Good morning, ladies and gentlemen, and welcome to the Enerflex third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Following Enerflex's prepared remarks, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Stefan Ali, Vice President, Strategy and Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us on our third quarter 2022 earnings conference call. With me on the call today are Marc Rossiter, President and Chief Executive Officer, Sanjay Bishnoi, Senior Vice President and Chief Financial Officer, and Benjamin Park, Vice President & Corporate Controller. During today's call, we'll touch on highlights from our third quarter 2022 results, comment on the performance of our three business segments, and provide an update on the Exterran acquisition, which we closed on October 13th. Unless we state otherwise, the results referenced today represent stand-alone Enerflex performance only. Before I turn it over to Marc, I'll remind everybody that today's discussion will include non-IFRS and other financial measures, as well as 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 refer to the advisory statements within our news release, MD&A, and other regulatory filings, all of which are available on our website and under our SEDAR and EDGAR profiles. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. With that, I'll turn it over to our President and CEO, Marc Rossiter.
Thanks, Stefan, and thanks to all our listeners for joining today's call. This is an exciting time in Enerflex's history, having closed the Exterran acquisition just four short weeks ago. Operationally, the timing of the acquisition is very good considering the strength of today's global macro natural gas environment. Natural gas is an increasingly important component of the global energy mix, with energy security and decarbonization at the forefront. Enerflex is ideally positioned with our technical capabilities, expanded offerings, and larger geographic footprint. Before I speak to our integration efforts and what lies ahead for Enerflex, I want to briefly address Enerflex's stand-alone third quarter results as they were solid and represent current momentum of our industry. During the quarter, we recorded sequential improvements across all key financial metrics, including expanded margins in each of our product lines.
Our Engineered Systems bookings were nearly CAD 350 million and included an impressive CAD 100 million of energy transition projects, which I will speak to momentarily. Despite producers continuing to exercise capital restraint, our manufacturing capacity is tightening, which has allowed us to capture expanded margins on new bookings and grow our backlog to CAD 884 million at period end. Together with Exterran's product sales backlog, our combined pro forma backlog of CAD 1.5 billion represents excellent visibility into our revenue-generating capabilities next year and it de-risks our near-term de-leveraging plan. Our U.S. segment continued to be a leading contributor to our business performance as Permian Basin activity and growth in LNG exports drove demand for our products and services. Notably, our U.S. Contract Compression fleet reached a record-high average utilization rate of 95%.
We performed as expected, given the large portion of our business in Latin America and the Middle East that is recurring in nature. We are progressing construction of the large natural gas infrastructure project that was awarded last year in the Middle East and expect to bring that facility online in the fourth quarter. While we have seen year-over-year improvements in our Canadian business, we expect activity to increase once a mutually beneficial resolution is reached between the Blueberry River First Nations and government of British Columbia regarding future resource development in the province. As I alluded to earlier, Enerflex continues to expand its energy transition business in earnest. We are seeing significant demand for our energy transition solutions as our customers look to reduce their corporate emissions and as we jointly drive the global decarbonization agenda forward.
During the third quarter, we secured approximately CAD 100 million in energy transition bookings, which we'll collectively capture and permanently sequester over 1 million tons of CO2 per annum once the projects are in operation. For several decades, Enerflex has been a trusted partner in delivering these types of modularized integrated solutions to serve this growing market, and I look forward to continuing to report on the successes of our energy transition business over the coming quarters. Now turning to the Exterran acquisition. While it's only been four weeks since we closed the acquisition, we have been busy integrating the two organizations. With operations in over 100 locations in more than 25 countries, we are quickly realizing the benefits of our highly complementary product lines and geographic footprints.
I'm pleased with the progress the teams have made so far as we focus on delivering our expected annual run rate synergies of $60 million as quickly and efficiently as possible. Currently, we are on track to capture about half of the expected synergies within six months of closing and the balance over the course of 12 - 18 months, improving our free cash flow position and the underlying profitability of our business. We are also taking the time to learn and understand Exterran's cryogenic and produced water technologies in greater detail as we incorporate them into our broader portfolio. This includes completing three Exterran projects in the Middle East that are underway, two water facilities and one cryogenic natural gas facility. One of the water facilities became operational just this week, and the other two projects will be completed in 2023.
I'll now turn it over to Sanjay to touch on the financial highlights from the quarter.
Thanks, Marc. Enerflex saw continued strength across all business segments and product lines during the third quarter, given the supportive natural gas supply and demand dynamics at play. This morning, I will briefly touch on the key financial figures from the quarter before turning to the new debt capital structure we established as part of the Exterran acquisition and what our deleveraging strategy looks like moving forward. Reflecting increased business activity, Enerflex's top-line revenue of CAD 393 million increased for the sixth consecutive quarter. Revenue increased by approximately CAD 20 million or 6% sequentially and resulted from a larger opening Engineered Systems backlog, a record high average utilization rate on our U.S. Contract Compression fleet, and favorable currency translation effects from a strengthening U.S. dollar.
Our gross margin also continued to trend upward in the third quarter, expanding to CAD 79 million or 20% as a percentage of revenue, while the lower margin work awarded during the slowdown is now largely complete. Gross margins for all three product lines improved from the second quarter. With these improvements in revenue generation and margin expansion, Enerflex recognized an Adjusted EBITDA of approximately CAD 53 million during the quarter, CAD 8 million higher than the second quarter of 2022 and CAD 20 million higher than the third quarter of 2021. Enerflex recognized a net loss of CAD 33 million during the period. Notwithstanding the positive impacts of strong business performance, rising interest rates drove a CAD 48 million-dollar non-cash goodwill impairment for our Canada segment. This goodwill predominantly related to goodwill recognized when Enerflex was spun out of Toromont in 2011.
Lastly, on our third quarter financial results, we invested CAD 46 million in Energy Infrastructure capital expenditures and work in progress related to finance leases. Of this, CAD 27 million was directed at our rental assets and CAD 19 million was directed at the large natural gas infrastructure project underway in the Middle East that Marc referred to earlier. Now, turning to the new debt capital structure that we put in place in October as a part of the Exterran acquisition. Through the refinancing, we established approximately $1.5 billion of total credit capacity for the company, which includes $700 million three-year secured revolving credit facility, $625 million of aggregate principal amount of 9% senior secured notes due in 2027, and $150 million three-year secured term loan facility.
Upon close, we used the net proceeds of the notes and the term loan facility along with an initial draw on the revolver and cash on hand to extinguish the existing Enerflex and Exterran notes and credit facilities. Today, the company's net debt balance is approximately CAD 1.36 billion, which is in line with our prior expectations. That brings me to our near-term deleveraging profile, which remains a top priority for Enerflex. Over the next several months, as we fund the completion of our in-flight projects, our net debt balance is expected to peak by early 2023. We expect to reduce our bank-adjusted net debt to EBITDA ratio to below 2.5x by year-end 2023, as in-flight projects come online and our CAD 1.5 billion combined backlog is processed through the P&L.
Thereafter, Enerflex's free cash flow will grant the flexibility to allocate capital between further debt reduction, shareholder returns, and disciplined growth with the objective of enhancing shareholder value over the long term. Finally, Enerflex remains committed to delivering a sustainable dividend to our shareholders. Last night, the board declared a dividend of CAD 0.025 per share, which will be paid on January 12th, 2023 to shareholders of record on November 17th, 2022. With that, I will hand it back to Marc to provide some concluding remarks.
In closing, the outlook for Enerflex is as strong as ever. Having just completed our transformational acquisition of Exterran, we are ready to harness the robust macro natural gas environment by leveraging our increased scale, geographic reach, and ability to serve a broader customer base in key natural gas growth regions across the globe. Our asset base of nearly 2 million horsepower compression and over 25 natural gas infrastructure facilities is designed to be stable and low risk with its diversity of geographies, counterparties, and underlying commodity drivers. Our near-term priorities, integrating the two organizations and deleveraging as quickly as possible, will increase our ability to create significant shareholder value as we continue to deliver on our vision of transforming energy for a sustainable future. With that, we are happy to take questions.
Thank you. To ask a question, you will need to press star one one on your phone. Please stand by while we compile the Q&A roster. One moment please for our first question. Our first question will come from Michael Robertson of National Bank Financial. Your line is open.
Hey there. Thanks for taking my questions. Congrats on a solid quarter. I just had a sort of follow-up on some of the opening commentary. I believe, Marc, you said that you guys were expecting on being able to extract roughly half the synergies in the coming six months. I was just wondering if you could provide some more color on sort of the, I guess like the low-hanging fruit versus some synergies that will take longer to extract. I assume some of the stuff that you expect to be able to do quicker might just be sorting of redundant positions or facilities. Any thoughts on that would be helpful.
Yeah, sure. There is a group of people that were dismissed from the counterparty pretty much on day one. That was their executive management team primarily and some senior leaders. There's board costs that we're able to avoid right out of the gates. In the first six months, it's largely redundancies in people.
Got it. Okay, that's great. I'll jump back in the queue.
Thank you. One moment please for our next question. Our next question will come from Keith Mackey of RBC Capital Markets. Your line is open.
Hi, good morning, and thanks for taking my questions. Maybe if we could just start off, I know you've got a pretty healthy amount of projects you're currently working on the Energy Infrastructure side. Maybe, Marc, if you could just talk a little bit more about what you're seeing in the bid pipeline for Energy Infrastructure projects. Is there anything that you're, you know, currently active on or what does the market look like for new opportunities?
The pipeline is pretty quiet right now, Keith. We're not working too actively on any particular investments, and that's primarily because our number one priority is de-leveraging the business.
Got it. No, thanks. Thanks for that. The second question would be, just on the new energy type bookings, maybe you can give us a little bit more color on what you booked for that CAD 100 million in bookings this quarter. Do you have a target for kind of how you see this industry or this segment unfolding as far as what type of financial impact the new energy could make to the combined Enerflex in the next, you know, call it one to two years?
The projects are carbon capture projects, where we're supplying, you know, modularized integrated carbon capture facilities. They're in the United States. They're in Canada. The projects in the United States are largely funded by 45Q and the Inflation Reduction Act. In Canada, projects are more pilot in nature with some premier oil and gas companies that are looking to get a head start on post-combustion carbon capture. That's the nature of them. They're equipment sale contracts. It's important to note, I think that these, there's a small component in the CAD 100 million that I would call pilot projects, but the vast majority are operational, commercial, industrial scale carbon capture projects. They're not experiments, they're not trials, they're not pilots. They're Enerflex, please build a plant because we want to start sequestering CO2 right away.
I think for a lot of people that are paying attention, especially to the Canadian space, that is not being heard anywhere in Canada, that people are actually doing projects that they have a vision to getting this stuff in the ground in 12-24 months. I think that's one of the benefits of our global reach, is that we're exposed to different government frameworks that are moving at different paces to get these CCUS projects going. We're definitely a big participant in Canada, but it's much slower as there's not a clear government framework for making these projects successful. I think that the Canadian projects will take years, a number of years, maybe up to 10 years to fully be realized, whereas the projects in the United States are happening right away.
We're really excited about our footprint in the U.S. and giving us access to those projects. These projects come with next to zero technical or execution risks. It's things that we've been doing for decades, almost 150 projects in total. We're really happy to be chosen as a partner in these projects, especially that one where we're doing 450,000 tons at a single facility. That's a very exciting project for us. As far as the size of the prize, I believe in the past we've said this could be a CAD 200 million per annum revenue business. I could see a window to that.
I mean, CAD 100 million for the bookings in a single quarter. I think a CAD 200 million dollar average run rate from an Engineered Systems point of view near term is not at all being too aggressive on that front.
Perfect. Thanks for that color. Maybe finally, one for Sanjay. Thanks for the current net debt number. Maybe if you could just sort of run through what you expect for the rest of the quarter as far as cash and CapEx and ultimately where you think that gets you to, net debt-wise closer to the end of the year. I know you mentioned you expect net debt to peak in early 2023, but just sort of looking to get a little bit more goalposts on what we should be looking at or targeting for the end of the year, that'd be helpful.
Yeah, sure, Keith. You know, look, I think we sort of gave you the latest and greatest data we had, which I think was November 9th. Is that the date that we tagged, I think? It's, you know, I'd say there's not a whole lot that we materially expect to change between November 9th and the end of the year. I do expect the balance will move up a little bit, but I don't expect it's gonna be any material movement.
Got it. Thanks. That's it for me. I'll turn it back.
Thank you. As a reminder, to ask a question, you'll need to press star one one on your phone. One moment please for our next question. Our next question will come from Tim Monachello of ATB Capital Markets. Your line is open.
Hey, thanks everyone. First question is to follow up on the synergies target and the integration. I'm just wondering if and when you guys will be looking at potential to, you know, consolidate the footprint, if there's any more upside to that $50 million U.S. figure that you stated.
We're looking at it right now, and that's a part of the integration effort that we're working on. If there is rationalization of geographic footprint, we'll be communicating that in subsequent quarters.
Okay. Anything you've learned through the early stages of, you know, you've been doing pre-integration work up until the deal closed, but as the deal closed, I'm sure you got more access to facilities and data. Is there any learnings that you've seen come through?
I mean, there is. Definitely with full access to all the data, Enerflex, you know, Enerflex people and all of our new teammates are definitely getting to know how each other does business. There hasn't been any significant, you know, really significant positive or negative learnings. It's a business that we understand, so everything we see, once we sort of translate it into the numbers and the language that Enerflex management is used to seeing, it's a pretty traditional business and no big surprises.
Okay. There's one line in the MD&A just talking about that you guys are looking at the reporting segments and evaluating how you might report them going forward. I would have thought that they are fairly analogous, but maybe there's something that I'm missing, so I'm curious what the gives and takes in that discussion are.
Yeah. Tim, this is Sanjay. You know, we're currently looking at it. We'll probably roll out some more formal guidance when we talk about Q4. But you know, as you're aware, you know, some of our businesses have just gotten bigger. Like our Middle Eastern business is bigger. Our Latin American business is bigger. It just begs the question, how should we be reporting? You know, we don't see a wholesale change. We still think we're gonna stick to geography being the primary variable by which we segment the business. But we are thinking about, you know, how do we break it out to provide a little bit more transparency.
Oh, I see. Okay. Maybe adding another geography or a little bit more granularity around the Rest of World segment.
Yeah, those are the questions we're currently evaluating.
Got it. Okay. I'm curious if you can provide a little bit of an outlook on how demand is shaping up for natural gas related Engineered Systems products. 'Cause you get $100 million worth of bookings in CCUS, which means we would've seen a decrease in U.S. bookings around natural gas. Is that a function of you know, reduced demand timing? Or is there an element that maybe you guys are passing on some projects because you don't want the working capital drag or you're trying to de-leverage?
Tim, I don't think that our pipeline of opportunities would reflect any decrease in demand for compression and natural gas processing. If you wanna call that our traditional ES business, it's quite robust.
Okay. That's all for me. Thanks a lot, guys.
Thank you. Again, to ask a question, please press star one one on your phone. One moment please, as we compile the Q&A roster. As I see no further questions in the queue, I would now like to turn the conference back to Marc Rossiter for closing remarks.
With no further questions, I wanna thank everyone for joining today on the eve of Remembrance Day in the Commonwealth and Veterans Day in the United States. I'd like to thank all of my Enerflex teammates that served in uniform. We'll be thinking of you tomorrow. We look forward to connecting with the investing community in the new year to discuss our full year results and our first quarter of integrated reporting.
This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.