It's back.
Yep.
Talking on the mic.
Got it.
Okay. All right, everybody, I'd like to introduce our next presentation here at Planet MicroCap Toronto, powered by MicroCapClub. Now presenting Mike Buker, PHX Energy Services.
All right. Thank you, everyone, for taking some time to hear our story. PHX Energy Services Corp, we are a directional drilling contracting company. I will quickly explain what that means. Often, I find people hear the term drilling, and they think drilling rigs. We are not a drilling rig contracting company, but we do work with those companies. What happens is, our customer is the oil and gas company or the operator of a well. Think Exxon, Oxy, Conoco, Shell, Paramount, et cetera. They hire a rig contractor, names like, in Canada, Precision and Ensign Drilling. In the U.S., it might be H&P, Nabors, et cetera. Then they hire a directional drilling company like ourselves. Our job is to steer the well, these are oil and gas wells, from vertical to horizontal, we drill a curve.
Now that often people say, "Well, how can that pipe bend around a corner like that?" Keep in mind, we are talking about 200 m of depth here, or roughly 600 to 700 feet. Once we get horizontal, this is the formation of interest that our customer wants us to drill through. They are trying to get as much exposure to that formation as possible. These would be names like, you might have heard the Montney or the Duvernay or the Spraberry in the U.S. Once we get horizontal in that formation, we are drilling as far as the customer would like us to horizontally to get the maximum amount of exposure. That distance varies from, say, 1,500 m to 6,000 or 7,000 m, depending on the acreage that the customer owns. We provide this equipment here at the bottom, and that equipment does a few things.
It tells us where we are. We have a tool down there called a measurement while drilling tool. It sends information up to surface so we know where we are downhole, and then we have a couple of different methods for steering the well. We have people that are, they live on the well site during the course of the drilling of the well, and their job is to monitor the tool health, make sure everything is running as planned, and then steer the well on the desired path. We have been in business for 31 years. We are Calgary-based, TSX listed, but a little bit unique in our space. We generate 75%-ish of our revenue in the U.S. The Permian Basin in West Texas and Eastern New Mexico, it is the largest concentration of drilling rigs in North America. There is roughly 275 active drilling rigs just in that one basin.
There is about 210 active drilling rigs in all of Canada, just to give you some context. The interesting thing about the Permian Basin is all of the customers that are drilling in that area are extremely focused on performance. They are very driven to do. In our industry, people like to say, "We want to drill the next well faster than the last well." Suppliers like us that can help them do that are going to win, and they are quite happy to pay us a premium if we can save them a lot of money. That is a pretty unique feature of the Permian Basin in West Texas. Just a quick sampling of customers, some interesting facts along the bottom. 2025, we drilled almost 13 million m across operations.
Operations look like roughly 40 to 50 active jobs per day in Canada and 50 to 60 active jobs per day in the U.S. We have a very small international operation running in the Middle East with a partner. Then, of course, the typical customer for us is large to super major multinational oil and gas companies. Our biggest customers currently are Exxon, Oxy, Shell. Just a little reference on our industry as a whole. The directional drilling industry is really divided into two tiers. We've got roughly 35 to 36 competitors across all of North America. The total addressable market for our business is active drilling rigs. It's about 800 active drilling rigs today. Roughly 200 in Canada, 600 in the U.S.
35 to 36, depending on the day, competitors, but there's only really six or seven competitors that we compete against in what I call tier 1. To be a tier 1 directional drilling provider, you have to have proprietary equipment that is performing at a very high level. You really can't buy off-the-shelf technology and perform at the level required to keep customers like Exxon happy. You have to have something interesting that you're developing in-house in terms of reliability, speed, efficiency. There's a lot of data being accumulated downhole. We have to get that up to surface very quickly. You have to drill very quickly, well after well after well. It's become factory-type drilling today. You also have to, of course, focus on relationships. That's always been a big piece of our business. We're an expensive service, comparatively speaking, on the drilling rig.
Typically, the drilling rig is the most expensive cost for our customer. Directional drilling is number two. What's become really important over the last few years is the ability to pass audits. In order to work for companies like Exxon or Oxy or Petronas, we have auditors coming into our shops in Calgary and Houston on a regular basis and combing through health and safety, quality, the equipment that we're using to fix the tools that are going out to their rig. They want to make sure that we're doing service and repair on those tools effectively to make sure that the tools don't fail. Worst case scenario for a directional drilling contractor like us is we're drilling a, let's call it a 4-mile horizontal well. To give you a little bit of an idea.
A typical well in the Permian Basin in West Texas, we're about 11,000 feet or 3,500 m deep from surface down to the formation, and we're drilling roughly 3 mi to 4 mi or somewhere in the range of 5,000 to 6,000 m horizontally. If we're down 3,500 m and we're drilling out 4,000 m and all of a sudden our equipment fails, that's a bad thing because now we have to stop drilling. The customer has no choice but to stop because they don't know where they are, and they have to pull all of that equipment out of the well bore, change it out and run back in. That's going to cost probably two days of rig time at CAD 120,000 a day. It puts a strain on the relationship. Reliability is key to be a tier one provider.
Speed, efficiency, essentially helping that customer drill fast is the key and good things will happen. That is really how we have grown. If you look back on the history of the company, we entered the U.S. market in 2002 at essentially zero market share. We slowly crept that up. Today we are running around 10% or 11% market share in the U.S. So of those 600 active rigs in the U.S., we are providing drilling services on 60. We have about a 22% market share in the Canadian market. So on any given day we are running between 100 and 110 active full service jobs. I am just going to jump ahead a little bit. Here is a bit of a close-up on the technology. I want to spend a little bit of time talking about this piece of equipment here.
It is called a rotary steerable tool, and this is the newest, latest piece of technology that has entered our space. There are two ways to steer a well, the traditional, what we call a bent motor, and the newest version is a rotary steerable tool. This tool has pads at the bottom and imagine this tool is continuously rotating and the pads are applying pressure on the formation to steer the bit, as we are continuously rotating. So, this is a much better, faster way of drilling than the traditional method of using a bent motor. Now why that is important, we are currently the second largest provider of this technology in North America behind Schlumberger A typical non-rotary steerable job for us, we are charging about CAD 15,000 a day for that.
If you add the rotary steerable tool into the mix, we run all the same equipment, we just screw this tool onto the end of the equipment. The day rate goes up to about CAD 35,000 or CAD 40,000 a day. So the customer is getting a big improvement in performance and they are quite happy to pay that extra day rate, because we are saving them enough rig time in order to justify the expense. This is a big growth driver for us. We have enjoyed four years of record revenue in a time period that our total addressable market has shrunk by 30%. That has really been a function of adding these rotary steerable tools to the mix. So today, about 20% of the 800 active rigs in North America are using this technology. Between ourselves, Schlumberger, Halliburton, Baker Hughes, that number is going to increase.
We think we will get to 30%, 35%, 40% over the next few years. So our goal is to continue to capture as much of that growth in that rotary steerable space as possible. We will be releasing our Q3 results next week. When you look at the overall market in our business right now with increased WTI pricing that we have seen because of the conflict in the Middle East, our U.S. customers are quite flush with cash and they are going through budgeting cycles right now. I think it is safe to say there is going to be an increase in the rig count, especially in the Permian, once these big customers get through their budgeting and get into 2027. We are also seeing a lot of optimism in the Canadian space, which is something that we have not seen for a long time.
Pipeline talks, LNG, we're probably going to see between one and two million barrels of oil, increased oil exports out of Western Canada over the next 5 - 10 years. In order to pump that heavy oil out of Fort McMurray, you need a lot of condensate, and condensate comes out of the gas market. Our view is that we're going to see an increase in both the gas drilling and oil drilling in order to keep up with the demand for the product on the future. I think from a macro perspective, things are certainly lining up and looking a lot better than they did just a couple of years ago in Canada. Lastly, our return of capital strategy. If you go way back in time in the early 2000s, we were a trust, a dividend-paying trust. Of course, the rules in Canada changed.
We then shifted to a dividend-paying corporation. We were paying dividends right through till a pretty severe downturn in our industry in 2015. We suspended our dividend at that time. We got through 2015 and 2016, which were some tough years. Got into 2017, we had some extra cash. We started buying back our own shares, through the NCIB program. If you look from 2017 through to today, we bought back about 28% of our outstanding shares. Then we also reinstated that suspended dividend in 2020, originally at CAD 0.025 per share per quarter and we've since increased that five times up to its current CAD 0.20 per share per quarter or CAD 0.80 per share annually. This all is part of our, what we call our return of capital strategy, where we've committed to get 70% of excess cash back to shareholders. Just some quick numbers.
At CAD 0.80 per share annually, we've got 46 million shares outstanding. That's about a CAD 36 million commitment on the base dividend. Then that 70% number's rough 2027 expectations. We have three analysts that cover us. They would have us generating around CAD 70 million in excess cash. 70% of that is roughly 50. CAD 36 million of that goes towards the dividend. There should be a little bit of extras for continued participation in the NCIB program. We're pretty opportunistic when it comes to share buyback. Or as we did in 2025, we didn't really participate in the NCIB. We were concerned about what was going to happen to the price of oil. We got through to the end of 2025. We had some extra cash, and in March of this year, we declared a CAD 0.20 per share special dividend.
In full year 2026, we actually paid five CAD 0.20 dividends for a total of CAD 1 in dividends. This is a really important piece of the strategy for us is rewarding shareholders, and we've been doing that for a long time. I think I might end it there and see if there are any questions. Yes, sir.
Just curious, the NCIB, what sort of share price were you paying back in 2017 and so on? Where did you buy the shares back?
The question is what was the share price for the NCIB. If you go way back in time, I want to say the very first purchases were in the CAD 2 range.
Yeah.
The average is probably CAD 8, somewhere in that range. CAD 6 -8 . I do not know exactly off the top of my head, but yeah.
I am just curious, what is your cost of, how much were you borrowing money at?
6%.
6%.
Yeah.
If you are doing it entirely with six, can you start saving-
It is right at 6%, yeah.
If you start to stack up being in profit as opposed to expensive, would you have 10% or 19% shares?
Well, it depends what your perspective is. We are constantly wrestling with this.
Yeah.
Our board is of the mind currently that we have all the levers to pull. One of the tricks in our business is you have to invest in new technology.
Yeah
or you're going to become irrelevant very quickly.
Yeah.
Sometimes that's a hard thing for shareholders to get their head around is, often people will say, "Well, you've spent all this CapEx." We spend roughly CAD 70 million -CAD 80 million This year, call it CAD 80-ish million in CapEx. There must be a point in the future where you can just stop spending and then just harvest. But the truth is, in our business, if you're not continuously upgrading equipment and getting more equipment to continue to grow, you're going to become irrelevant very quickly. We've got the CapEx component is priority number one. You have to make sure that you're spending that money wisely. Then we've got all the other levers. Make sure debt is low. We've got a management team that's been together for 30 years, and we've been through lots of ups and downs. We don't like a lot of debt.
Debt can be extremely detrimental to an oil field service company at the wrong time. So keeping debt, we have some internal metrics that we use, keeping debt low, and then rewarding shareholders comes in after that to make sure that we're doing that. Yes.
Thanks for the presentation, Mike. Two questions for you. You talk about this relatively new rotary device where 20% of the market now are paying, you said, CAD 35,000 versus CAD 15,000-CAD 20,000 a day. On your end, what your take is on that by utilizing that tool with Chevron of the world. Can you just loosely quantify what that saves them by spending that extra CAD 15,000-CAD 20,000? How much, I am assuming time equals money. Maybe you can quantify that.
Sure.
Second question is pertaining to grabbing more market share. As far as M&A part of the playbook, is that something that you guys are discussing as well?
Sure. The first question is, the benefit to the customer when it comes to that rotary steerable technology. Maybe I will jump back, because this is a really important piece of our strategy. As a general rule of thumb, you are going to drill twice as fast with one of these in the ground as without. Now, of course, with everything it gets a little complicated, but just using that in mind. If we were drilling 200 m an hour conventionally, we should be drilling 400 m an hour with this technology in the ground. And often you are going to see that and maybe even a little bit better. From a client's perspective, the total cost of a drilling rig is about CAD 120,000 per day.
And if you can go from drilling 3,000 m - 6,000 m in a day, then there is a big, tremendous advantage to them. The constant goal from our customer's perspective is, it took us 10 days to drill the last well. We want to drill the next one in 9, 8, 7. And you have seen that over time. Since this technology rolled out in North America roughly 8 years ago, the amount of time it takes to drill, say, a 3,000-meter Montney well has gone from 25 days to 12 days. And then you can apply that same logic in the Permian. Some of those deep, complex Delaware Basin wells that used to take 40 days now take 20 or less, or 15. So, it is hard to give you an exact number, but generally speaking, you should drill twice as quick with this in the ground versus not.
Sorry, what was the second question?
M&A part of the
M&As
Playbook.
Yes.
Market share.
What's our thoughts on M&A. We have not been an acquirer for 15 years. We have a very unique package of equipment. This is technology that we buy, and we do some engineering work on it. The other two pieces of equipment, the drilling motor and the measurement-while-drilling tool, these are in-house designed products. They are very unique to us. To go out and buy a competitor, it is hard to get our head around how we are going to incorporate their equipment into our fleet. Not impossible, but it becomes a little bit of a trick. My opinion is I think we are getting to the point where in the directional space, there is room for some M&A activity. I am not going to say never, but we are going to be very cautious.
I would say if you look back historically, we haven't been very good at M&A in the past, so we're going to be real careful to make sure we don't make past mistakes again. Yes.
Say you buy the rotary tool, who owns the IP, or is there IP on this rotary tool?
I'll give you the I've only got a couple of minutes left. The two leading tools in the world today are Schlumberger's Orbit and Halliburton's iCruise. Baker Hughes has a tool as well called AutoTrak. We bought the very first Orbit tool that Schlumberger ever sold outside of that organization back in 2018. Today, we have roughly 70 of them in our fleet. In 2024, we bought the first Halliburton iCruise tool, and today we have roughly 60 of those in our fleet. The IP is owned by them, but we have a perpetual license to continually buy more, and they actually service them for us as well.
It gets a little tricky because we have a tool that we screw onto the top of the rotary steerable tool that pulls information out of that tool and sends it up to surface, which gives us an advantage. But that's essentially our strategy with that rotary steerable technology. They certainly can't stop selling them to us as long as we keep living by the terms of the agreement.
A question for you, just on the macro. In Canada, I think we are at 220 rigs right now. Feels like it is the biggest we have been in about 10 years or a decade. Where do you think that rig count can go? Obviously, we are already over $100 oil. You have a conservative government in B.C., LNG tripling by 2035, infrastructure coming in. Where can that 220 rig count go to realistically over the next couple years?
The question is, what is the rig count in Canada going to do over the next few years? My gut feeling is we are going to see a slow but steady increase in rig count. How high can it really get? I think there is limitations on how many, we will call them high-spec or at least medium- to high-spec rigs can actually go to work in Canada. I think it is reasonable to assume that in five years, there might be 300 active rigs in Canada. I do not think there will be 500, but I can see where we are going to continue to slowly tick up. I think there will be incentives for rig contractors to maybe bring some good quality rigs back to Canada that at some point in the past have left. Yeah, that is probably where that is going.
In the U.S., obviously that rig count has been anemic for a while. It has ticked up recently. Do you think if we are already over $100 oil, how much can that U.S. rig count tick up if it has really gone up just a little bit past $100?
Yeah. U.S. rig count a year ago was 550 rigs. Today, it is 600. I think we will be at 650 rigs in the U.S. by this time 2027. I do. I think it is going to be so tempting for other privates to jump in, and even the big multinationals are going to I think that we will be adding. It is not going to go into crazy like it used to, but I think another 50 rigs is pretty reasonable. Yes, sir.
Talk about sales related to capital. How much working capital is required to continue to grow, and what kind of return on invested capital as measured by free cash flow would you end up expecting going forward?
Question is return on invested capital and working capital. Today, we have roughly CAD 130 million of working capital. When I look out into the future, I would think that might come down a little bit. Then return on invested capital, historically, we've averaged 25%-35% of return on invested capital. Does that answer your question?
Thumbs up.
All right. I think we are just about done. One more question. Yes, sir.
I was just going to ask, what is stopping your competitors replicating this technology, and what are the barriers to entry until we have replication there? In terms of pricing and market pressure, what would happen if several competitors came out with something better?
Sure. The question is, what is stopping competitors from replicating the tech and stealing market? The six or seven competitors that we have in the tier 1 space, they all have some version of this. Of course, we think ours is better. But if you ask them, they would probably say theirs is better. But I think if you were to ask the people that count, Exxon, Oxy, Shell, they would say that the motor that Phoenix runs is the best in the industry. The MWD tool. The MWD tools, the threshold for success is just work, essentially. If it does not fail, you are good, and I think most of our tier 1 competitors have that. The rotary steerable technology, there are things that we do to these tools that others do not, that gives us a competitive advantage. But what really drives our competitive advantage is the whole package.
Reliability and continuous improvement, and I think we do that better than any other company out there, including Schlumberger, Halliburton, Baker. We are very driven on relationships with customers. You can have the best equipment in the world, like Schlumberger. Schlumberger is an excellent company, or SLB. But they do not focus on relationships the way that companies like we do, and I think that is really driven our success of, you go into an Oxy or a Conoco, and we can go talk to the Vice President of Drilling, and he will tell you, "We do not like the way Schlumberger is servicing their equipment, and they are not willing to change, and you guys are, so we are going to give you more work." And that is typically how the conversation goes. I think we are done. Sorry. Is that it? All right.