Q3 2019 Earnings Call
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Thank you all can actually so services dot com. There were also be recorded replay available until November <unk> 2019, more information on how to access a replay feature was included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today November 7th 2019, and therefore, you were advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
In addition, management's comments may contain forward looking statements within the meeting up this United States Federal Securities laws. These forward looking statements reflect the current views of couldn't tonic management. However, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the state.
It's made by management the listener is encouraged to read the annual report on Form 10-K quarterly reports on Form 10-Q , and current reports on form 8-K to understand certain of those risks uncertainties and contingencies.
The comments made today May also include certain non-GAAP financial measures additional detailed and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly earnings release, which we can be found on the qbs website.
And now we'd like to turn the call over to Q assets, President and CEO Mr., Chris Baker.
Thank you Natalie and good morning, everyone. Thank you for joining us today for Quintana Energy Services' third quarter 2019 conference call. Since the last time, we spoke in August we have continued to make positive progress and had a strong third quarter. Despite the macroeconomic environment continuing to deteriorate with.
Continued constrained customer spending a surplus of available surface equipment, and an overall era of uncertainty around underlying market fundamentals.
However, despite these difficulties im pleased to say that we have met these challenges head on and have not only to solidify that strengthened our business to operate in what has become a rather unpredictable and volatile marketplace.
The corporate restructuring plan affected during the third quarter has gone smoothly as my prior experience with the company's corporate team as well as our key operating leadership has enabled me to step in seamlessly.
Ultimately our team has continued our focus on streamlining our operations optimizing our asset base and searching for additional cost savings and synergies within the organization.
Im proud of the progress that we have made this quarter and I'm looking forward to other opportunities to improve execute and expand Q, yes.
Although there are numerous factors driving the market that are outside of our control such as commodity prices and customer budgets. We have made it a priority to aggressively manage those factors within our control that best position Q, yes for the challenges ahead.
This means a continuation of the rationalization of our cost structure as well as balancing this effort with the need to maintain an asset base and geographic presence that we will enable us to fully participate in the eventual market upturn.
It also means sustaining our momentum in providing superior execution in the field and we do this by supply and highly trained personnel along with well maintained latest generation equipment and technology that provides our customers. The outstanding service quality they have come to expect.
While executing on these initiatives and the depressed market can be challenging we've seen some encouraging signs that our efforts are paying off.
Given the overhanging macro environment of slowing production growth rates in North America onshore.
Activity declines weighed on the third quarter results.
We saw combined horizontal and directional rig count drop roughly 11% from the end of the second quarter through the end of the third quarter along with further further erosion to date.
And while the macro market in the third quarter with very challenged for our industry as a whole I'm very proud that curious was able to achieve a number of accomplishments.
First we successfully completed the sale of our mid con conventional pressure pumping locations for $4.4 million.
We exited three facilities as we continued to streamline our operational footprint and our focus.
We successfully negotiated a solution to a material supply contract.
And further we've reduced our corporate gionee beyond the actions previously discussed.
These actions in addition to our relentless focus on our cost structure yielded the impressive results that were reported yesterday.
For the third quarter curious reported consolidated revenue and adjusted EBITDA of 121.1 million and 8.7 million respectively.
Compared to 125.6 million and $5.9 million Inc.
To queue of 2019.
We posted the highest quarterly adjusted EBITDA for the year driven by improved profitability from our directional drilling pressure control and pressure pumping segment.
This performance was driven by our cost cuts in corporate restructuring initiatives, which began in the second quarter and continued throughout the third quarter as well as improved utilization of our remaining active cruise.
Taking a closer look it's our segment performance.
In directional drilling our utilization remained steady and we were able to to successfully drive some sequential market share gains.
You May also recall that during the previous quarter, we experienced some transitory issues in the form of increased standby and rig moves which negatively negatively impacted our twoq margins.
With those issues now behind US along with continued honing of our cost structure, we saw a sizable improvement in our profitability.
For the third quarter 2019 rig days were relatively flat both sequentially and year over year coming in at 4863 days.
Our monthly average rig total revenue was 67 of which 59 were followed me rigs.
Our customer base in DD is extremely blue chip focus as we generated revenue working for seven of the top 10 operators in the U.S. So far in 2019, and we have outsized market share among the top 20 operators compared to the broader rig count we're very proud of the statistic and believe is implemented of.
Turning to providing the highest level of performance and service to our customers in the field at a cost competitive price.
Adjusted EBITDA margin for our directional business expanded by more than 500 basis points sequentially as the cost cuts initiated in Q2 fully took effect during the third quarter and a more favorable favorable job mix drove an improvement in our blended day rate.
Now turning to our completions related segments.
Within our three completions related segments budget exhaustion and constrained customer cash flows have driven widespread reductions in completion activity, leading to more white space on the calendar and oversupply conditions for our equipment, which which further adds to the pricing pressure.
From where we stand now we've seen these conditions deteriorate from the ended the third quarter into fourth quarter.
Although this elevated pressure has made conditions more difficult. We have continued to refine our cost structure and work to maintain acceptable utilization levels up for our crude units in order to stabilize margins.
Based on our strategy our growth spending continues to come down we're highly focused on both enhancing returns and optimizing our asset base to suit market conditions.
Looking at our pressure pumping segment the pressure pumping segment showed sequential improvement in both revenue and adjusted EBITDA.
Our two active frac spreads experienced higher utilization, although this was partially offset by lower pricing and slowed activity in the last month for the quarter.
We were also able to sequentially improve margins as a result of our cost cutting program.
You may recall from our last earnings call that our pressure pumping strategies shifted thoughtfully and deliberately in order to improve utilization at lower cost, we announced the pursuit of opportunities in adjacent geographic markets and the consolidation of our mid con pressure pumping operations into our centralized Union city facility.
The expansion to adjacent markets enabled us to obtain a higher utilization level that carried into the third quarter and decentralization of our mid con operations is effectively reduced our cost base and paired our presence to more appropriate levels.
In the third quarter, we actually begin to see the benefits of these actions flow through to our Q3 profits and margins.
Moving to pressure control our pressure control segment saw a moderate sequential drop in revenues for the segment's adjusted EBITDA more than doubled over the same time period with approximately 70% of segment revenues driven by coal tubing continued soft pricing in the coal tubing market weighed on the segment's top line.
However, this was partially offset by an increase in activity in utilization as was a material improvement in our snubbing margin, which was also driven by improved crew utilization.
These factors coupled with our cost cutting efforts yielded strong sequential improvement in adjusted EBITDA. Despite the revenue drop.
In fact, the segment's third quarter adjusted EBITDA was the highest it has been in 2019.
Lastly, turning to our wireline segment as I mentioned earlier fundamentals in the wireline business continue to be the most challenged over three completions oriented businesses with results contracting to this activity ground to halt at the end of the third quarter.
Wire line for the third revenue for the third quarter was down 50% sequentially and down 48% year over year.
Although lower overall activity was the primary driver for the decline. We also idled one additional location, which contributed to the lower revenue as we retrench to two core geographic regions in our unconventional pump down business.
There are also remains an overall lack of pricing discipline in the market due to the fragmented nature of the wireline service market and the more limited pump down opportunities available in the back half to 2019.
We are continuing our efforts to rightsize, the wireline segment and too focused on V. Most efficient operators working in our core geographic markets.
Given the systemic challenges within Wirelines market, we believe further reducing our footprint rightsizing, our cost focusing operations on high efficiency pumped down and giving district managers, great accountability are the appropriate steps to manage through these challenges.
With that I will now turn the call over to key for who will review our financial results in greater detail Keith.
Thanks, Chris before I dive into segment detail I'd, just like to point out that this was a busy quarter for Q, yes, but the team did a fantastic job and a tough market and it shows in our results.
The benefit of our Q2 cost cutting initiatives began to be reflected in our Q3 results in Q3 was our best quarter year from an adjusted EBITDA perspective.
Let me begin with an overview of our business segment financial performance, starting things off a directional drilling.
For the third quarter of 2019 directional drilling revenues of $57.1 million increased 5% sequentially and were up 12% from the third quarter of 2018.
Compared to Q2 of 29 team day rate was the primary factor that accounted for the directional drilling revenue increase driven by job mix geographic mix and demand for premium tools services.
As Chris mentioned in his remarks rig days were flat sequentially and compared to the same period in 2018.
For the third quarter of 2019, we had a total of 4863 rig days and a monthly average of 67 rigs on revenue of which 59 were follow me rigs.
During the third quarter, we successfully drilled 364 wells for 39 customers on 83% discrete rigs across 33 different target formations.
Third quarter adjusted EBITDA for the directional drilling segment was $9.1 million, which was up 56% from the second quarter of 29 team.
Adjusted EBITDA margins for our directional business increased by more than 500 bip sequentially to 16%.
Now onto pressure control.
Our pressure control segment generated total revenues of $26.8 million for the third quarter of 2019, which was down 3% sequentially and down 14% year over year.
Pressure control adjusted EBITDA in Q3 was $3.7 million, which more than doubled the $1.6 million R&D in Q2.
The segment's adjusted EBITDA margin also more than doubled rising from 5.7% in Q2 to 13.7% in Q3 of 2019.
The margin increase was driven by the combination of both improved activity as well as the impact of our ongoing cost reduction initiatives.
Moving onto the pressure pumping.
The pressure pumping segment generated total revenues for the quarter of $27.3 million, reflecting a 14% sequential gain and a 45% decline from last year's third quarter.
We saw our average revenue per stage increased 28% sequentially driven by a shift in job mix offset by a corresponding 13.6% decrease in stages completed during the quarter.
For the third quarter of 2019 pressure pumping frac to total of 700 stages compared to 810 stages in Q2 of 2019 and 908 stages in Q3 of 2018.
The decrease in stages compared to Q2 was driven primarily by white space on the calendar and schedule challenges during the third quarter.
Pressure pumping adjusted EBITDA for the third quarter was $1.2 million compared with $762000 in Q2 2019.
And $5.8 million in Q3 2018.
Lastly, we'll close out the segment discussion with wireline services.
Wireline revenue for the third quarter was $9.9 million, which was down 50% sequentially and down 48% from the third quarter of 2018.
From Q2 of 2019 to Q3 in 2019, we experienced a 14% decrease in revenue days and a 24% decrease in day rate.
Wireline adjusted EBITDA for the third quarter of 2019 was a loss of $2.8 million, which is down from a profit of $384000 in Q2 of 2019 and down from a loss of $738000 in Q3 of 2018.
Now I'll turn to our consolidated results.
For the third quarter of 2019 revenues were $121.1 million, representing a 4% sequential decline and down 20% from last year's third quarter.
Our consolidated adjusted EBITDA was $8.7 million in the third quarter of 2019. This was up from $5.9 million in Q2 of 29 team and down 33% from Q3 of 2018.
The sequential increase in EBITDA was largely driven by the flow through into Q2 cost cutting initiatives and our ongoing corporate restructuring program.
During Q3, the company implemented corporate restructuring program to align its cost structure with the current and anticipated market conditions for us onshore oil field service providers in connection with this plan Qs recorded $5.3 million in restructuring charges during the quarter.
Additionally, due to deteriorating conditions in the North America completions market and cash flow losses in our wireline in pressure pumping segments. During the third quarter of 2019, we tested the carrying value of certain acuity asses long live tangible and intangible assets for impairment.
Based on the results of our Recoverability testing our pressure pumping segment recorded an impairment expense of $34.2 million and our wireline segment recorded an impairment expense of $2 million for a total impairment expense of $36.2 million during the third quarter.
Consolidated DNA expenses were $12.1 million, which was down 13% from the second quarter of 2019.
This decrease was the result of lower stock based compensation expense.
I'd also note that our corporate expenses have come down significantly over recent quarters as part of our larger cost rationalization efforts falling from from $3.6 million in Q1 of 2000 $19 million to $2.6 million in the third quarter of 2019.
Going forward, we expect our corporate expenses to approximate roughly $2.3 million to $2.8 million per quarter.
Third quarter interest expense was $898000, which was largely flat with the SEC second quarters interest expense.
And up from $574000 in the same period of 2018.
Going forward, we would expect interest costs to come down as we unwind working capital and pay down debt.
The provision for income taxes in the third quarter of 2019 was negligible amount and related primarily to state margin taxes.
Now I'd like to briefly discuss our cash flow statement balance sheet and liquidity position.
During the third quarter operating activities provided cash of $3 million, our networking capital for the quarter was $48.6 million and this was down from $50.9 million in Q2 of 2019.
As activity has slowed and revenues have decreased we have worked to shore up our working capital by focusing on converting receivables to cash and buy more effectively managing our vendor relationships to match cash disbursement timing with receipts from our customers. We will continue to proactively manage our working capital to achieve greater cash flow.
Currency going forward.
Gross capex totaled $7.6 million during the third quarter of 2019 compared to $8.9 million in the second quarter of 2019, and $11.9 million and the third quarter of 2018.
During the third quarter capital spending was driven primarily by maintenance capital spending.
On a net capex basis to 7.6 million of gross Capex was largely offset by asset sales of $6.7 million, yielding a net capex of only $920000. The asset sale proceeds were largely driven by the previously announced sale of our conventional midcon pressure pumping locations and.
The monetization of other obsolete assets.
For 2019, we continue to forecast $32 million to $35 million of gross capital spending for the full year and as always we plan to remain highly disciplined and evaluating our capital spending in this highly volatile macro backdrop.
Other cash flow items of note in the third quarter include the repayment of $2 million of our revolving credit facility as well as $570000 and share repurchases totaling 305000 shares, bringing our total year to date share repurchases to 573000 shares.
We continue to have a strong balance sheet and ended the third quarter with a total debt balance of only $33 million and $14.9 million of cash on hand, yielding a net debt balance of $18.1 million. We continue to have one of the strongest balance sheets in this sector. We ended the quarter with 39.1 million dollar.
As a net availability under our revolving credit facility and total liquidity of $54 million with that I'll turn the call back over to Chris Chris.
Thanks Keith.
With rig counts still trending down in completions activity placed by budget exhaustion and excess capacity, we have been heavily focused on maximizing the company's flexibility rebalancing our footprint within select geographic markets and improving our ability to weather uncertainty in the market landscape.
We saw Q3 adjusted EBITDA expand meaningfully despite a reduced revenue base. So it's clear, we're making positive strides towards that goal.
Despite these encouraging results there remains more work to be done with that in mind, we will continue to aggressively address our cost structure and focus on streamlining and better integrating support functions, including HR payroll and accounting within our completions oriented businesses and Q, yes, more broadly going forward.
We will continue to focus on driving asset and crew utilization, while managing our asset base for the long term.
At the end of the day, we're in the service industry. So we focus day in day al while providing the safest highest level of service possible to our customers and we will put our crews up against anyone in the industry.
Looking towards the fourth quarter from a consolidated perspective, we do not expect any meaningful improvement a customer activity for Q4 on the drilling side, we expect activity to hold and are optimistic that customers may begin to pick up rigs late in Q4.
But on the completion side, we will continue to fight through further deterioration in pricing and utilization.
With that said, our ongoing asset optimization and cost structure refinements, coupled with our strong balance sheet and considerable liquidity provides us with an industry, leading credit profile and significant operating leverage putting us in an enviable position compared to an industry peers.
As we look to 2020, we're working through our budgeting process now as our all of our customers, we're not expecting meaningful activity improvements over 2019 levels. However, we also did not believe the third or fourth quarters of 2019 are necessarily representative of the new status quo.
We remain optimistic about our prospects for 2020 and believe our Threeq you results illustrate the significant intrinsic operating leverage embedded in Q.
As we have worked to optimize our cost structure and streamline the organization.
Finally, I would like to fake all of our co workers across Quintana for their continued efforts and personal commitment to safety integrity and customer service.
With that we will now take your questions. Operator. Thank you we will now be conducting a question and answer session.
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Please ask one question and one follow up question and then rich you for additional questions.
Our first question comes from George O'leary with Tudor Pickering. Please go ahead.
Good morning, Chris morning Keever.
Good morning, George Foreman George.
My first question was actually just kind of popped up as you are wrapping up your concluding statements Chris on that on the drilling side and correct me, if along but I think I heard you say side no activity there might be flattish there was clearly some share capture in the third quarter is that playing a role.
Role in yells ability to keep your directional drilling business kind of flattish with the with the third quarter is a job mix again kind of helping there.
The revenue there and then the the potential for customers to pick up.
Activity late in the quarter I thought was interesting I guess, what pennant drove that that comment that discussions with customers or something else.
Yes, sure. So I guess, a couple of facets to that.
Weve clearly seen rig count continue to roll going into October and so thats going to drive some decline in overall job days, but as we look out towards December in kind of the exit rate, what I would say from where we sit today, we're forecasting a Q4 exit rate as far as job days to be greater than where we sit today and so I think all.
Finally job days fall slightly from Q3, but I think we're going to exit the quarter and enter 2020 on a better footprint, where we sit here today.
Ultimately at the end of the day.
Just reiterate.
Something that I said earlier I mean, we've got a very very blue chip customer base, our performance in the field at our shop and Willis and the performance we deliver.
Continues to drive outsized market share and so when you look at the rollover in rig count I would argue yes, we have gained share and we continue to expect to do so as rig count kind of climbs back going into Q1.
Great. That's that's super helpful color in.
Answered all those questions well at the next question and clearly that the cost cuts are really impressive in your kind of getting them.
Your your efforts from earlier in the year are bearing some fruit I wonder if you can walk us through which cost buckets. Those cuts so far review, which drove the lion's share. Those if you think about them from a people perspective leases in real estate supply chain. The asset sales I know there were some facilities there.
Which are the primary buckets those costs came from and then looking forward as you further look to rationalize the footprint et cetera.
Where's your focus.
Yes, sure. So I mean look that it's pretty broad question of into the day I would say a couple of things first at this point, we're we're mostly fine tuning.
I would think were 90% of the way there we have in October recruitment reduced one additional pressure pumping crew.
But otherwise pretty much all of the incremental reductions are going to be from synergies within corporate and other kind of back office functions.
Key for you want to jump in is going to talk about the buckets, Yes, Georgia, you hit kind of all the all the buckets nail and ahead.
And personnel was was certainly kind of the largest grouping.
But you're right on in that we also clearly executed on asset sales.
The tax to supply chain Weve internalized portions of our cost structure, where possible and looking going to continue to chip away at those items.
Through the end of the year, assuming the market remains.
Status quo.
The market changes, obviously, we'll continue to reassess.
And attack the cost structure as necessary.
Great out I'll sneak one more in as I could just given all that the changes that you just kind of enumerated or that we talked through a little bit and from a repair and maintenance Capex perspective, where would you say that sits today given the current asset base.
Sure.
So I think RMB I think maintenance capex for for US is and others is clearly assumption of utilization levels.
Which obviously today are relatively depressed.
So from a modeling perspective, I think I also think about it is probably maintenance capex as a percentage of revenue.
I'd say, we're not planning.
To certainly cannibalize any of our equipment base.
Or to forgo any necessary spending.
But capital spending will be down on an absolute basis, just due to lower activity levels.
So for us on a year to date basis.
And Capex has been running a little north of 5% of revenue.
Going forward.
I would expect kind of 5% to 6% of revenue to be a decent range.
Provided though that any changes in revenue are more of a function of utilization rather than price right.
That makes sense all right Abdullah I'll turn it back over thanks for the color guys.
Yes, sure no Allergan.
Thank you I would like to turn the floor over to Mr. Baker for closing comments.
Thank you once again for joining us on the call today and your interest in contain energy services and we look forward to talking to you again next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.