Q3 2019 Earnings Call
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Good morning, everyone and thank you for joining us today to discuss <unk> third quarter 2019 results.
With me today anything I think I guess.
The Chief Executive Officer.
It's a certain risks and uncertainties.
A number of factors and uncertainties could cause actual results in future periods to differ materially from what we talk about today.
More complete discussion of these risks we encourage you to read the company's earnings release, and our documents on file with the FCC.
In addition, we refer to non-GAAP measures during the call.
Please refer to the earnings release on our public filings for a full reconciliation of net loss to adjusted that lost EBITDA and adjusted EBITDA.
For definitions are non-GAAP measures.
With that I'll turn it over to have any for opening remarks.
Some comments on the rig market, what's playing out today and a quick summary of some strategic initiatives we have underway.
First the third quarter was definitely choppy for IC D with breaks continuing to transition between customers.
Which caused our reported cost per day to be higher than we would like.
This was not due to cost increases for operating rigs, but due to continued transition related costs, such as labor as we move rigs around and our customer base.
But we exited the third quarter with more rigs, earning revenues under contracts. Then we began the quarter. In fact, if you excluded the three fcr rigs that we took out of our marketed fleet at the ended the second quarter, we actually increased our contracted pad optimal AC rig count by three rigs.
During the quarter.
In addition to these incremental adds during the quarter, we successfully re contracted 11 rigs, including adding another one to our south Texas operation all resulting in the net increase in contracted pad optimal rigs.
And as we look forward, we still have strong conviction that are contracted rig count will increase on a net basis as we enter next year.
And with that point I'd like to offer some more detailed perspective on the current market and how I see de strategically fits into what's going on in the U.S. landmark it today.
It is common knowledge that what our industry has seen in 2019 and what we expect to see in 2020 and beyond is a shift in E. N P. Operator behavior as they focus on returns and operating within free cash flow as capital markets are mostly closed for purposes of financing growth capital.
We believe this is the new normal range bound oil prices between 50 and $70 per barrel and a north American rig count generally range bound between 800000 rigs and the companies that will succeed in this environment will be the ones that manage their business across this new paradigm, rather than overreacting, one way or another to supply and.
The man cyclical swings.
And the disruption and Choppiness in the market, we've seen over the past several quarters.
And we'll likely see over a few more simply rearranging the pieces.
Efficiently operate in this environment.
Just as an example during the third quarter alone we had five rigs moved to new operators.
Our customers have reduced rig counts in 2019, even in the face of higher commodity prices compared to their 2019 budgets and are more focused than ever on operating efficiencies.
In a multi well pad based manufacturer model.
To be competitive our customers require rigs in operations that maximize efficiencies reduce cost.
And maximize its production.
And we're seeing that in the rig fleet dynamics, we are experiencing today.
The AC rig count now represent 75% of the U.S. fleet up 10% just in the past 12 months.
Super spec rig count remains robust and day rates are holding up relatively well even in a rapidly declining rig count environment.
And in the past six months, we've seen a greater willingness of our customers to evaluate and consider new technologies, such as drilling optimization software in order to maximize overall efficiencies.
Definitely but there is more going on in the contract drilling industry, then just a declining rig count.
Within this decline we believe we are seeing the final fundamental shift away from legacy equipment, the old way of doing business and to operations and equipment that maximize drilling efficiencies in our opinion, there's equipment that has been laid down in the past 12 months that will never operate again in this new world order.
And there's more to come in other words the final manifestation of the ongoing rig replacement cycle is underway.
And I see D. is extremely well positioned to participate in this evolving market dynamic I rig fleet is young our rigs are pad optimal engineered to maximize manufacturing efficiencies for our customers and we're focused on north America's most prolific oil and gas producing regions. Our merger integration is complete.
And we're now marketing our larger rig fleet across an expanded customer base as they prepare their 2020 budgets.
As noted in our press releases over the last couple of weeks, we've made significant progress with respect to drilling optimization software. We have one system deployed in a second being deployed with one of the world's largest major operators as we speak.
As you may recall as opposed to choosing a path in which we internally developed these systems, we chose to partner with a few third party providers several of the largest oilfield service companies in the world and developing software in equipping our rigs with this new technology.
Over the past 12 months, we have established third party solutions that now are able to be deployed across our entire drilling rig fleet.
In short our entire fleet is ready as our customers continued to adopt the software solutions as a method to drive operating efficiencies increased reliability and ultimately drive down development costs. We're very excited to prove the value creation capability of the software when used in combination with our pad optimal shell driller rigs and.
As a pathway toward earning incremental margin for our rigs I see these rig fleet is very well positioned to compete and this evolving market.
Of course in the near term the market's choppy in forward visibility regarding customer plans for 2020 remains cloudy.
Very few MP operators have released their budget plans for next year, but the consensus view seems to be at best flattish upstream MP spending for 2020 compared to 2019.
But for the reasons I just outlined even in a flattish type environment. We had IC de believe we will be increasing our operating rig count as we move into 2020.
Since the ended the third quarter, we've already executed extensions on for operating rigs.
We also have two rigs that we expect will reentered the marketed fleet that will meet the highest technical specifications in the industry, including three pumps for engines 25000 feet of racking capacity enhanced hook load if needed and drilling optimization ready in other words rigs that MP operators must have in order to effectively.
We operate in the overall market I, just discussed and most important for us rigs our customers are willing to pay robust day rates for.
And contract discussions for next year, very strong with more opportunities for rig activations than we have idle rigs, what's an excellent customer high grading opportunities.
Day rate and contract tenders are generally lower in shorter than we would like.
Most of the work today as pad to pad the six month contracts, even though most customers have longer work lines for the rigs.
Lastly, I'd like to discuss some important strategic initiatives underway.
We've been active under the stock buyback authorization granted by our board late summer.
As we move forward, we will balance repurchases against required investments in our fleet debt repayment and available cash flows.
But where we are today and what we perceive as an obvious dislocation between our public market valuation and the real value of our pad optimal fleet and company. We expect to continue to be active in our buyback program.
On the debt and liquidity side, we're in a very good position our trailing 12 month net debt to adjusted EBITDA ratio is 2.3 times.
And our net debt to total cap is approximately 24%.
We do not have a debt maturity for four years since October 2023.
And we have committed assessable liquidity at 930 comprised of our cash.
And our Undrawn revolver and term loan according to $46 million.
Our debt is pre payable all are in part at anytime.
On our fleet, we're nearing completion of our first SCR and AC conversion, which is novos capable as I mentioned earlier, our IC de rigged three out three which had its hook load capability upgraded to may in pounds and setback capability enhanced is complete and current him being marketed.
Looking forward I believe these will be the final to upgrade we complete until market conditions improve.
We will continue to add third mud pumps and fourth engines to our fleet as customers require where weaken our incremental day right. The justifies the expenditure, but we expect our 2020 capital budget to be substantially lower than our 2019 expenditures likely in the $10 million to $14 million range with maintenance Capex next year, representing approximately eight.
End of this estimate.
So with that I'll turn the call back over to Philip So he can walk us through the financial results for the company.
[noise] Thanks Anthony.
During the quarter, we reported an adjusted net loss of $7.9 million.
10 cents per share and adjusted EBITDA of $7.7 million.
Excluded in calculating adjusted net loss was a noncash impairment of $2 million associated with goodwill.
Recorded in the Sidewinder transaction.
Overall reported results are consistent with our preliminary numbers, we reported a couple of weeks ago. Although the final noncash goodwill impairment was slightly higher based upon final purchase price accounting for the transaction.
With respect to other items during the quarter.
Revenues included $300000 of early termination revenue.
Including this early termination revenue revenue per day was $28559 per day, representing a sequential decline of $309 per day.
Rig utilization of 76% came in below guidance provided in our second quarter conference call, primarily due to a delay in scheduled rerate scheduled rig reactivations during the quarter.
Cost per day $14914 per day came in higher than our guidance relating to the reductions in operating days at a higher and higher than anticipated crew and rig transition costs.
SGN, a $3.8 million, including noncash compensation expense of $600000 kemet consistent with guidance as full realization of merger synergies occurred during the quarter.
Depreciation and interest and tax expense came it consistent with our prior guidance.
Cash payments for capital expenditures net of disposals insurance recoveries and capital lease additions were $7.7 million during the quarter.
Our overall 2019 capital budget of 29 million at our disposal recoveries and leases remains unchanged.
Moving onto our balance sheet.
September Thirtyth reported net debt, excluding finance leases, a net of deferred financing costs $118.2 million. This debt debt. This net debt is entirely comprised of our term loan which requires no amortization and does not mature until October of 2023 four years from now.
Well the is prepayable at any time and contains minimal financial covenants.
At September Thirtyth, we had total liquidity a $46 million comprised of cash on hand, and availability under our undrawn revolver and term loan accordion.
Our backlog at September Thirtyth stood at $57.8 million, representing 7.4 rig years of work.
At quarter end, we had seven rigs operating under short term contracts not included in this reported backlog.
Now moving on the guidance for the fourth quarter of 2019.
We expect to see the following.
Spect operating days to increase approximately 5% over the third quarter.
Revenue per day is expected to range between 19000 $920200 per day.
But the expectation that receive minimal to no benefit in the fourth quarter from the two rigs undergoing upgrades that Anthony discussed in his prepared prepared remarks.
Cost per day during the fourth quarter expected range between 13700 $14100 per day sequentially lower than the third quarter, but still reflecting some inefficiencies associated with rate transition costs.
SGN, a depreciation interest and tax expense.
We are expected to be flat compared to the third quarter.
And with that I'll turn the call back over to Anthony.
Thanks, Phil I have no further comments at this time operator, let's go ahead and open up the line for questions.
We will 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 a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily.
To assemble our roster.
The first question comes from Kurt Hallead with RBC.
Please go ahead.
Hey, good morning.
Morning hurt I appreciate the appreciate that color and an update.
So I'd say, Anthony the commentary regarding the opportunity, but some rigs back to work.
You know is.
A little bit more optimistic than what we've heard some from some others, though.
Not too far from from say consensus view point right in the context as you kind of look out beyond say fourth COVID-19 and into the first part. So wondering if you can give us some additional context around the discussions you're having with the customer base and.
Maybe some some.
Early insights as to how they're thinking about their their budgets and spending plans for for next year as well.
Sure. That's a great question, Kurt just to you may recall, we are utilization was hit earlier in the year driven by number of factors certainly influenced by a particular customer that that dropped.
Some of our rigs not not related to performance just.
Budget exhausting early in the year Recalibration of span those kind of thing. So we suffered earlier in the year is what I'm trying to say we came out said you know the rest of the year, we'll be adding rigs I think the performance of IC de over the third quarter showed that to be the case, we certainly ended the quarter.
More rigs working then we began and we're we're reaffirming that guidance that we're going to continue to add rigs, where we're going to add rigs is art too.
Some existing customers, but what I'm really excited about some of the good discussions we're having right now our with customers that will be new to IC D. These are guys that.
Prior to the merger both of the legacy companies may have been too small to have serious conversations like that with him.
And now we're able to have that discussion.
Some of them are high grade opportunities, where the customer as Recalibrated spend you know he has reduced as rig count to where he plans to be as he rolls into 2020, but now he's looking across the slate and seeing and finding opportunities where where performance can be improved and we're certainly and those kind of discussions.
The two rigs, which we've upgraded here in the back part of the year. One is ready to go we're in discussions on that rig and then we're real excited about the AC conversion. We're nearing completion of that project. We're about to start the commissioning phase here in early November .
That rig as Weve discussed is novos capable so.
All of the interest surrounding technology.
That rigorous has three palms, it's got all the bells and whistles on it that data customer would would would would like in the in the U.S. Unconventionals. So I think when you think about the the rig class the rig capabilities the specifications and all we've got the right Reg.
We're talking to the right customers.
Clearly as we think about 2020 it feels like overall upstream. The MPC then at best will be flattish I've seen some numbers, it's way too early and processed it to confirm but maybe it's down slightly year over year, but I guess the case that we're trying to make is that he.
Even in a flattish to even slightly down environment, we would expect to see IC de continued to increase is contracted rig count.
All right appreciate that color now in the context of the.
Commentary on fourth quarter with.
It's coming down op cost coming down so cash margins looked like there could be relatively flat.
With that with where you were in the third quarter.
Again it is as you look out onto these opportunity set for 2020, alright, theres been some discussion around.
Leading edge pricing, maybe coming down at the margin, but it looks like overall.
Not a.
There's not this massive rates that a bottom on on pricing they give us some indications on how you see that might be playing out for your rigs going into next year.
Yes, we talked about the continuum of day rates and.
The situation that you may be negotiating whether it's a rollover type contract with an existing customer whether it's an incremental add to the new customer where the competitive situations different whether you have three pops or our two thoughts and technology or not and things like that.
As you think about where I Cds average day rate is we think about the especially the high grading opportunities that we're looking at for next year, We would expect those day rates for those rigs to to be at or even above where our average day rate has Ben.
That allows for some room.
For the highest in day rates to back off some but it would still be incremental to where I CD has been and where we are right now so we believe that.
There's a bias upward and our average day rate and it's it's the fleet mix is there the incremental rig adds that we're looking at and the opportunity set that's in front of Us garden.
Okay, Great and maybe just one last one one dynamic.
On Capex. So I know you gave us the net capex numbers for both 19 and 20 and that's I know net of asset sales and so on but on a gross capex basis.
As we kind of match this up with what you guys put in your 10-Q's and cash flow statement, how do we think about gross capex for 2020.
It would be in that range Cartus Philip.
Being that $10 million to $14 million range. We there are some asset sales that will look at we don't have any plans yet.
It would be in that range.
Okay appreciate that.
Thank you.
Thank you Kurt.
Your next question comes from Ryan fixed with B Riley FBR. Please.
Please go ahead.
Hey, guys. Thanks for taking my question.
Welcome.
Somewhat following up on the Fourq Guide you guys see rig margin and rig count higher is it fair to say that Threeq you could be a bottom in terms of Bulls eye cities for account and rig margin.
Does this fill up I think talked about the rig count. So we do think it was a bottom there I think on margin as well.
Third the third quarter was very difficult for us on a cost per day basis. The lot of transition going on we see that alleviating some in the fourth quarter as we move into the next year, we see our costs really normalizing down.
Quite a bit lower from where they were even what we guided to and the and the fourth quarter guidance.
Thanks, Phil and then for the SCR conversion scheduled for completion during the fourth quarter does that really have a contract in place once upgraded and can you share where you expect your operating rig count to exit for Q.
Yes, so on the the rig thats being upgraded it does not have a contract today.
That's a project that we commenced back in August early September we figured 60 to 90 days, including commissioning so were more or less on track with that.
We've entered a period, where we should be marketing the rig.
Of course, this is happening against a backdrop of our customers recalibrating and finalizing budgets and this kind of step so it's our expectation that.
Construction.
The upgrade and the commissioning will be complete during the month in November I think as we think about startup for it to we're kind of targeting ended the year and could start a little earlier could be a few weeks into 2020.
We're on track with that and.
Sorry, I got the other question.
Just if you could share where you guys expect operating rig count to exit Fourq you sure. Yeah. I think we've said kind of 23 to 25, maybe 26 rig something like that as we exit the year it.
You had to pin me down today, it's probably on the lower end of that range, but 20 324 rigs ended the year is where we expect to be go pretty confident about that.
Great. That's helpful I'll turn it back thanks, guys.
Right.
The next question comes from Daniel Burke with Johnson Rice. Please go ahead.
Hey, guys good morning.
Ryan Daniel.
Well I think I wanted to revisit kurtz.
Good day, and make sure I heard something correctly just on revenue per day trends I'm. Just so you guys expect it just got full year 2020 revenue per day would be kind of at are higher than the kind of 20 8-K per day midpoint ish level of Q4's guide is that is that correct.
That's what is feeling like Daniel.
Okay, Great I, just want to make sure I had that that pinned down correctly and then.
So to flex the other side of what makes the margin and talk about operating cost per day. Philip heard you said, you guys have confidence and getting that figure down, but I mean as there is there a number of up or is there do you have to get to a certain utilization level or certain count of active rigs to get back down to the kind of low to mid 13, K level and I know there's rig level.
Cost and some other cost burden that it has to be spread across the rigs, but but wanted to pursue that a little bit.
Yes. So if you look back when we operated were 100% utilization. We had we had quarters. We ran below $13000 today, we actually have synergies we realized in the from the transaction that could even do that we could do better that that environment, but we're not going to get down to there if our one run in 25 or 26 rigs is going.
To be some fixed cost absorption that that would offset that but the things that are affected us in the third quarter in our affect us a little bit enough in the in the fourth quarter is rigs moving around between customers. We had five rigs move between customers and the third quarter, we're going to have some some of that this quarter. So within the rig count you guys don't see it there.
A lot of churning back and forth and Accretes inefficiency, we've got to go stack a rig for a couple of weeks here, we still have to pay the cruise because that's the.
We don't want to lead the crews are extremely important so as that alleviates itself, but we think it will next year as the the budgets come into play and I see us getting down.
The 13, five type of range I'm pretty comfortable with I'd like to think we can do better than that but 13, five seems like a reasonable number for us. If we're running 25 average say if we averaged between 80 and 90% utilization of the 30 rigs or market next year that be 2025, and a half rigs we market we run next.
Sure on average we should be in that 13 fiber hopefully a little lower range.
Okay. Thanks, that's helpful. And then just just last one for me small for clarification you guys current active rig count as of today is it stood about is it still 23 kind of where you finished the third quarter.
Yes.
Okay, Alright, great guys I'll leave it there thanks for the thanks.
Thank you.
The next question comes from Dan cuts with Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
Yeah.
So just one wanting to get a little bit more color on your capital allocation priorities I know that you guys said that your current valuation definitely makes share buybacks attractive, but just could you talk a little bit more how you're looking at.
Great capex versus share buybacks versus debt reduction and.
Hi, guys are thinking about that going forward.
Thanks.
Hi, this is still up.
When you think about upgrade Capex right now we don't have any plans to upgrade any other rigs in our fleet, we've got to idle SCR rigs, we could upgrade AC and there was too.
AC rigs that we could upgrade those those are off the table right now.
The only kind of upgrade our capex that we're looking at would be adding third pumps or fourth engines to our rigs and anything related to software where our customers are willing to pass for it that's what we're going to look at going forward as far as capital allocation in the near term. We do think there was a dislocation in our share price and so when you think you can.
We think about that versus debt repayment.
I'm, probably in the near term leaning more towards.
Share repurchases debt repayment, though we do need to be thinking about paying down our debts as we move forward and we can do that that debts prepayable at any point in time, all our in part so as we move.
Later on in next year will probably be looking more we'll start thinking about paying down debt as well.
Got it thanks, a lot and then.
So just kind of with with merger synergies synergy realization behind us.
Are there any other cost savings initiatives that you guys are undertaking or is it more just a factor of re contracting rigs improving utilization and you know that leads to better fixed cost absorption.
Just would love to hear your thoughts on that thanks.
This is Anthony certainly more operating days better absorption is going to help and benefit us.
We've really done a really good job on the integration wringing out every cent of synergy opportunity that we've had over this year certainly going forward, we would expect to continue to see some benefits obviously the.
The big use we've secured that but on the margin continuing to leverage our combined.
Purchasing power leveraging the the ERP system, specifically, the purchasing application, which we use.
The same type pressure that I think all service providers are feeling from our customers. Obviously, we're applying that same pressured to our vendors as well. So we're going to continue to work to lower cost where we can.
I think we've got a better opportunity as a combined company than we had individually.
A year year, and a half ago to do that.
But yes, we're not going to let up the folks is what I'm trying to say.
So it'll be a combination of holding average revenue and uneven increasing it but certainly better absorption lowering cost where we can just by being smarter about what we do and being very selective about the vendors we do it with.
Great. Thanks, a lot for the color I'll turn it back thank you.
The next question comes from.
Taylor Zurcher with Tudor Pickering Holt. Please go ahead.
Hey, good morning.
And.
Wanted to follow up on the other question on capital allocation for next year, and clearly you mentioned that near term it sounds like share repurchases have climbed to sort of pecking order, but as we think about 2020.
Are you willing to share any or do you have any sort of internal target for absolute net or absolute debt reduction next year.
Viz, a viz beyond that you might look at share repurchases or is it really kind of a wait and see approach right now.
There is no absolute target today.
We haven't finalized our budgets for next year that point, Tom We may we may put a target, but today, it's going to be you know with our share price where it is today.
No, we think thats, an incredible value for us.
So there's no there so it will be a wait and see and obviously when we put our we have our final budgets, which will put in place early next year than we may have an absolute target, but the board's outsource.
Okay.
Understood on the cost line.
Well, we understand the inefficiencies in past couple of quarters and that'll spill over into Q4, as we think about Q1 I tend to think about that quarters, having some lumpy payroll taxes and things like that in there and so cost or.
Sequentially higher.
Should we be modeling.
Theoretically you'll have a higher rig count in Q1 at least on outlook you provided today, so will the fixed cost absorption impact be enough to outweigh some of those lumpy items that typically occur in Q1.
I think will be lower than where we guided today.
Fourth quarter for the first quarter.
Okay, we're going to get some more benefits if if the rigs we have planning to come out during that quarter. I think I think we'll see lower cost per day than what we guided to for the fourth quarter I don't think it'll be thirteenfive a day I.
I think because of the reason you just added.
You talked about.
And I'll sneak one we're in.
You mentioned in Q1 and prepared remarks that a lot of these new contracts, you're signing or are the ones you see on the horizon 2020, or more more well to well type programs and then the here now feels like there's a lot of churn within your rig fleet with rigs trading hands.
It is part of that just because as you work with new customers.
It kind of want to.
Test out ITD for the first time and.
Our keeping the program pretty short.
The that or do you see the market really.
Turning to more of a well well in three to six month month type.
Kind of market in 2020, <unk>, just given where we're operators budgets are likely to come in next year.
Yeah. So I'll take that this is anthony so the churn that you referred to.
Is driven has been driven for IC D. and I think it's true for lot of our peers by a budget exhaustion rig thats been working with working with a guy.
For the first 910 months of the year.
Budget the rig line ended he released the rig.
We I guess my.
Point I would make is that we were able to successfully re contract that rig. So it wasn't that someone tried this out and it didn't work out and we had to move on down the road. It's like said taken a rig that had finished with that particular customer, but it with a new customer.
That.
He has primarily been the reason for the churn I think the fact that we've also been able to.
Not only re contract working rigs, but now bring out idle rigs also as a testament to the brand the reputation operation reputation that we built in the marketplace as well that's a tough market out there no doubt about it I mean, we're off about 23% year to date on rig count.
Certainly feels like we're nearing the bottom you think you're at the bottom and you see another two dozen rig decline like we did last week, but it does feel like we're nearing the bottom and we would expect to see overall rig count bottom out here in the next month or so and began to go the other way early in 2020.
That are still I appreciate the responses. Thank you.
This concludes our question and answer session I would like to turn the conference back over to.
Anthony.
It goes for any closing remarks, okay, guys. We sure appreciate everybody make in time to dial in today.
I appreciate you just your interest and support of IC, Dave Obviously were available. If you have any questions. Please feel free to reach out and I look forward to see any out on the road or talking to you if not before okay. That's all from here.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.