Ladies and gentlemen, thank you for standing by, and welcome to the Enerflex fourth quarter and year-end 2021 results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to turn the call over to your host, Stefan Ali, Vice President, Investor Relations, Strategy. You may begin.
Thank you operator, and good morning, everyone. Here with me are Marc Rossiter, Enerflex's President and Chief Executive Officer; Sanjay Bishnoi, Enerflex's Senior Vice President and Chief Financial Officer; and Ben Park Enerflex's Vice President, Corporate Controller. During this call, we'll be providing our financial results for the three months ended December 31st, 2021, a brief commentary on the performance of our three business segments, and a summary of our financial position. Today's discussion will include forward-looking statements regarding Enerflex's expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. For more information, please see the advisory comments within our news release, MD&A, and other regulatory filings. Approximately one hour following the completion of this call, a recording will be available on our website under the Investors section.
During this call, unless otherwise stated, we'll be referring to the three months ended December 31st, 2021 compared to the same period of 2020. We'll proceed on the basis that you've all taken the opportunity to read yesterday's press release. I'll now turn the call over to Marc.
Thanks, Stefan, and good morning, everyone. To call 2021 a transition year would be an understatement. We entered the year with a very low backlog, no vaccinations, and the pervasive global uncertainty in the energy markets. The advent of vaccines has since led to a broad reopening of economies and robust demand recovery for oil, natural gas, and natural gas liquids. Although our customers are continuing to exercise discipline in capital spending, good projects with strong long-term returns tend to get funded, and supportive fundamentals have led to demand for everything from gas compression, to gas processing, to electric power solutions. Enerflex's fourth quarter results benefited from this momentum, delivering our highest quarterly revenue since the beginning of the pandemic. We continue to see healthy demand across each of our global regions, as evidenced by the strong Engineered Systems bookings of over CAD 320 million.
The recovery has been broad-based with meaningful upticks coming from each of Canada, U.S.A and our Rest of World segments. We have been especially pleased with the increased bidding activity in Latin America, which was hard hit by COVID-19 and was expected to take much longer to recover. During the quarter, we commissioned a system to reduce flare gas and CO2 emissions in Colombia. Our teams did a good job of gaining margin traction for new bookings, though the overall market remains very competitive. In addition, we continue to navigate supply chain constraints that began to emerge in mid-2021. While these challenges have been manageable, we expect that our teams will be dealing with inflationary pressures on materials, freight costs, and delivery delays throughout 2022.
Our energy transition team, formed in early 2021 and led by Patricia Martinez, continued to progress opportunities to meaningfully decarbonize the energy sector. Our deep expertise in modularized process solutions critical to the energy transition is the primary reason for our successful partnering with customers in this space. In addition to participating in several studies, we have executed multiple MOUs, project development term sheets, and engineering projects for strong counterparties who are seeking lower carbon solutions via CCUS, renewable natural gas, hydrogen, and electrification. Broad momentum within the energy transition space will require governmental policy that supports meaningful infrastructure spending on low carbon solutions. Nonetheless, certain customers are already exploring these opportunities and committing to either pilot projects or, in some circumstances, permanent facilities.
For instance, in 2021, we were awarded the design, engineering, and fabrication of a hydrogen compression solution for a green ammonia plant, which, when commissioned in 2023, will be the largest of its kind in North America. We also electrified tens of thousands of horsepower in the compression space and continue to see strong demand for electrified solutions. More recently, we've entered into an arrangement with a major Canadian producer for a post-combustion CCUS pilot project, which has the potential to take the project site to net zero. While the energy transition landscape is still in its infancy, the early success of our team should help to solidify Enerflex's position as a key partner for any customer who's seeking to decarbonize operations. Our aftermarket service business performed as expected, gradually recovering from the industry downturn despite the operational and travel restrictions caused by the pandemic.
In 2022, we expect that our teams will have to navigate region-specific inflationary wage pressure and the same supply chain constraints as Engineered Systems, particularly regarding to the price and availability of OEM parts. Our Energy Infrastructure platform, formerly known as Rentals, demonstrated its resilience throughout 2021. Fourth quarter results benefited from improved revenues and high utilizations from our U.S. Contract Compression fleet of approximately 400,000 horsepower that maintained an average utilization of 89%. Our fleet's performance was enhanced throughout the year from operational efficiencies captured through instrumentation and telemetry upgrades, which are maximizing uptime and value for our customers. In our Rest of World segment, we secured a 10-year extension on a BOOM asset that has been operating since 2016.
Renewals are particularly attractive to Enerflex and our shareholders as the extended revenues come with little or no new capital expenditure. Future quarters will also benefit from another large asset that we were awarded in early 2021 that commenced operations in early January 2022. Collectively, these assets reinforce our strategic goal of generating long-term stable cash flows. Overall, I'm very proud of our team's efforts and success throughout the year to keep our assets performing and our customers happy. Lastly, subsequent to the quarter, we announced our intention to close on an all-share acquisition of long-time industry participant, Exterran. Since our announcement, we have progressed matters pertaining to regulatory, capital structure, and integration planning.
Upon closing, this transaction will immediately create a true Energy Infrastructure company, and Enerflex remains focused on delivering on the strategic rationale of the acquisition, including increasing recurring pro forma gross margin to approximately 70% of total, striving for a sustainable cost structure through synergy realization, and providing better capabilities to our global client base. I'd like to thank all of our employees, customers, and suppliers for helping us execute on our strategy in 2021, and I look forward to the year ahead. I will now turn the call over to Sanjay Bishnoi to review our financial results.
Thanks, Marc. Quarter- over- quarter, Enerflex saw an improvement in both revenue and operating margin, driven mainly by higher Engineered Systems revenue, improved gross margins on certain Engineered Systems projects, and lower SG&A. Compared to the prior year, operating income was lower due to competitive margin pressures on Engineered Systems projects that we discussed in our third quarter earnings call, the recognition of large finance leases at the end of 2020, and lower government grants received. Offsetting these decreases were improvements in Engineered Systems revenues on stronger opening backlog, reduced SG&A, and the recognition of finance lease for the 10-year BOOM extension that Marc discussed. From an accounting perspective, this finance lease results in some one-time revenue recognition and recurring revenue that will be recognized over the next 10 years.
SG&A costs of CAD 40 million decreased from the same period last year as a result of lower share-based compensation and decreased profit share expense. During the quarter, as a non-cash item, the company derecognized CAD 45 million in deferred tax assets related to unused tax losses and other deductible temporary differences in Canada. Generally, deferred tax assets are recognized for all unused tax losses, carry forward tax credits or other deductible temporary differences if it is probable that they can be utilized against taxable profits. Management regularly assesses the unrecognized deferred tax assets to determine what portion can be recognized in response to changing economic conditions or recent events. During the quarter, it was determined as unlikely that sufficient taxable income will be available in the Canadian region to offset these unused tax losses prior to expiry.
It should be noted that a portion of our corporate overhead costs that cannot be passed down to the countries in which we operate, as well as our interest and debt-related expenses, all reside in Canada and offset income generated by our Canadian business and contribute to our outlook on recovery, recovering these Canadian tax losses. Enerflex continues to manage working capital, including realizing inventory into projects, the balance of which has decreased by approximately CAD 40 million versus the comparative period. From a capital allocation perspective, we directed CAD 17 million towards Energy Infrastructure, the majority of which funded the organic expansion of our U.S. Contract Compression fleet. We also invested CAD 13 million towards the construction of natural gas infrastructure assets, which will be accounted for as a finance lease. Our 2022 CapEx is premised upon the closing of our transaction with Exterran.
As disclosed with our transaction announcement, expectations for pro forma 2022 expenditures in U.S. dollars are approximately $200 million-$220 million for growth CapEx, $200 million-$225 million for work in progress, and $40 million-$50 million for maintenance CapEx. Our near-term focus is on continuing to preserve the strength of our balance sheet. Enerflex has done a great job of maintaining conservative leverage throughout the cycle, exiting the quarter with a bank-adjusted net debt- to- EBITDA ratio of 1.0 to 1 , compared to a maximum ratio of 3:1 , while maintaining substantial undrawn credit capacity and cash on hand.
Enerflex's Board will continue to evaluate dividend payments on a quarterly basis based on the availability of cash flow and anticipated market conditions, yesterday declaring a dividend of CAD 0.025 per share to be paid on April 7th, 2022. This completes the formal component of the webcast. Additional details can be found in our February 23rd press release. We will now be happy to take any questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Aaron MacNeil with TD Securities.
Hey, morning, all. Thanks for taking my questions. I've got a couple on the energy transition initiatives. I guess first, seems like you're getting good traction there. Can you give us any goalposts on materiality in terms of, you know, what's in the backlog or what outstanding bids might look like? Second, you know, what's your range of your typical market share on any given type of project? Like, are you a small portion of the total capital, or are you a meaningful portion? Finally, you know, it seems like most of the stuff you're working on in this arena is through more of a capital sale or Engineered Systems type of business model. Is it fair to assume that you wouldn't entertain owning and operating this type of equipment until, you know, the operations or economics of these types of assets are better understood?
I know I've asked a lot, so
Yeah. You've asked a lot, Aaron. This is Marc. Thanks for asking, though. The equipment that we booked in Engineered Systems that we talked about in the prepared remarks, they're between, say, CAD 10 million-CAD 30 million worth of Engineered Systems bookings. They're in the hydrogen space. They're in the non-fossil fuel space and the RNG space, et cetera. The big prize is CCUS projects. You know, those will be meaningful projects. We think that a capture plant for a pre-combustion industrial source could be CAD 30 million-CAD 60 million, maybe more. We know there's a lot of those sources throughout Canada and the United States. In the U.S., the 45Q tax credit does make a lot of those projects profitable.
I think there's several infrastructure developers that we're working with in the Midwest of the United States, where we are really looking to build those capture plants. To the degree that we could close two , three, or four of those, that's definitely material money. You know, finally, I don't know market share, to be honest with you. I know that we've got good relationships with the major infrastructure developers in the United States that are looking at CO2 trunk lines and capture systems. It's very new. Finally, the comment about sales versus ownership, we definitely want to be owners of these assets.
I think that our balance sheet isn't big enough to own every capture plant in the United States, not by a long shot, but there's definitely situations where our initial thought with the customer is, "Please let us build, own, and operate this so that we could generate long-term sustainable returns for our shareholders." That being said, if people wanna own it and operate it themselves, sometimes these plants will be inside the fence of an existing facility, not as easy to get somebody else to own that. They may engage us as a turnkey contractor or an equipment supplier. We'll essentially do what our customers want, but we'll be pushing the idea of asset ownership early as much as we can.
Understood. You said in the release that you've gained some traction on margins. You know, understanding that it's gonna take a few quarters before we see it in the results, just hoping you can sort of quantify the magnitude and maybe share your overall views on market tightness. I guess I ask in the context of, you know, several multinationals announcing intentions to grow Permian production in 2021. You know, kind of just wondering what you think, you know, associated gas demands could be on either, you know, Engineered Systems segment bookings or, you know, practically your practical ability to increase utilization of your Contract Compression fleet beyond.
Well, we're closely reaching almost maximum theoretical utilization of the fleet. You know, collective wisdom on the fleet is once it gets to 90%, over 90%, you're kind of at max 'cause you need some stuff in reserve for your good clients. As far as margin traction goes, yeah, we don't give out numbers. I would say we've been improving booking margins from several to a handful of points. I'm gonna be kind of vague for you, but you know, definitely that's one of our top priorities for 2022 is making sure that we get the best possible margins that we think we deserve. We think we're one of the best purveyors of this equipment.
We feel that our equipment is the best when it's in service, and we feel like we should get more margin for that equipment because the value it generates for our customers. The competitive dynamics is throughout 2021 kept a lid on that. When we say meaningful traction, it's several to a handful of points margin that we've seen increase just in the last quarter.
Okay, great. That was all for me. I'll turn it over.
Our next question comes from Tim Monachello with ATB Capital Markets.
Hey, good morning, everyone.
Morning.
First question just around, I guess, what you're seeing for demand in terms of bookings and bidding activity in the beginning of 2022. Are you seeing an uptick that I guess would be consistent with, I guess the optimism around the macro outlook, generally speaking in North America?
The pipeline is good. It's the best way I can explain it. You know, the geopolitical unrest, uncertainty doesn't help from that point of view, but the macroeconomic fundamentals in the bigger basins that drive Engineered Systems sales, Permian Basin, Montney, Middle East, and Latin America for us, the fundamentals are all there. The pipelines are good. We'll see if the geopolitical events, you know, that are going on today put a lid on those things or not. It's something we'll be watching pretty closely.
Okay. I guess the occurrence of finance lease structured BOOM contracts has been increasing, which makes sense under the IFRS 16 guidelines. As we go- forward and we see more renewals. Is it likely that most, if not all of those renewals will be accounted for as finance leases?
Yeah, I would say it's likely, Tim. Like, we're gonna have to evaluate them one by one. I think it's likely, and it goes to how we underwrite these projects where we depreciate, you know, the balance of plant, over the life of the original contract. Whenever you're getting a renewal, you've got a very low book value on the balance of plant. You know, I think that fact alone makes it likely, but we're gonna have to look at them one by one.
Okay. Is there any renewals that you know of that are coming up in the current year? Can you help us frame just sort of the size of the renewal picture this year?
Yeah. I think our you know our big renewals are behind us. I don't think that we're anticipating anything big in the go-forward picture. I think that with the renewals that we've made the BOOM assets that are on the balance sheet are in really good shape in terms of contract tenure. They're all under you know really long contracts now.
Okay. Got it. I guess once the Exterran business rolls in, there'll be a little bit more renewal activity, I would imagine, just given the contract book in that regard. You guys had a pretty big cash windfall in the quarter related to deferred revenue, which I'm guessing is just milestone payments on some of the projects you have or are going to deliver this year. Can you speak a little bit just about, I guess, the duration of those cash flows that are getting pushed forward?
I think, Tim, you're referring to we had a big uptick on cash on the balance sheet at the end of the quarter. And that was very much related to just the team doing a really good job on collecting cash and you know, being mindful of when we pay our vendors. It was largely a working capital you know, performance by our teams around the world. I don't think that is necessarily sustainable, right? Like, you know, we saw a large amount of cash come in. We're not gonna be seeing that, you know, going forward. I think we'll, you know, probably see that normalize a bit, but that was the underlying driver of the buildup in cash.
Okay. 'Cause I saw there was about an CAD 88 million swing in deferred revenue in the quarter.
Yeah. It's predominantly just, you know, as industry conditions improve and as our backlog improves, we've got a little bit more deferred revenue that's on the books.
Okay. I appreciate the details, guys. I'll turn it back.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key. Our next question comes from Cole Pereira with Stifel.
Hi. Morning, everyone. Wanted to start on margins. I mean, you gave some good color there. Sounds like we've seen a bit of an improvement, and you have line of sight for a couple more basis points. I'm just kinda wondering, you know, what's the line of sight in the Engineered Systems business to maybe get back to a more normalized level of, call it, 20%-30%? I mean, could it happen by year-end? Is it more of a 2023 event, or is there just too much lack of visibility at this point?
Cole, your 20%-30% number, we're not gonna comment on that particular thing. Like I said to Tim a few minutes ago, it's tough to really predict where margins are going. We're trying to get as much as we possibly can. One of the things that kept the margins low in 2021 was a compression-driven recovery in Engineered Systems, and compression is the segment of Engineered Systems that typically comes with the lowest margins. To the degree that international and gas processing and downstream and petrochemical business formulates a larger portion of the backlog, and those projects are all more complicated. They're more complicated, they're a little bit riskier, so they come with higher margins.
The degree that compression is a little bit de-emphasized in the backlog and those other businesses take up a bigger portion, you'll see the margins go higher. We don't give out numbers on where that's going to be. When you talk about normal margins, it's been a few years since we've had any stretch of time that I would call normal. It's so fluid, you know, from that point of view. It's very difficult for us to provide any public guidance on that front.
Okay. Fair enough. That's good color anyways. A strong Canadian Engineered Systems booking number in the quarter, but obviously segment margins do remain a bit challenging there. I'm just wondering, can you add some color on how you see the outlook for that business?
Canada. Well, the outlook is good. You know, the part that's challenging for us when we think about Canada as a market is that the operators are excellent. Our customers are good at what they do. The regulatory environment is challenging to say the least. Just when the macroeconomic backdrop opens up with good egress and good fundamental condensate prices and crude oil prices, there are regulatory challenges to getting projects done. You know, we had projects in the quarter that got put on hold. They were either booked or they're in the pipeline that got put on hold by the Blueberry First Nations challenges in that area. Just when the market's getting some momentum about putting good infrastructure
In the field, everybody has to stop, and that's not helpful. I wish I had a crystal ball to say Canada is gonna be a big growth area for us. There's just too much uncertainty. We hope that it is. We feel like we've got a very advantaged footprint in Canada. We feel like we've got a good position in the market for our core products, our AMS business and Engineered Systems and our ability to do turnkey projects. We think we lead the pack in a lot of those areas. The degree that Canadian producers put infrastructure spending in facilities, we hope that'll be really beneficial for us. Again, it's more of a regulatory concern today than any of the macroeconomic fundamentals.
We are really excited about this pilot plant for CCUS we're doing with a major Canadian producer. That's an example where people are like, "Listen, the regulatory is uncertain, but we're gonna go do stuff anyways because we feel quite certain about what the future of our company looks like. Let's do a pilot project to do CO2 sequestration post combustion," which is a pretty big deal. We're really excited about doing that pilot with that customer. I wanna highlight that, but sort of back to regular good old-fashioned gas processing, gas compression, increasing production of gas and liquids. Canada has everything they need to do all that. The only thing that it doesn't have is real clear regulatory framework, both on conventional development and decarbonization.
Okay. Got it. That's helpful. Thanks. Just kinda coming back to your comments on carbon capture. I mean, as we think about remaining hurdles is, you know, what needs to happen next? Is it more of increased clarity on the regulatory angle, or is it more so just working out, some of the project specifics?
Canada and the United States and Rest of World are three completely different conversations. In Canada, anybody doing a carbon capture project today, first of all, very few people are spending significant money doing it because there's no value in carbon. You know, outside of the Alberta Large Emitters project, which a lot of our customers don't fall under, nobody's gonna do any projects until there's price on carbon for emitters that aren't part of the TIER program. People are lining up their toy soldiers to make it work. You know, they're getting people like us to do studies. They're trying to figure out the size of the stuff, the CapEx. They're looking. A lot of people have submitted proposals to Alberta government to secure pore space, which is really the first step.
Once they secure pore space, then once there's a price on carbon, that people can bank on, then they'll start doing these projects. There are a lot of dominoes need to tip over before people start sanctioning large industrial projects in Alberta. We're in the middle of a lot of those, and we want to be. We wanna be part of the solution. We think it'll be good for our customers and our shareholders when more clarity comes around. In the United States, the 45Q tax credit, which is currently in law, that pays for post-combustion carbon capture with a modest return. It is enough for infrastructure companies to sanction projects and start building facilities. That is where the majority of our real bidding work is happening.
We would love to be able to talk about bookings in subsequent quarters for carbon capture facilities in the U.S., but we're not predicting any or providing any guidance to that degree today. So 45Q is good. The extra incentives that are in the Build Back Better plan would be even better if those come through. Canada has a long way to go, and we've been waiting for a long time from the federal government to come out with low carbon fuel standards and come out with some kind of a tax credit or a reimbursable thing for carbon capture and sequestration, but it's just nothing's coming quickly. It's frustrating for us, and I know a lot of our customers that are ready, willing, and able to start doing these projects.
Okay. Great. Appreciate the color. That's all for me. I'll turn it back. Thanks.
Our next question comes from Michael Robertson with National Bank Financial.
Hey, good morning, all. Appreciate you taking my questions. Just had a couple follow-ups here quickly. Start with the Engineered Systems margins. Good to see the bookings and backlog continuing to trend up. Taking a sort of step back and looking at the broader space, do you see your own and the industry's sort of excess capacity getting soaked up? And how do you sort of see that moving forward?
We do. I mean, we're busier in our shops in Calgary and Houston than we were a quarter ago. We can't speak for our competition, but we believe that they are as well. How that stays for the subsequent quarters is not something we predict or disclose, but the macroeconomic fundamentals are positive. The way that producers talk about developing production in the Permian and the Montney Shale is positive. We would hope that capacity utilization stays very high going forward, and that would lead to better margins for all industry participants.
Got it. I appreciate that, Marc. Just one more from me. I suspect it's rather minimal, given that you guys sell globally and, you know, looks like the bulk of the rest of the world segment is focused in LATAM and Middle East. I was just trying to get an idea of what, if any, sort of exposure you guys have with sales into Russia and/or Ukraine.
Well, just to make it clear, it's not material. We don't see the Russian invasion of the Ukraine as a material event for Enerflex from a particular sales and revenue streams that we have. It does destabilize the world and one thing that business loves is stability and predictability. We're not minimizing the potential impacts of this event. With respect to the business we do in Russia or the Ukraine, it's minimal and not something that we would have to talk about. Really, we stopped doing business in Russia after they invaded the Crimea in 2014. At that point in time, the Canadian and U.S. governments, which is where a lot of our you know, we have to follow those laws very closely.
They pretty much said, "Stop doing business in Russia," and we did. We're following the letter of the law and the spirit of the law. Really since 2014, we haven't spent any real business development efforts trying to grow our businesses in Russia. You know, nothing really there for us. It's just we are gonna watch very closely any impacts this has on global oil and gas spending.
Understood. That's great. Great color, Marc. Thanks a lot. Appreciate it, and I'll turn it back.
I'm not showing any further questions at this time. I'd like to turn the call back to Marc for any closing remarks.
Thank you, operator. Since there are no further questions, I'd like to once again thank you for joining us on the call. We look forward to giving you our first quarter results in May.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.