Q3 2019 Earnings Call

Greetings and welcome to the basic energy Services' third quarter 2019 conference call. At this time, all participants are pretty listen only mode question answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host trace stops. Please go ahead Sir.

Thank you try and welcome to our 2019 third quarter earnings Conference call. We appreciate your interest in our company joining me on the call and David short <unk>, our senior Vice President and CFO .

Today I plan to discuss our 2019 third quarter results.

Operational focus strategies for the remainder of the year, David will walk through some more detailed financial metrics for our recent quarter.

The first nine months.

2019 had been more challenging than most expected.

Crude prices remain range bound with the sentiment bearish on weaker global demand expectations.

As they stopped or crude prices have persisted.

Third quarter saw continued decline in activity, but the impact largest on our completion related services.

That outlook is unlikely to change here in Q4.

As many of our upstream customers have pointed to exhaustion and their gross capex budgets.

In addition, many largely in peace continue to focus on preserving liquidity and operating within cash flow.

With the active U.S. drilling rig count, reaching its lowest level since April 2017, a challenging environment has been created.

So often services as we enter 2020.

In contrast to this reduction in new well drilling and completion activity, we have experienced customers pursuing measurable returns by way of enhancing existing production single best option, we're generating cash.

Early indications for 2020 for many of our larger customers verify this trend, which should greatly benefit our core production oriented businesses.

Late last year, we commenced a strategic realignment initiative, which included the relocation of assets yard closures the sale of noncore businesses.

We're very pleased that these strategic initiatives have shown positive results in 2019 with margin preservation and even improvement despite shrinking revenue.

But this effort is not complete in order to meet the challenges of today's market and maintain our company's position, we continue to aggressively indecisive LICAT cost against this challenging backdrop.

Total revenue up from 50% just a year ago.

This ongoing relative increased exposure to production service. This will result in greater revenue stability.

With significant upside potential for all go library midstream wholly owned subsidiary I'll give an update on that business in a moment.

Last quarter I discussed are transferring of 17, Quintuplex Frac frac pumps that are now deployed.

Hi horsepower mud pumps and are well services operation. These pumps continue to perform extremely well as part of a bundled workover and high spec 24 hour rig package.

We credit our industry, leading utilization to the fact that our packaged offerings are best in class inspect and capability design for the work of today's long lateral wellbores.

Since late 2018, we've made significant moves to lower corporate and field level Gionee cost modernize our information systems and continue to apply best practices to our working capital management, we're very pleased with the fruits of these efforts today.

With the continual gene a run rate down 30 million from the third quarter of 2018.

Turning to third quarter results margins remained relatively stable quarter over quarter. Despite total revenues being down sequentially was September marketing some of the softest revenue levels. We've seen this year.

Adjusting for the $3.9 million write down related to our manufacturing division direct margins were flat quarter over quarter at 24.6% in.

Meanwhile, completion remedial revenues decreased approximately 10% quarter over quarter largely on declines in frac activity.

Despite this sharp decline in revenue segment maintain margins of 23.1 down only 50 basis points from second quarter.

That has continued since our consolidation the frac assets.

The mid continent area in May.

We're continuing to trim the cost of our pumping services grew by blending the GE nice structure of this division into our other existing region operations.

Further operating margin results for CNR segment was the rental performance related to our industry, leading workover and 24 hour packages.

Well services segment revenues were essentially flat with the second quarter, we marketed at an average of 307 rigs in Q3.

Which 272 or high spec average rig utilization was 68% for the quarter and well servicing rig hours totaled 149000 compared to 155000 in Q2.

The average 24 hour rig count.

19 for the third quarter 15, but these large packages are multiyear dedicated customer agreements. These agreements cover abroad Multiwell development projects with larger operators and they are concentrated in the Permian basin.

Water logistics revenue declined 5% in the second quarter levels to 48.5 million with margins down 220 basis points from the second quarter, but still remain higher than margins. We saw the entire year of 2018.

Negatively impacting third quarter revenue and margins in water logistics segment was lower completion activity, resulting in lower flowback volumes.

Severe weather in holiday disruptions impacted Q3 revenues more than second quarter. We estimate this impact to the top Ryan was approximately $4 million.

And I believe grace.

Typically overall salt water disposal volumes continued to grow quarter over quarter to 10.8 million barrels a company record.

With 35% of these volumes coming from pipelines and 13% coming from third party trucks.

In the Permian basin, 63% and disposal volumes, a third quarter came via pipe up from 58% in previous quarter.

On the water hauling side. The total number of basic trucks declined to 75 to 795, that's down 5% year to date.

While the number of trucks as GE decreased significantly from our peak of over 1000 that decline has slowed recently as we optimize utilization of our fluid handling truck fleet.

Looking forward the strategy for Rockwell LIBOR midstream remained straightforward and adding contracted volumes to our disposals and increasing our third party truck volumes. Our team continues to evaluate and negotiate perspective contracted volumes. These opportunities ranged from Sri midstream contracts.

With volume commitments and acreage dedications to basin wide trucking contracts with large upstream operators.

The latter creates a strong upstream push to our disposals. In addition to our Salesforce pull for the third party water and facilities.

The targeted payback on all water midstream projects is approximately three years, but due to our ability to use our existing network capacity rather than exclusively greenfield capital certain projects may see a quicker payback.

As we noted last quarter all of our contracts that require basic capital have recourse to the customer if the contract as breached protecting our capital and our returns.

As we move forward, we will begin to see the true operating leverage in this business in 2020 as pipeline and third party truck volumes increased significantly while basic trucked water remains the steady foundation for all volumes.

Overall, we ended the quarter with adjusted EBITDA of 13.9 million inline with our expectations, despite revenue being slightly lower sequentially.

We're constantly evaluating our plan and we'll remain disciplined in our approach to capital allocation this year.

Based on results to date, we expect full year capex to be inline with prior guidance of 58 million.

As we look forward to 2020, we plan to again invest the majority of our expansion capital in the Permian focused water infrastructure by way of Agua Libra midstream.

We do not anticipate the Unstacking frac equipment in the near term but.

But an eventual increase and well completions could represent a source of significant upside.

Under our current capital expenditure plan for the remainder of 2019, we are updating guidance for 2019, EBITDA and expect finished the year between 53 million at 56 million of adjusted EBITDA.

That I'm going to turn call over to David for more financial details.

Thank you and good morning, everyone.

Plan to provide details on our third quarter financial performance compared to the sequential results from second quarter 2019, unless noted in an outlook for the fourth quarter in first half was 22 warning.

During the third quarter basic reported a 38.9 million GAAP net loss for a $1.52 per share which included non cash impairment charges of 7.1 million or 28 cents per share related to our contract drilling assets. We have moved to assets held for sale.

In an inventory impairment at our Taylor industries manufacturing business.

Q3 revenues decreased sequentially, 6% 278.4 million in the second quarter, while total company direct margins were relatively flat near 25% when excluding the non cash charges adjusted EBITDA decreased 16% sequentially to 13.

8.9 million, that's compared to 60.5 million in Q2 was 23% decremental margins sequentially.

For the nine months ended September 32019, our weighted average shares outstanding were 26.6 million.

Now turning to our segment results.

Our production oriented businesses combined for 59% of total company revenues was well servicing and water logistics, representing 32% and 27% respectively.

And with the prior quarter.

In these two core segments revenues decreased 3.7 million or 3% sequentially on reduced activity, while direct margins decreased 1.4 million or 5%.

Completion, and remedial services revenues were 70 million in the third quarter, a decrease of 10% over the prior quarter and represented 39% of total revenues.

While margins were relatively flat at 23% compared to 23.6% in Q2.

Due to increased margins of 41% in Q3 in our raft line of business compared to 37% in Q2.

Well servicing segment generated third quarter revenues of 57.1 million the sequential revenue decrease of 2% compared to Q2 on lower rig count and utilization. However, we were pleased to see segment profit increased to 13.6 million or nearly 24% in Q.

Three from 13.1 million or near 23% in Q2, as we continue to benefit from cost control measures.

Additionally, our daylight rig count was weaker as we averaged 96 daylight rigs in Q3 as compared to 100 808 during Q2.

The primary drivers were largely happy customers deferring discretionary spending.

The water logistics segment generated revenues of 48.5 million a sequential decrease of 5%.

Segment profits were 28.2 person were 13.7 million a decrease of 12% over the prior quarter, primarily due to decreased completions related activity as larger eve MP slowed down there completions activity in the central in Delaware basins, which impacted rentals and service work.

In spite of these headwinds in a plans decrease interactive fluid truck count water disposal volumes reached a record 10.8 million barrels in the third quarter.

Direct margin I will leave Ray midstream business within our water logistics segment increased 89% in Q3 as additional pipeline volumes contributed to higher direct margins in our water midstream operations. We expect total company revenues to decrease sequentially for the fourth quarter.

2019 based on the normal decreasing working days and seasonality during the fourth quarter end market sentiment that easy companies will continue to curtail capital spending into the end.

We ended the year.

Reported or undigested Gionee expense decreased during the third quarter to 32.1 million a decrease of 2.7 million compared to the second quarter.

Adjusted Gene a decreased 2.2 million sequentially or almost 1 million on an annualized basis.

We expect gene next Miss in the fourth quarter of 29 seem to be approximately 31 million.

Third quarter depreciation amortization expense was 29.2 million compared to 29 million in the second quarter, and we anticipate DNA in the fourth quarter to remain flat.

Reported net interest expense was 11.6 million in Q3 compared to 10.4 million in the second quarter.

The increase was related to accrued interest on an income tax judgment and anticipated settlement from prior tax years.

Expect Q4 quarterly net interest expense to be 10.2 million. While interesting 2020 is expected to decreased to approximately 9.7 million per quarter as the principal amount owed on our capital leases continues to decline.

Our effective tax rate was zero for the nine month period as of September 32019. The company had approximately 860 million net operating loss carry forwards for federal income tax purposes for which we care a full valuation allowance.

Due to our wells, we do not anticipate paying federal income taxes for the foreseeable future.

Cash cash capital expenditures for the quarter ended Septemberthirty 2019 were 11.2 million compared to $16.8 million in the second quarter and were 53.9 million year to date.

Expenditures were partially funded by proceeds from dispositions during the third quarter.

2.1 million.

Approximately $5.8 million of cash Capex was spent on expansion projects, primarily on ongoing midstream projects with the remainder remainder for maintenance.

Point 4 million in Q3 compared to 1.4 million in the second quarter and we do not expect to have substantial additions for the remainder of the year.

We expect our year end capital lease balance to declined to approximately 40 million.

We currently expect 2019 full year capex to be approximately 58 million, including total lease additions for the year of.

8 million with a range of estimated cash proceeds from dispositions for the year of $15 million to $17 million.

Net working capital decreased sequentially as we paid down accounts payable and accounts receivable decreased as a result of reduced activity.

Our Dsos were 65 days well over 90 day receivables represented 9% of art, Hey, our balance at September 30.

As previously disclosed we have authorization for a 5 million dollar share repurchase program.

Share repurchases have totaled 2 million shares for 3.4 million in Q3 with total cumulative shares acquired through October Thirtyth of 2.5 million shares for $4.8 million.

Our cash and cash equivalents were 50.5 million in our borrowing capacity of net of letters of credit was 50.4 million with no amounts drawn on the IPO at September 30.

Total available liquidity at the ended the quarter was 101 million and on long term debt net of discounts was 336 million compared to 350 million at year end 2018.

We expect total debt reduction during the year of approximately $19 million.

Primary focus today is to generate operating cash flow and protect our liquidity through spending discipline, while continuing to modernize our business processes to optimize our cost structure and service delivery efficiency.

Effectively and efficiently delivering business intelligence to our internal and external customers is critical particularly in today's competitive market.

We continue to invest in that successfully deployed best in class technology systems to enhance our competitiveness.

Our success in this effort has positions basic to respond to the supply chain management organizations within our customers that are demanding more and more data. In fact, we've recently attracted a number of global integrated customer procurement teams, who have been impressed by our unique ability to provide the business intelligence.

In customer portals, they're requesting.

We expect to make further progress as supply chain management continues to drive decision, making within S&P organizations large and small with that I'll turn the call back to ROE for some concluding remarks.

Alright, Thank you David as we head into the winter months and expect potentially stronger than typical seasonality in the fourth quarter, we anticipate customers to continue to focus on returns and free cash flow generation.

With our industry, leading fleet of high spec service rigs and associated rental equipment, along with the vast network of salt water disposal Wells makeup Aqua Libra midstream, we believe the basic energy services delivers a compelling value to upstream producers were just prediction production services offerings and operational.

Outperformance.

Even with this stable platform and production oriented businesses healthy returns in our service sector can be greatly improved with a high level of consolidation.

To that and we're working consistently on opportunities that present scale cost synergies.

And de lever the balance sheet, while bringing any specific transaction across the finish line has proven difficult.

In the industry over the last several years, we remain strongly committed and optimistic that more and more of our peers field as we did.

Now more than ever we feel consolidation is critical to our space.

Lastly, as this will most likely be my last earnings call with the basic team.

I'd like to take a moment to comment on how proud I am of the team has assembled here of basic today.

While none of us can control the price of oil for the level of demand for our services in our industry. This team has continually executed at one of the highest levels and the entire service industry space has been an honor and privilege to work side by side with each and every one of my teammates over the last 14 years.

I would also like to thank our board our customers our vendors are covering sell side analysts and of course our shareholders.

I'm confident that this industry best days are not behind it and that the basic energy services team will be a different differentiating factor for many years to come.

And with that operator, please open up the call to questions.

Thank you will not be conducting a question answer session. If you like you, placing the question can you. Please press star one of your telephone keypad, a confirmation tone will indicate your line is in the question Q.

You May press star to if we'd like to remover question from the Q.

Participants using speaker equipment, and maybe necessary to pick up or handset before pressing the sarkies once again that star ones, replacing the question Q1 moment, please probably pull for questions.

First question today is coming from Tommy Mall from Stephens. Your line is now lives.

Good morning, Thanks for taking my question.

And Tony.

One of the sort of I will leave Ray a couple related questions. There first for the Capex, that's going out the door already.

When.

And.

When one will a lot of that start to hit the model.

And specifically if you could give us a size range or AMAG, just the magnitude of any sense of how big an impact we might see going forward and then.

Second related question as you think about the opportunity set.

For potential investments.

Can you frame up for us just a hypothetical project how much capital.

You might take down for any given project it sounds like it might be a three year type payback, but anything else you can do to help aside the opportunities that would be helpful. Thank you.

Sure So I.

I think in 19 by the time, we get through we're going to have spent somewhere in a range of between eight and 12 million on these infrastructure projects Avago Libra.

We probably start to see the EBITDA generation of that they'll start in the late.

First quarter of 2020.

Might even see that a little sooner than that but I think just you won't see the full run rate until second quarter of 2020.

I think that these projects.

Typically do have a 36 month payback or better.

This particular project, probably has a little better payback than that.

So you can kind of figured the EBITDA only talk about payback, we're just talking about cash on cash. So you can kind of calculate to EBITDA yourself. If we think it's going to be 30 to 36 months.

With.

Full run rate kind of.

EBITDA generation from from that kind of spin that was a big project. We don't expect every project to be nearly that big that system has multiple SW days, it's got multiple gathering stations.

Lots of of trunk lines and gathering lines. So we feel like not every one of these projects can be nearly that involve.

Several of them will be two and $3 million kind of projects some will be less than a million, where we're actually just retrofitting.

What was the private basic disposal to a more commercial disposal that that allows third party more third party trucks.

So if that makes sense, we'll go from like a three day.

Depo to a six bay Depo those are going to pay back very quickly so probably less than 18 months payback. So it's kind of all over the map. We just think 36 months is kind of the Max.

And then I think more importantly, we.

I don't want to deploy capital where.

We don't have or at least significant capital.

For these gathering systems, where we don't have contracted.

Support from the customer base and so thats what the discussions are today is getting getting commitments on paper.

All you commitments are hard to get acreage commitments are a little easier.

Lots of Greenfield out there for some customers lots of interest in what we're doing and where we're doing it but it's driven by what the customers are willing to to contract. So.

Where we're being very judicious when it comes to deploying that capital and we will be in the future because obviously without a third party capital provider.

We've got to be careful because we just don't have a ton of dry powder go out there and build system after system. So.

It will require some support from the customer in some cases, we might even have customers that want to contribute to the capital outlay. So we're have lots of irons in the fire I hope that answers your question Tom.

It does and I appreciate it and your comments on capital lead me to my second question I wanted to ask in recent quarters you guys have.

Given an estimate on where you think you may end the year in terms that cash balance I wondered if you could update us on that and then any early peak you could give us into 2020, Capex I understand it's premature, but a range would help or even just qualitatively some of the considerations that are in place.

Thanks.

I'll, let David speak to 2020, because I, probably won't be here for it but I think that.

Beginning this quarter and a 40 to 45 range is probable.

Will that.

That will.

Include Sun.

Capex that we have planned for the fourth quarter, we can dial that back in you know in other words, if we saw customers change their behavior dramatically, we might we might curtail that a little bit. So I think thats more of a high high case.

Or as low case for cash so we get out we can pull we can pull cash in actually end up with more cash than that if we saw things.

No go more off the rails or something but right now it looks pretty stable and we feel like all the customer commitments. We have are going to hold 30 ended the year I think David you want to talk about where do you see in 2020, yes, I think this year, we've communicated we're going to spend about 58 59 million for the year.

Sure that's in a year, where we had a lot of expansion capex upfront that number will be in the neighborhood of about 23 to 24 for the year as far as expansion next year, obviously is not something that we're going to do as far as.

A lot of discretionary capex, so I think that number for the year next year. If we're in the 30 million cash capex level.

We would supplement that with some additional leases for our rolling stock.

So that number might be upwards of 35 to 37.

Range, but thats kind of what we're thinking at this point and obviously.

In the Oldfield space you can't really.

Mike Annual plans, you got to be able to adjust and react to the conditions on the ground and we know those things are going to change there will be a we'll be ready to do that.

Alright, Thank you gentlemen, ill turn it back.

Thanks, Tom.

Thank you. My next question today is coming from John Daniel from Simmons and company. Your line is now live.

Thank you and ROE good luck on a.

Your next adventure and thank you for all the support over the years.

I guess my first question is margins were.

Pretty commendable and CNR segment, given the revenue drop.

Just curious you know the guidance points revenues being down needs I think you said similar amounts in Q4.

Within CNR.

How would you.

See margins within that segment in light of just seasonality in another revenue decline.

I think decrementals, they're going to be about what they were in the transition from second to third quarter and propped up by the rental and fishing tool business and all of the work that we do on these big Workover packages that gets lumped into CNR. So.

You know the Acidizing businesses stable the cementing businesses stable our coal tubing business is pretty stable knock on wood, we're pretty happy with those results right now as softness.

Part of that business is frac and while our utilization has been good pricing has been the toughest thing we've got.

Some of our larger peers out there just dropping prices below.

What we think are really.

Breakeven returns at the field level, we pass on that work, we don't even we won't even try for it so we can't make.

A decent cash return at the field level, it's not something we're interested in participating and so.

But but when they do when they throw those prices out there they bring the whole tied down and so so it makes things.

Tougher in that business so I.

I think frac is the softest piece it will be the softest piece in the fourth quarter, but even though we expect some additional reduction well completions.

We think our rental and fishing tool business and our coil business seem in acid will hold decrementals about what they were.

Second quarter to third quarter, and just to add to that.

John you know the we're going to be benefiting going forward from a fairly substantial realignment in our pumping services division, where we've integrated those input into our regions. So.

Gonna be kind of resetting our cost structure. Thank our are pumping services group has done a great job year to date in getting ahead of that we had a tough first quarter or first few months of the year, but since that time we've been.

In that 15 to 20 or our plus percent margin and we hope to see the benefits of that additional work as we move forward.

Okay, and then when sort of following on Tommys questions within the what the water business.

These investments that you've made do you think again I know you don't be held the 2020 guidance, but would you feel comfortable at least with margins gross margins there being north of the low thirtys with these investments assuming no major change to industry activity.

Absolutely I'll be disappointed if they're not higher than that so.

The Big if you were just talking about pure piped water and kind of pure midstream kind of margins, yes, theres, a mark margins get.

Lesser for.

You know pure truck barrels.

But still pretty good.

Considering some of the other margins that are out there in services today those are still pretty healthy margins in the mid to high Twentys. The the one thing I would say as.

As well completions reactivate and we've had several customers talk about fracs that had been postponed until the first of the year things they they.

Absolutely going to do in the first quarter. So we think that flow back barrels are going to pick back up in the first quarter and that's going to add tremendous support to margins in the fluids business.

In the first quarter, we could get.

Nice surprise in that business with flowback barrels remember flowback barrels are usually by the hour not so much by the barrel margins are higher and frankly, we see skim oil cuts that are that are slightly higher on from flowback barrels. So those are always it's a good time or when we're working around the clock doing flow back.

Okay. Thank you and then just two housekeeping ones for me if you could remind me where the for work in Frac spreads are located which regions.

And then yeah okay.

It's ranging from four to five.

North Texas, Oklahoma.

We do a little bit will work in Kansas, and a little bit of work in the DJ <unk>.

We also will will fracs on.

I will jump over in do.

Central Basin platform and Midland Basin.

From time to time as well.

Okay.

And then I guess the final one for me.

Noted in the release I don't like you said this in your prepared comments, if you did I miss that but on the assets like the drilling assets. You can you would you hazard a guess what you're targeting for term debt proceeds from asset sales over the next three to six months.

I don't want to get into what we think ever going to see auction because I think auctions always surprised everybody.

No we were confident that.

No.

We're going to sell a split between some stacked assets and some going concern.

We've had some.

Folks trying to come in before the auctions and make some offers so we have some ideas, but I mean I think.

The drilling equipment is certainly not going to bring a premium, but it's going to its going to be.

Something that where we're happy with when it's all said and done it's probably under 10 million, but but you know all end, but now we've got several.

Inbounds on all of that so it's that's healthy to see and good to see.

Well just have to see what the auctions bring when it's all said and.

He's had a Q4 and that ROE yes.

Okay. Thank you very much for your time.

Thank you.

Thank you. My next question today is coming from Daniel Burke from Johnson Rice and company. Your line is now live.

Yes, good morning, guys wondering Dave.

Oh, I guess I wanted to return briefly to the cash Capex plans for 2020.

David you talked about 30 million a little while ago. Just wanted to understand is that is that essentially a maintenance only budget or have you guys been able to restrain or with the rationalization the asset base.

It is maintenance only a component of that and is there a growth hold.

That's going to be.

It's going to have some expansion component to it. So I think the way we would look at things is we're going to be pretty stingy on discretionary capex, but as Rob mentioned, if we have identified some customer customer sponsored projects.

Not some of the larger projects, but some of those one off smaller ones than we might look at that but I mean, I would look at that as as being highly levered to the maintenance of our fleet.

Okay got it.

And then just to pivot over to.

Well services business it was nice to see.

The 24 hour rig packages that were active hold steady from Q2 to Q3 despite.

Industry activity levels declining as you look ahead to next year.

If we do see completion activity kind of rise can you just remind me how many of those packages you had the ability to field and what do you think the prospects our roads and maybe maybe touch that number back up closer to where it was a year ago.

Well it all the a function of the completion work I mean, I think don't.

And possibly some bigger workover, we're doing both right now.

You know Recompletions and.

Some lateral extensions things like that.

And even some some brand new lateral work.

But I think the driver for that will definitely be completions and drill out.

We'll probably.

We filled it as many as 31 I think that was our peak.

Kind of average last year was 23 to 24, we could quickly get back to that number in the first quarter of 2020.

But I would be disappointed if we didnt touch that high twentys and possibly even low thirtys number before the end of 2020.

Got it.

All right guys look I'll I'll leave it there in a row certainly certainly all the best all the best looking for.

Thank you Dan.

Thank you we received about question answer session I was just from a floor back over to ROE for any further closing comments.

All right. Thank you operator, and thank all of you for calling in.

I look forward to a watching this company continue to excel I hope consolidation.

As a big driver for this industry I'd love to see a lot of it done over the next to.

Few years and love to see basic be a big part of that as a as a significant shareholder.

And Tim I came.

I remain your biggest supporter and a high the highest level of confidence that the next CEO will be just as proud to work with you as I have been so thanks everybody.

Chuck you soon.

Thank you that does conclude todays teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.