Q3 2019 Earnings Call
Good morning, and welcome to the Superior Energy Services' third quarter 2019 earnings Conference call.
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I'd now like to turn the conference over to Paul Vincent. Please go ahead.
Good morning, and thank you for joining superior Energys third quarter 2019 conference call.
With me today are superior's, President and CEO , Dave Dunlap, our CFO , Westy Ballard and our C O Jamie spec sorry.
During this conference call management May make forward looking statements regarding future expectations about the company's business management's plans for future operations or similar matters.
These actual results could differ materially due to several important factors, including those described in the company's filings with the Securities and Exchange Commission.
Management will refer to non-GAAP financial measures during this call.
In accordance with regulation G. The company provides a reconciliation of these measures on its website with that I'll turn the call over to Dave Dunlap.
Paul and good morning to everyone listening to our call today.
Well begin with a brief review of our third quarter activity Westy will discuss segment results and all off or thoughts on our outlook before turning the call over Fourq you are right.
Before discussing our quarterly results.
It is important to address the action taken by the New York stock exchange to commence proceedings to de listed our company's common stock during the quarter.
On September 26 during market hours, we received notice that trading of our stock had been suspended on the New York stock exchange and the de exchange intended to commence the listing proceedings as a result of an abnormally low share price for an extremely short period of time.
Since the intraday low on September 27, the first full day of trading after the N.Y. as he took this extraordinary action.
Our our share price increase more than 560% through November threerd.
We have publicly disclosed that we are appealing this ruling.
Additionally, we continue to take measures to regain listing compliance with the exchange within the original six month cure period, we were granted by the exchange when we received a noncompliance letter in August .
These measures include improving the results of our operations divesting noncore assets and conducting a reverse stock split of our shares.
I want to be clear that while there are very understandable concerns about our ability to reduce repay and refinance our debt due in December 2021, approximately 26 months from now.
Our primary objective today and every day is to do what we believe is best for our shareholders.
As such we believe it is in the best interest of our shareholders for superior energy to be listed on a major national Securities exchange, whether that be the NYSE or one of its competitors.
Immediately following the NYSE suspension of trading under our stock we opened a special one we purchased one Doe and a number of our directors and executive officer officers purchase shares.
After additional discussions with our board of directors on October 1st we announced authorization to repurchase up to $15 million of our common stock and today, we have repurchased more than 9.7 million shares at an average price of approximately 43 cents per share.
We believe these actions more so than any words demonstrate our commitment to improving the value of our common stock and confidence we have and resolving negative sentiment regarding our ability to manage an unsecured debt maturity more than two years from today.
For the third quarter of 2019 superior energy generated revenue of $426 million adjusted EBITDA of $65 million and adjusted net loss from operations of $34 million or 22 cents per share.
As has been the case for the past several quarters us land markets contracted resulting in lower sequential revenue.
Throughout the year, we have been very responsive to lower activity levels and have continually reduced our exposure to the U.S. land market, most notably in pressure pumping, which has been the most competitively challenge service line.
As a result of this proactive approach to activity reductions are U.S. land revenue decline of 6% during the quarter was inline with the some sequential decline in the us land rig count.
After adjusting our revenue for the sale of drilling rig service line, which occurred in the second quarter.
Although the U.S. land market is difficult today with a challenging outlook, we are not idle.
During the third quarter, we began the process of further integrating our wealth services and fluid management service lines under a more efficient basins centric management structure.
This is a natural continuation of the integration of our US service lines that has been underway since 2015.
This particular integration is substantial and we'll have both financial and commercial benefits for superior energy.
In addition to our initial estimate of at least $10 million of annualized cost reductions. This integration will result in improved capabilities to respond to market opportunities with package services that address the non drilling non frac service opportunities over the life of a us onshore well.
We believe that over 50% of the revenue opportunity in the service lines occurs post completion.
During the producing life of a horizontal well.
The combination of these service lines in conference is greater than 25% or greater than $550 million of our 2018 consolidated revenue of $2.1 billion.
This meaningful component of our organization is asset rich will operate with a very low capital profile for the foreseeable future and a scalable.
Our immediate focus will be to enhance the current free cash flow capacity of the service lines and be the large scale multi basin provider of lifecycle services.
As mentioned in the hydraulic fracturing market in the US is exhibiting significant structural weakness, which will likely take some quite some time to resolve as pricing remains weak and equipment supply in the market as well in excess of even the most optimistic demand estimates.
Given these realities, we continue to reduce the number of active fleet during the quarter from six to five.
Although there are indications that some of our competitors are now reducing their marketed capacity the hydraulic fracturing market remains challenged.
Our operational priorities continue to be aligned with our financial objectives of improving operating margins improving return on capital and building cash balances.
During the third quarter, we accomplish these objectives as capital spending was lower resulting in strong free cash flow and an increasing cash of $26 million.
Building cash through operations and non core divestitures directly supports our debt reduction objectives, which we believe is an important factor in improving shareholder value over time.
During the quarter the divergence between us land from us offshore in international markets continued.
While you us land drilling and completion activity weakened.
The U.S. offshore and international markets continued to expand.
In contrast to the weakening us land market, we experienced improved results in our us offshore and international regions.
In the US offshore region completion activity increased benefiting our premium drill pipe and completion tools business and our expectations are for activity to remain steady during the fourth quarter, although seasonality is always a risk.
International revenue grew during the quarter, primarily due to increased premium drill pipe rentals in Latin America in West Africa.
Recently, we conducted our first sumit job in Kuwait after being awarded a five year contract earlier this year.
This opportunity and a new market for us is indicative of the types of expansion opportunities, we will target internationally in the future.
Full year 2019 international revenue growth of at least 10% seems reasonable to achieve at this point.
We are committed to consistently generating free cash flow, reducing capital expenditures improving our returns on invested capital overtime divesting service lines, which aren't competitive for capital and lowering total debt levels. We are orienting superior energy toward an environment of low to no us land growth.
And moderate us offshore in international improvement over time.
We do not anticipate a sudden cyclical recovery.
However, the diversity of our business is our strength and overcoming these challenges.
And was critical to our results during the quarter.
We are an incredibly that we're in an incredibly difficult market and our forever grateful to the effort and dedication of our people to conducting our work safely while continually seeking ways in which to adapt to a fast changing environment.
After almost five years since oil prices began their exceptional decline the people who remain in this industry are given everything they have on behalf of our company and our the embodiment of our values and culture.
The continued achievement of operational and financial milestones that will improve our capital structure will be a direct result of the blood sweat and tears of the incredible team we have.
I know you are listening.
And I hope you all know how much I honor would you are doing to support our organization as we confront the challenges ahead of ahead of us and with that what's the will discuss our third quarter financial results. Thank you, Dave and good morning, everyone in discussing our operating segments. All adjusted third quarter sequential comparisons will be made to our adjusted.
Yes.
Ill also provide commentary regarding fourth quarter expectations for each segment.
As we've discussed in the past our focus has been the generation of cash and enhance liquidity through continued capital discipline ongoing noncore divestitures and management of working capital. This quarter, we generated $21.4 million of free cash flow an increase of $18 million from the second call.
Quarter, despite a weakening us land market.
Our cash position increased to $260 million.
We continue we expect to continue to build cash during the fourth quarter generating free cash flow of $5 million to $10 million.
Capex for the quarter was $26 million and we now expect 2019 capex to be between 140 and $150 million.
We believe that we have our organization on a path to consistently generate free cash flow and grow cash in the quarters ahead.
Well, we have not concluded on the operational outlook for 2020, I'm certain that we will lower capital expenditures and continue to reduce our cost structure over the next 12 months.
As far as segment results, our drilling products and services total segment revenue increased to $111 million.
Premium drill pipe revenue increased as a result of increased demand from us offshore in international markets for the fourth quarter, we expect cement segment revenue and EBITDA to be lower by 5% to 10%.
Primarily due to the us offshore activity mix shifting towards drilling activity.
And our onshore completion and Workovers services segment revenue decreased 11% to $145 million, primarily as result of the divestiture of our drilling rigs service line during the second quarter.
We continue to reduce our deployed hydraulic fracturing fleets and average five fleets operating during the quarter.
The pressure pumping market remains challenged and we'll continue to move horse power from the market until per fleet economics are in excess of maintenance capital for sustainable period.
Fourth quarter revenue and EBITDA is expected to decline as a result, a fewer active pressure pumping fleet fleets.
These declines will be partially offset by expected seasonal increase in our fluid management business.
Our production services total segment revenue of $99 million declined slightly primarily due to lower coil tubing activity. Looking ahead, we expect fourth quarter production services results to be relatively flat with our third quarter performance.
And the technical solutions segment total revenue was up slightly to $71 million strong us offshore completion activity supported improved completion tool sales, which were offset by reduced well control and subsea intervention activity as several projects concluded in the second quarter.
Completion tools activity will be a large portion of our Q4 results in this segment.
Should all planned activity for the quarter occur as scheduled revenue could increase as much as 10% with strong corresponding EBITDA incrementals.
Before turning the call back to Dave here, a few modeling related items.
DNA for the quarter was $63 million inclusive of a $4 million net benefit due to restructuring costs and a gain on a litigation settlement.
We expect fourth quarter DNA to be approximately $70 million.
DNA is expected to be between 67 and $70 million fourth quarter interest expense is expected to be approximately $25 million.
Thank you and I'll now turn the call back over to Dave for closing comments, okay. Thanks Westie.
There is no doubt that the outlook for our industry has changed.
No longer our market share and growth the primary measures of success moving forward in a low growth environment, we must prioritize full cycle returns free cash flow and minimal use usage of leverage.
We've taken consistent measures to reduce capital spending and are now generating free cash flow, which we believe will be sustainable in the current environment.
Additionally, after the exceptional deceleration experienced in us land markets during the fourth quarter of 2018.
We have been very aggressive in preparing ourselves for a similar event this year.
While this primarily relates to reductions in our pressure pumping capacity. We've also continued to integrate other us land businesses, which will reduce operating costs.
As a result, we believe that while us land markets face a significant risk of activity deceleration during the fourth quarter the impact on superior may be muted.
There is limited visibility into 2020 work programs for us land customers and we will not carry costs with the hope that activity next year will improve from current levels.
As I mentioned.
The diversity of our product and service lines is our strength.
And our cornerstone franchises are positioned to benefit from the growth we are seeing globally and then offshore markets.
International opportunities are one single market and looking ahead, one success will be defined by which markets they have exposure to.
For example, even with limited visibility, we expect overall international revenue to increase in 2020, perhaps as much is in the past several years.
Looking more closely we have doubts about near term improvements in Argentina, but expect that any declines there will be more than offset by what we see as meaningful opportunities in the middle east as well as increased activity offshore, particularly West Africa.
Before concluding there should be no doubt from listeners as to our core objectives. We are building cash we are resolved to reduce total debt levels and we'll continue to divest assets and service lines, which do not compete for investment in the current oilfield environment.
We are determined to improve shareholder value through these initiatives and believe that the structural disruption in our industry is experiencing will create opportunities for superior to take Boulder strategic actions over time.
That concludes our prepared remarks, operator, please open the lines for Q.
Yes.
We'll now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset for pressing the keys to withdraw your question. Please press Star then to.
At this time, we will pop posit momentarily to assemble a roster.
Our first question comes from Kurt Hallead with RBC. Please go ahead.
Hey, good morning, David team.
The cart.
I appreciate the.
Appreciate the candour as always and the additional color commentary.
So Dave on the.
Onshore completion, and well services business he kind of outline the dynamics that are taking place there and the benefits you you kind of alluded to just wondering like as we think about that element.
How do we think about the improvement maybe in margins or returns on capital within that segment as you kind of execute on that on that game plan. There also the I mean, the integration that we've done is a big carries over to both the onshore completion and the production services segment in the onshore completion segment Thats, where.
Service rigs in fluid management.
And of course fracturing reside so there'll be some margin improvement overtime as a result of the integration I don't know how much of it is evident during the fourth quarter as we continue to see and expect to see utilization declined during the fourth quarter, but one I think when we start comparing.
Quarter year over year quarters, as we get into 2020, the impact of the cost savings that we're putting in place will become very apparent.
And it Doug I said it will be evident in both the completion segment as well as in the as well as in production services segment.
Okay. Thanks, and then west I appreciate the guidance you provided on for Q. So the dynamics around the onshore completion and well services business, you said decline due to fewer fleets kind of get that.
Just wondering you gave kind of order of magnitude of revenue declines in margin impact for the other businesses.
I Wonder if you can potentially help us out intake as we take a stab at what that might mean for for that business segment as well.
More specifically to dps or across the enterprise just on the onshore completion and well services business.
Margin declines will won't be as dramatic certainly we we don't have the visibility that we we'd like to have in the fourth quarter and so it's a little it's a little difficult, but I'd I'd I plan on flat for now.
And that segment.
Okay. That's helpful. Thanks question.
Our next question comes from Steven.
Gang Garro with Stifel. Please go ahead.
Thanks, and good morning gentleman.
So Dave when you when you think about this.
We are looked out 24 months and.
We look back at kind of the road map to get you where you'd like to be in 24 months what has to happen. Both both operationally from a cash generation perspective et cetera. How do you you must have a thought process on how this evolves over the next two years is the debt maturity comes due in.
So what are the key key drivers you think you need to hit over the next 24 months.
And whether its market driven or STN.
Maybe maybe both.
Yes, sure Steve It's I mean, I don't think there is.
Any thought in our shop about the market being able to to help us much from.
From the standpoint over the course and next 24 months I mean, we've got we've got to take actions and make arc make a conclusion that the market is going to continue to be solved.
And so when you think about the levers that we have to pull it is related to what we do from an operational cost standpoint, and continuing to drive.
Our cost structure down I think we've been very effective and doing that.
And then and then once again reduced capital spending and our objective over the 24 month period is to generate as much free cash flow as possible our operations.
To put us in a better position to deal with the December 2021 maturities at the same time.
We have clearly been taking steps to divest of certain assets that would be additive to that cash balance and we've had success with that this year.
We didnt have any divestitures that closed during the third quarter, but we did of course of the drilling rig divestiture in the second quarter I think what you can expect us to do is to continue to look for opportunities.
To add to cash balance through divestitures.
And we are we're acutely aware of.
Of the challenges that exist in in the marketplace, we're not counting on marketplace to help us. This is all self help.
Okay, great. Thank you for the color and then just as a quick follow up when you think about 2020 Capex I know.
I know you guys mentioned it would be it would be down I imagine most of that any.
Maybe break out what's what's maintenance and whats gross and I imagine any growth capex would be would be targeted to the international markets is that right way and congrats.
Thats clearly the right way to flip to think about him in the us land market.
Is not one where we will seek growth opportunities in 2020 are probably for quite some time, we certainly did in 2019.
There there may be some opportunities and premium brlfive, which would be.
A product line that we would prioritize both from a growth capital at a maintenance capital standpoint, because the returns are.
The highest that we have in any of our service lines in premium drill pipe I'd say bottom hole assemblies is is very close to.
Similar return as we get in premium drill pipe, but listen I think what you would you should be expecting and we have not completed a 2020 budget yet so I don't I'd, rather wait and give pure guidance on 2020 capital spending until we've done that but if you're thinking about something less than 100 million, you're thinking about it correctly and clearly we've taken our pace of spending down to that point.
We're in 2019, if you kind of thinking about what we did from a capital spending standpoint in the third quarter. It's on that pace of 100 million I think it'll be a bit lower than that.
Very good thank you.
Our next question comes from John Daniel with Simmons Energy. Please go ahead.
Hey, Dave Thank you for the Mcandrew as well I'm just curious if you can provide a bit more color on the restructuring steps you took within the well service and trucking business, specifically just any color on.
Magnitude of facility consolidation and just sort of where you are targeting that business geographically today and just some if you can color on what the working fleet is.
Yeah sure so I mean, it's.
I'd rather get into the details on the capacity of the working fleet, maybe offline just a lot of detail, but just to give you a broad idea I mean, we have we have managed those service lines in.
In a fashion, where we had a management team and SGN a effort.
That was focused on fluid management and a separate effort that was around those other well site services, including service rigs coil tubing.
Flowback pressure control cased hole wireline.
Those are similar customers there clearly similar types of businesses and operating basins and and the move we've taken as to consolidate what we're two separate entities. Our approach to the market is one that is now very much regional and so where we where we operate.
In the basins that we operate and we've got a single team that has all of those assets available to them and John really its could take advantage of what we're finding is.
As good opportunities that are in the production space outside of completion services I know for a long time, there's been talk about is there a production opportunity for service rigs and I don't know that my opinion on that as necessarily change, but we're seeing plug and abandonment opportunities, we're seeing opportunities where we're providing.
A pressure control via hydraulic horsepower on parent wells, while CCI wells are being Fracked and all of those are packaging opportunities. So you think about the plug and abandonment, where we can we can put a service rig we can put a summit unit we can put.
All of the accessory equipment and basically provide a say package to do all of that that's better managed on a regional basis and taking advantage of customer relationships I think our concentration.
Is in places like mid continent.
DJ Basin Powder River basin.
But we also have exposure horse in the Permian and an Eagle Ford as well as the Marcellus though.
Hopefully that gives you color you look at it helps ill pester Paul offline.
Indulge me.
The last one just it thinks just stay where they are and I know you don't want provided 2020 guidance formally but what's the right place holder for DNA. After you get through all of the changes you've done surprise I mean, I think I think that I think that you know the reductions that we have undertaken from a gionee and overall from a from a cost standpoint.
Over the course of the last four or five years has been iterative and I think you can expect us to continue to take steps and.
And it sort of moves to continue to grind down overall SGN at cost.
It's it's we've not been static in this we've taken a lot of DNA out since.
The downturn began but we are constantly evaluating ways to operate more efficiently whether that's from a sales team standpoint, or a management team standpoint or facility standpoint, So just expect us to continue to grind those costs down.
Okay. Appreciate your time thank you.
This concludes our question and answer session I would like to turn the conference back over to Dave Dunlap for any closing remarks, okay. Well. We appreciate all of you joining us today and I'm happy to answer any follow up questions offline. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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