So we have a duty to make sure that the balance sheet for our business reflects that shift. I don't think we over lever the business in the first place in the context of customers outspending cash flow but seems like that change to cash flow driven businesses that we work for is permanent or semi-permanent and the if that's the case, then we continue to pay down some debt and feel our way through our customers' expectations to spend money. We know that there is a lot of money to be made for long-term equity holders by buying and canceling stock and we're keeping our eye on that.

Yeah, now I agree with you and then it also if there is more caution in 2020. It just sets up more powerful up leg once people see the deliverability issues from the US shales is not as high as expected. Two more questions for me, one of the Permian side if this new mud system, you've got for the Permian Delaware is giving you market share and your competitors don't really have a product for it. Is this something that you can change to the Eagle Ford or to other basins, the Montney or in Canada, the Duvernay in Canada and create a higher margin product for yourselves?

No, the great thing about mud business as much as the industry says drilling is manufacturing. It's not you're screwing a hole in the ground and all you have to do is drive around North America to see that geography changes and so that system, Josef is a slumber would call it basin specific, it works in a certain type of geology and it's not required in other areas. It's the fact that it's not if there was one size fits all eventually everyone would yet and the customer would bid it down.

No, I was just wondering if there was something that you were doing new here that you could use for a period of time until your competitors do create something especially for the tougher basins. But I pick up just saying there. Lastly, with the announcement by a Minister Savage, of opening up conventional drilling, do you see that as a potential balance to your Q1 revenue forecast or your business forecast for2020?

Yes. We do. We've already seen products come in. We're seeing some well capitalized operators looking like they're going to put some money to work. So, that move by the government looks to be helping services a bit in the near term.

Okay. And the last one for me is just popped in my head with the TC decision the interruptible where, hopefully prices are firmer in the summer. Are you seeing anybody on the business side? Sort of talking about more activity, given their hope that we're not looking at $0.20 gas of a more like a $1.50 gas in the summer and buy new put together a plant business plan for activity in the summer?

Too early to say. Our Canadian customers are getting very financially strong by being hamstrung on growing production. So I think the that [ph] growing. We just don't know when it opens up.

Okay. Thank you so much for letting me on this stuff and congratulations again for decent quarter, a tough business. Thank you.

Thanks, Joseph.

This concludes the question-and-answer session. I would like to turn the conference back over to Tom Simons, President, and CEO for any closing remarks.

While in conclusion, the quarter allowed CES to further de-risk by reducing the bank line by another CAD20 million. It allowed us to buy three quarters of a million shares and a comfortable it allowed us to comfortably fund our dividend on our cash flow. So we're not using debt or equity issuances, as our industry has long been known for to fund dividends or fund CapEx. We funded the 10 million cash CapEx or a cash flow as well. Going forward, we're going to remain conservative around our balance sheet, will buying cancel shares and will fund our modest dividend out of cash flow. All of that is only possible because of our people running great business lines. We thank our customers for the business, and look forward to creating value for equity holders, while preserving value in the bond. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.