Q3 2019 Earnings Call
Greetings and welcome to nine energy services 2019 third quarter earnings call.
This time, all participants are in listen only mode.
My question answer session will follow the formal presentation.
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At this time I'll turn the conference over to Heather Schmidt, Vice President Investor Relations Mr., Brett you may now be it.
Thank you good morning, everyone.
And welcome to 90 service earnings conference call to discuss our results for the third quarter 2019 with me today, our and Fox President and Chief Executive Officer, and Clinton radar Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward looking statements, reflecting nine to use about future about.
Forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectation. We advise what's your sort of your earnings release and the risk factors discussed in our filings with the FCC, we undertake no obligation to revise or update publicly any forward.
These statements for any reason.
Our comments today also include non-GAAP financial measures additional detail.
And a reconciliation on the most directly comparable GAAP financial measures are also included in our third quarter press release I can be found any investor relations section of our website I will now turn the call over to answer.
Thank you how they're good morning, everyone and especial. Thank you to all of the veterans for their service to the country.
Thank you for joining us today to discuss our third quarter results for 2019. This quarter revenue fell below managements original guidance and adjusted EBITDA fell within the range of minutes management original guidance. The revenue was below guidance due primarily to the sale of our wealth services Division in which we lost a month.
Contribution and the closing down of our wireline operations in Canada, which I will speak to more later in the call.
Despite market conditions weakening throughout the quarter, we increased cash flow from operations by over six times quarter over quarter and our cash position is up significantly to 93.3 million adds up as of September thirtyth.
We expect our cash generation to remain strong for the remainder of the year and into 2020. We also anticipate total capex to be down by over 60% in 2020.
Company revenue for the quarter was 202.3 million net loss was 20.6 million, which includes a loss on the sale of our production solution segment of approximately 15.8 million and adjusted EBITDA was 24.2 million basic earnings per share was negative 70 cents adjusted net loss for the.
Quarter was 4.7 million or negative 16 cents per share Oh, I see for the third quarter was 4%.
The market was challenged in Q3 and worsened throughout the course.
Customers remain extremely focused on staying within capital budgets, prompting many operators to scale back or slow down activity in the second half of the year to ensure they need work come in under their budgets with that many of our competitors are acting irrationally from a pricing perspective to gain market share.
This behavior, coupled with activity decline throughout every region has led to increased pricing pressure from which no service line in the hardest hit region earnings the northeast, where we have to meet Frac activity is already down over 25% versus the end of Q1, which has caused increased pricing pressure and our total revenue in this region today.
Crease by approximately 26% from Q2, the Q3 slightly more than the 20% decline you anticipated.
As a reminder, we sat on our last call that we asked me to Frac crews could drop from as high as approximately 55 to 60 crews at the end of Q1. She was lowest 35 to 40 and potentially more following Thanksgiving.
We believe these declines are still accurate our operations in sales team has done an incredible job, winning new market share and managing costs to keep that region viable and we believe the staff. We haven't please is rightsized to address the current operational needs of the business for the remainder of the year and into 2020.
The northeast accounted for approximately 20% of nine total revenue and includes both wireline and completion tool.
As we anticipated and discussed during our last call composite plugs continue to receive pricing pressure across all regions activity declines have caused revenue and total stages completed to decrease quarter over quarter.
Since the second quarter, we have lost approximately 20 to 25 Frac crews followed across our composite plugged business. The majority out of the northeast for some context, you can think about every frac crew completing approximately two and a half wells per month with each well, having approximately 75 plugs.
Assuming 22 crews this equates to approximately 4100 plus per month or approximately 12300 plugs for quarter.
The bulk of these losses came from dropped frac crews by operators curtailing activity, while a few others were lost due to our unwillingness to chase price to the bottom.
While we have reduced price on our composite plugs to maintain existing market share to aid an excel the introduction of our new tools. In 2020, we have me this strategic decision not meet and reasonable pricing by some of our competitors.
Cementing remained steady with both activity and price relatively flat quarter over quarter, despite rig count dropping by approximately 11% over that same time period cementing remains one of our most defensible businesses and we continue to innovate with new slurry designs and execute with unparalleled on time rates of over 95% on the service.
Execution side in the Permian, we were able to increase market share for the third quarter in a row.
Coil tubing thought to be declines in pricing pressures during the third quarter increased pricing pressure comes from a combination of overall activity decline new units coming to market and competitors looking to buy marketshare well. These competitors do not often when the work it does allow operators to place additional pressure on us to reduce price. Additionally, we estimate.
That is overall activity has declined throughout 2019, approximately 30 to 35, new large diameter units have come on or are coming to market, bringing a rough total of U.S. large diameter units at year end to 240 to 250 units, we are not there yet but because.
As coil is it more highly capital intensive business, we are watching pricing closely and will stack units before we destroy capital and generate negative full cycle returns.
U.S. wireline had been hit the hardest to date on pricing.
However, our team has done a great job maintaining overall market share in a declining activity environment, we're working with our best and most efficient customers to increase stage volume, enabling us to better work with them on pricing because of the increased efficiencies in this business and the low capital nature. There is very minimal maintenance capex, we do have more flexibility.
Pricing and are still generating positive EBITDA margins for every active region in the service line.
While the back half of your has been challenging we've been focused on executing our 2019 strategic initiatives, including evaluation of existing service lines and geographies that are not accretive to ROI see adjusted EBITDA margins and cash generation as well as the development of our new Dissolvable in composite club technologies I will stop.
Our by addressing service lines and geography, and then provide an update on our tool progression.
As part of this evaluation process, we identified two areas within the portfolio, we wanted to address well services and Canada on August 30, S., we completed the sale of our wealth services Division for Gate Energy services for approximately 17.4 million in cash subject to working capital and other post closing adjustments this transaction.
Need nine a pure play completions company that is more asset light, while also reducing our employee base by approximately 24% with 107 Workover rigs some of which were over 30 plus years old we identified a material capital commitment coming in 2020 and beyond and we were not willing to destroy.
Capital moving forward.
Divestiture also allows us to focus solely on our core service offerings and the successful development and commercialization of our new technology.
Simultaneously during the third quarter, we began the process of shutting down our wireline operations in Canada, we will maintain a completion tool footprint in this region, including a small number of employees and an office over the last several years the Canadian market has been extremely difficult with depressed activity challenge infrastructure and an oversupply.
Lives service companies and equipment.
Despite having a great team in place at nine this geography was not contributing to the overall earnings and returns of the business.
Additionally, like well services the wireline equipment was aging and would have required a significant infusion of capital to maintain current operations.
In the beginning of September we halted all wireline operations in Canada and received minimal revenue and EBITDA contribution for the month.
We reduced head count from approximately 90 people to 10, and there were approximately 1.4 million of severance costs associated with the layoff, which comprises part of the restructuring charges in Q3.
None of the 14 wireline trucks in the region will be generating revenue for the company moving forward.
Wanted to trucks could potentially be utilized for backup units or a meal work in U.S., but the vast majority will be sold.
Today, we are working on selling these units along with the remaining ancillary equipment and inventory year to date, Canada has generated approximately 18 million in revenue and generated 30.5 million in revenue in 2018, the majority of which has been from the wireline business total net PPD for Canada.
As of September 32019 was approximately 3.8 million and there was approximately 1.7 million of inventory we are in the process of selling or sending to U.S.
By restructuring the Canadian operations to be solely focus on completion tools, we have lowered the fixed cost significantly eliminated future capital expenditures and will be more resilient in the face of continuing challenging market conditions, we believe our new dissolvable and composite plugs will be marketable in Canada and can take market share driving prop.
Stability in 2020 and beyond.
Before I turn the call over to Clinton I will provide an update on our technology trials, which remains one of nine highest priority.
The first technology, we will be bringing to market is the low temperature dissolvable plug, which will address the Permian northeast and portions of other basins like the DJ Niobrara with lower bottom hole temperatures. Originally we anticipated field trials will be completed by mid Q4, because if current market conditions and seek.
Significant activity drops during Q3, especially in September we are extending trials to ensure we have met our internal threshold of successful trials. We are however, still very confident that our Q1 2020 timeline for commercialization remains on track throughout the quarter. We have won many trials across that.
Oh basins for multiple customers with unique wellbores. The success rate of the tool has been above 90% to date with any of the trials. We did not deem having 100% success, we were able to very quickly identify the issue with the operator remediate the problem and apply that changes to the next trial.
Through the trials, we have seen the foundational elements of the tool are intact, including the integrity of the new IP design and its ability to hold pressure with out slipping as well as the performance of our new materials that have dissolved within the timeframe required in temperatures as low as 137 degree.
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We continue to receive very positive feedback from the customers. We are partnering with and there was a strong appetite from other operators to trial the tool as we continue to produce and share positive results from our completed trials.
The second technology, we will be introducing is a high temperature dissolvable plug to address the U.S. markets like the Eagle Ford Haynesville, and the Bakken as well as international markets, including Argentina, and Saudi Arabia. This plug will utilize some of our existing high tempt materials, which are proven and have consistently performed swallow.
As the trials for this plan will begin during the fourth quarter. This year and we still anticipate field trials will be completed in Q1 with commercialization in Q2 of 2020.
We remain very confident in the continued performance of the materials that we've been running successfully for over four years and high temperature environment and have many strong relationships with customers willing to trial. The new tools. These operators belief in Dissolvable is already very wrote resolute due to historic run rates and our new shorter and lower costs.
Plug should only proliferate adoption across each regions.
Lastly, we will be introducing a new shorter all composite plug that will indra adjust the entire composite plug market. There is still a large addressable market for composite plugs that we can continue to access and gain market share we will be utilizing similar materials from our current Scorpion design and anticipate continued high level.
Performance from this product.
Field trials for the composite plug will begin in early 2020 with commercialization before the end of Q2 2020.
As we have progressed with the trials, we have grown more confidence not only in the dissolvable thesis, but in the tool design and materials.
Despite reducing the size of the tool by over 70%. Our team has been able to hold the highest downhole pressure is across the United States and provided consistent and predictable dissolution results in some of the colder temperatures.
As a reminder, all three tools will be utilizing the same IP design, which is approximately 70% shorter than our current plugs with fewer component parts, which will streamline assembly and supply chain.
Most importantly, it will reduce our manufacturing costs, ultimately, allowing us to lower the overall cost to complete for our customers. Our customers are still finalizing budgets for 2020, but today, we do anticipate overall north American MP capex spend to be flat to down up to 15%.
We will not be providing any formal guidance for 2020 numbers at this time, but I've tried to be as specific as weekend for commercialization timelines.
As we think about technology adoption and what we have seen from introducing new products in the past we believe strongly the largest risks to the tools is not in the future adoption of dissolvable or their successful performance of our tool, but rather the timing for market penetration and revenue.
You ramp it is extremely difficult to pinpoint the exact timeframe of large volume adoption, but we believe this will happen in 2020, we will start to commercialize the low temp dissolvable plug in Q1, but do not anticipate significant revenue increase to occur in Q1, but more like.
We in late Q2 or Q3.
That said I want to reiterate our strong confidence in our tool designed and materials as well as the overall dissolvable. He says and the growth potential. This brings to nine we feel confident we've reduced manufacturing costs to a point that enables us to lower the upfront assay for customers to be less or net neutral to current plug.
And drill out prices, while increasing returns for the operator by significantly reducing cycle times.
Ultimately these new products will provide a significant step change in the way our operators complete their wells increasing their IR, our three significant time savings, reducing their overall EFI and cost to complete with our lower priced offering and the elimination of drill out these lowering their carbon footprint with less than diesel powered.
Equipment at surface for the drill out and reducing overall risk at the well site.
I would now like to turn the call over to Clinton to walk through segment and other detailed financial information for the quarter.
Thank you and.
Our completion solutions segment third quarter revenue totaled 186.3 million with adjusted gross profit 33.6 million.
During the third quarter, we completed 1116, Shimon and Josh a decrease of approximately 3% versus the second quarter.
The average blended revenue per job increased by approximately 2%.
Seemingly revenue for the quarter was 55.8 million.
Decrease of approximately 2% quarter over quarter.
During the quarter, we received one incremental we'll see revenue related to our 2000 aging job search.
At this time, we anticipate receiving five of the HCM and huge related to 2019 Capex before the end of year, which will likely began generating revenue in 2004.
We hope to receive the remaining three units through an h., one or 2020.
During the third quarter, we completed 11007 or 881, wireline stages, and an increase of approximately 2% versus second quarter.
Yes, wireline stages were down quarter over quarter, where were slightly offset by an uptick in Canadian wireline coming out of the spring breakup. Despite a little contribution during the month of September .
The average blended revenue per stage decreased by approximately 10%.
Wireline revenue for the quarter was 59.2 million a decrease of approximately 8%.
And completion tools, we completed 20414 stages, a decrease of approximately 38% versus second quarter.
The majority of this decline came from our composite plug business.
Depletion total revenue was 40.2 million a decrease of approximately 28%.
During the third quarter or coal tubing days were decreased by approximately 16%.
The average blended day rate for Q3 decreased by approximately 5%.
Coal tubing utilization during the third quarter was 49%.
Which does include two small diameter units, we had park for the entire quarter.
Coal tubing revenue was 31.1 million a decrease of approximately 20%.
And our production solution segment second quarter revenue totaled 16.1 million with adjusted gross profit for the third quarter of $1.9 million.
During the third quarter, well services have utilization of 66%, which increased approximately 9% quarter over quarter.
Total rig hours for the quarter was 34324 in the average revenue per rig.
Was $470.
As a reminder, financial and operational measures for the production solutions segment over the time period of July Onest through August Thirtyth and do not include any contribution from September .
The company reported selling general and administrative expense of 19.2 million compared to 21.8 million for the second quarter.
This decrease was largely due to a reduction in stock based comp and a reduction in the retention bonus related to the Magnum acquisition.
Depreciation and amortization expense in the third quarter was 16.8 million compared to 18.5 million in the second quarter.
The company, we recognize income tax expense of approximately $700000 from the third quarter of 2019 in overall income tax benefit year to date of approximately 1.5 million.
The discreet impact from a production solutions divestiture and the current year impact or evaluation allowance physicians, along with the state and non U.S. income taxes are the primary primary components of our 2019 tax position.
During the third quarter. The company reported net cash provided by operating activities 69.4 million, an increase of approximately six times quarter over quarter.
The average dsos for the third quarter was approximately 57.8 days compared to 64 days in Q2.
Total capital expenditures were 10 million of which approximately 47% was maintenance capex.
Full year Capex guidance of 60 to 70 million remains unchanged.
Finally, 73%.
Spent year to date using the midpoint of the provided range.
As of September Thirtyth, 2019, non cash and cash equivalents were 93.3 million with 118 million of availability under the revolving ABL credit facility resulted in a total liquidity position of 211.3 million as of September Thirtyth 2019.
Or a deal was undrawn, but availability decreased quarter over quarter due to the cell overproduction solution business and a reduction in accounts receivable.
During Q4, we will have scheduled cash payments of approximately 39 million, which includes an interest payment of approximately 17 million capex between 16, and 17 million and payout of Magnums retention bonus of approximately 5 million.
We do anticipate working capital will be a source of cash during Q4.
I'll now turn it back and discuss our Q4 outlook. Thank you hunton.
During Q3, we began to see activity softness across all regions with the largest declined in the northeast. We do anticipate this continuing for the remainder of 2019 and that budget exhaustion will be exacerbated this year versus prior years due to MP capital discipline, coupled with typical slowdowns related to weather and holidays.
With further activity declines we will also see realizations of full quarter impacts of additional pricing concession meeting Q3 across all service lines.
With what we know today through discussions with our customers. We do not anticipate further pricing declines in Q4 and into Q1 of 2020 from the September decline.
At these current prices across service lines, we are still able to generate positive EBITDA margins, but we'll watch fracing closely to ensure we are not impeding ROI C and we'll parking is when warranted.
With a current market, we are managing costs very tightly and working closely with our operational teams to ensure we are shielding margin wherever possible without fundamentally impeding our earnings potential moving forward. This includes head count reductions, where applicable and since Q2, including the sales production solutions and closure in Canada, our head count it.
Down approximately 32%. Additionally, we are working with our vendors to reduce pricing on materials, such as coil rails gun bodies and other large volume items.
As we gain more visibility into 2020 from our customers, we will adjust accordingly, but today feel very confident we've right sized the business from a head count perspective to meet our current activity levels, while 19 highest quality service execution.
For Q4, we expect total revenue between 150, and 160 million and consolidated adjusted EBITDA between 11 and 15 million.
The revenue associated with the production solutions segment and the closure of our Canadian wireline business for the full quarter would have ranged from 20 to 25 million and the remainder of the decline comes from the full quarter impact.
As of September pricing pressure and exact exacerbated activity decline.
[laughter].
Due to customer budget exhaust.
On our Q1 call we talked about Q1 of 2019 as a good quarterly run rate forecast in 2019 and expected a flat year overall from activity.
And our cost effective.
We use this assumption as the basis.
Our annual guidance numbers as well as the foundation for our outlook on leverage metrics into Q4 2020 at that time, we miscalculated the implosion of the gas markets and the effect that have on our back half numbers as well as the added activity thought.
And pricing pressure has taken place across North American land in the back half of this year.
Because of this.
We have updated some of our previous guidance.
On the annual much side, we anticipate cash flow for operations per share will now be between $303.25 and $3 in 75 cents for 2019 versus the original four to $5 per share and we expect our high fee will be obtained five and 6% for 7%, which.
Does not include the loss of the production solution sale.
With the acquisition of Magnum.
Restructured our capital structure to have more flexibility and issued a 400 million dollar Bon Anthony New ABL in place, which is currently undrawn.
Our target leverage as onetime net debt to EBITDA. Originally we thought we reach within Q4 2020, using a flat H one 2019 run rate.
Baseline that with the addition of our new technology and a lower capex in 2020.
Since that time, we've seen the market shifts in H. two of 2019 and do you anticipate north American activity will be down year over year in 2024, we still expect growth in our tools business and a significantly lower capex summer 2020, with the market conditions, we have had to push the onetime net debt EBITDA timeframe.
The 2021.
Delevering the company will remain one of our top priorities.
But I do want to be very clear that we feel very good about the liquidity as a company. We have shown even in a down market that we are capable of generating significant cash flow and this will only become stronger as a shift more of our topline to completion tool.
We are already in discussions with our customers regarding their plans into 2020.
We do anticipate North America, and activity will be down year over year with the largest declines coming in the northeast what are gaining good visibility into H. 120 20.
Budgets will reset in Q1, and we do not think Q4 as a good run rate for 2020.
Our team has proven their ability to gain market share in an anemic environment and our discussions with customers today show activity picking up at the beginning of the year.
Regardless of the market forces nine has a unique opportunity generate EBITDA margin expansion and strong cash flow with the introduction of the new tool.
Whether the inflection point of volume for tools comes in Q2 or Q3 2020, we are excited about the commercialization of our new tools and the potential upside at brings to the company as well as the value it brings our customers.
Our capital light strategic plan is playing out we feel very good about our liquidity position, we chip, which we expect to improve as we shift more of our EBITDA mix to completion tools, while simultaneously, reducing capex. The biggest strategic challenge for the nine team continues to be the creation of a strong ROI see business with the ability to Jeff.
Very good profitability through cycle, we will now open the call Cqs.
Thanks.
Thank you at this time will be conducting the question answer session.
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Wonderful please while we pull for questions.
Thank you. Our first question is coming from the line of Sean Meakim with Jpmorgan. Please proceed with your question.
Thank you Hey, good morning.
Good morning.
So I understood the giving 2020 guidance is difficult at this line but.
Talk about how you would what's the numbers with respect to generating cash.
Selling well services would be helpful. In terms of shutting some DNA burden given the heavy labor content sounds like remedies that is most the maintenance spending on capex.
Golf what are you in terms of free cash generation next year and just how you think about the levers across the mix mix shift towards Fools capital spending working capital management will be good walk through that a little before us.
Sure absolutely. So if you think about our strategic acquisition and Magnum.
That was all done with a push towards making the business more capital light. So typically typically if you thought about reducing that capex spend by 60% or potentially more than that you would say hey, you know you're spending under the under your annual depreciation expense you really impeding assessing ability of the business going forward and what we would tell you is we're actually shifting.
The generation of an earnings. So you should continue to see that that capital spend be light in the next in the near term. So that's kind of just one aspect to realizes that not that were temporarily pulling back capex, but there were actually just fundamentally shifting the nature of the driver behind the earnings.
As a lot more capital light so thats, one thing I would say.
When you think about 2020, obviously as we said we expect that to be a flat to down year certain MTS customers have come out with their budget others have not so we're saying right now flat to down 15% that could change significantly as we come into Q1, meaning if it could be a little bit better than the down to five.
I've seen versus down 15%.
So you should expect that as you think about qualifying the overall numbers.
And again, you should expect to see a revenue and EBITDA contribution from the tools continue to make a push over time. If you think about the margin trajectory Sean think about US is starting this year with a 17% adjusted EBITDA margin and if you look at the midpoint of Q4 that that's an 8% margin. So when you walk that nine point down.
It's my intent to get this company to walk that nine points back up in 2020 by the end of the year. So you'll see us continue to expand that EBITDA margin, which also obviously helped us generate good solid free cash flow. So I would expect margin expansion and free cash flow is a story for 2000.
20 on and then beyond that we can start to able to layer in that really nice topline growth, but again as we said we wouldn't anticipate.
The trajectory of tools to really start to impact this company until each to 2020, but thats something that we're very excited about we think of the unique opportunity for this company outside of market forces and if I didn't answer your question I'm happy to provide additional color. Obviously, we'll also be providing cash flow per share a metric.
For 2020, when we get back Q4 call. So that you guys can build that cash flow statement, but I'm happy to take incremental questions.
Thank you have against that quite well that's a good segue to talk about the Dissolvable commercialization. So once you 20 still on track, let me try to think through.
When you think you'll be able to provide a firmer runway.
Adoption rate.
Your point is we'll take in terms of getting to the exact point of high adoption or high volume adoption, but maybe could you walk through the fundamental building was.
Beyond early commercialization endpoints warning.
Yeah, I mean I think.
Excuse me right now in this market.
Yeah, it's a 10th market the tone is tough it's a zero defect mentality across any service line and so what really matters probably more in this market than let's say if it was you know a $75 Wi Fi market.
His customers really want to see what's working for other customers and so I think there will be on.
That markets market penetration will be a little more conservative at least what we've priced and as far as accuse you where Q3 ramp just because of the tone in the market and customers wanting to say Hey, let me see how how this guy does at the full wellbore parcel wellbore on before they commit to it so I think.
What weve price in as far as thinking about when that inflection point happens on enough is that of a nuance given just the market right now and I would say again, it's the.
The commodity price environment in the activity in the budgets that we're seeing come out.
Those are certainly a headwind for any service line and even tools that makes it a little bit slower. So again very difficult for us to project exactly when this ramp will occur and that's why we're asking folks on the phone to risks that some somewhere between Q2 and the back half of 2020.
Because it's just it's very difficult for us to pinpoint it exactly but our experience with tools as its.
A little bit more like you know runners taking them there mark and that can be on a slow process. The diminished that gunfire is it just goes and that's really based on dependability and performance of those tools and Thats, what we have a whole lot of confidence about our senior field trials.
Got it very good exam.
Thank you Sean.
Our next question from the line of George O'leary with Tudor Pickering Holt. Please proceed with your question.
Good morning, and morning, guys.
Good morning.
Oh piggyback on Sean.
Final question, which I agree you answered well, but just kind of peeling back the on you know and that the cost side of the equation.
Talked about 900 bits of EBITDA margin that you'd like to get back next year I'm. Just curious if you think about the primary drivers there whether that be costs or.
Revenues.
Could you kind of.
Frame that for us whether its cost of revenues. It really gets you back and into taking a lot of costs out of the system already with the closure of Canada removal of 24% your workforce with the production business.
Buckets are left for you guys to Whittle away add on the cost side and where is your where's the management team kind of focused at this point on the cost of the equation.
Yeah, I mean, certainly are big lever is obviously head count right. So prior to the production solution sale. If you looked at our labor as a percentage of the top line.
On any given quarter, you can see that fluctuate between 30% to 35% right. So on a run rate basis, we've probably dropped 10 points off of that and that was obviously by design is not just shedding capital intensive businesses, but shedding labor intensive businesses. So that's also part of the strategy, but to your point 2020 the margin.
Spansion is not driven by cutting costs inside of those financial statements. The primary driver for margin expansion and regaining those points of margin throughout the year is the introduction of tools with a very high margin profile.
So again, obviously, you're always tweaking cost here in there, but the primary driver is going to be from the introduction of the tool and also remember George we have it we have purposely slammed that margin on those tools right now to hold those wellbores. So that was part of our initiative that we talked about in Q2 of holding.
Wellbores and holding market share so that we can fill those wellbores with cost that are lower with products that are lower cost to our customers on with much nicer margin profiles for the company. So again primary driver is from tools on the margin expansion side.
Okay, Great that's helpful and that it just I know, you're not giving guidance for 2020, but I want to make sure I'll get out over my skis, if I think of the Capex budget for 2020, assuming the down 16% year over year I'm in the 35 ish million dollar ballpark 30, 35 million am I thinking about.
That correctly.
You are too high it's going to be lower than that.
That's good to hear.
Glad I jumped on that they go further color I'll hand, it back over.
Thanks George.
Our next question comes in a way of JB Lowe with Citi. Please proceed with your question.
Hey, Thanks, Good morning, that's the quick but Capex cookbooks.
Good to hear I had a question on the field trials for the new.
Low temp plugs I know you guys said, 90%.
Plus successor I guess.
Is that it is that.
Good.
What kind of successor is needed for these these tools. During this is kind of.
I know you're working with customers that have already use these things before but I mean do do they need to see success rates above 95% getting into the high nine views and I guess as you did some tweaks.
First the first run.
What did you get that success rate up to one on the cover the second go round.
Yes, it's a very good question and I'm glad you asked it. So when you think about on some of the failures. We've had it's really important to think about what tape affiliate those are.
So as those had been for instance, plugs slipping or showing us that the design with flawed then even though the percentage of the failures may be low we would be concerned on.
In some cases, these where frankly operational issues at surface on and there were issues that literally indicated to us that it had nothing to do with the design for the materials. It was more just you know.
Collection of human error, frankly, sometimes on our part so I think if you stripped out a normalize on you would find that we are we have not so far been concerned with any of those failures, but we did want to be clear that we have had them on and they've.
Has been literally due to to human error or for instance, sometimes not choosing the right charges simple and frankly stupid things on that we should have been more conscious of before running those downhaul, but what you're really looking for in these dissolvable plugs.
When you make a tool that short it's very very hard to hold you know the differential pressures that we see in U.S. and so these tools are rated to 10000 PXI and for a very short tool to be able to hold high differential pressure is really challenging on and so we've been very pleased with theme that on the tool.
His ability to hold pressure and then secondly, we think about materials you don't want the customer.
Excuse me finding anything on the drill out and that can be any piece or part of that plug and so we've been enormously. Please with the fact that our customers are not finding anything a when they go and go back into that well. So those are kind of the two categories of issue that we're really looking at.
The other failures or just frankly, just not not a concern for us.
So I'm not sure if it answered your question.
For customers want to see 100% success all the time.
And right now in U.S. land market, they're very focused on that Youve, a bunch of really nervous completions engineers out there and so used to be very very conscious of their contacts and we certainly are.
Great I can imagine [noise] follow question just on the the two other new technology additions.
I guess the difference between the kind of old generation. The new generation is it mostly just on the length of the tool. It's not so much the materials, that's going into composition that right. That's exactly the right way to think about both the high temp and the composite on there that it allows us to come back into that Wellbore offer lower priced our customer.
Okay and offer much amelioration on our margin.
Okay. So the materials have been proven it's just it's just a different.
Gotcha Okay.
Then on the the pricing to the pricing concessions that you gave in Threeq you can you kind of stuck at those and.
An absolute number of percentage decrease or which product lines got hit more because it I mean are cementing revenue.
You know held in for the quarter was there was there person officials of the so nothing side as well.
I was kind of avoided on that no. It was yes, but it was pretty flat. So when you think about or at least when I think about Q4 as it relates to Q3.
You know 50% of that revenue guide give or take is due to divestitures are closing down wireline right and then the remaining 50% is really due to pricing activity and we actually split that out and ran those numbers and it's almost half and half, but where the activity declines are most pronounced.
Will be in the tools business and the coil business.
And where the pricing has been really hit hardest as of late in the coil business and and so thats kind of how you should think about I mean, I think we're really at a bottom now for wireline pricing on the other thing I think is important for folks on the phone to remember it's we're always also looking back at.
2015, and 16, and 2014 with pricing and looking at this current day pricing and and thinking about how it relates to the years. So if you looked at current day pricing relative to 2016.
In cementing wireline and Quill, you're still well over 50% in all of this service lines of where you are in in 2016.
So that's just important to remember on 14, you know you're you're still down in most of them on and the only reason our theme that business looks like it's up in price over 14 is because we fundamentally shifted the percentage of production string jobs that we were doing so we're always watching those so as as you know difficult.
Challenging as this market itself I have never once felt it is remotely close to where we were in 2016.
It's just anemic, but there is activity rebound that we already know about in Q1 on and we still think this business has a great ability by the end of year to generate a very nice margins given the context of the environment as well as excellent free cash flow and fundamentally reduced percentage of capex.
As it relates to to the topline so I'm not not a great market, but again, and we think we're well positioned to navigate it.
Alright, great. Thanks, so much.
Thank you for next question is from the line of Chase Mulvehill with Bank of America.
With your question.
Hey, good morning.
And I guess, a wanted to come back to the 900 Bips margin expansion.
Do you expect in 2020.
You could have highlighted the completion tool business.
The main driver driver there. So maybe could you talk about kind of where margins are today for this business and kind of where they were you know 12.
Two months ago, I'm, just kind of help us frame.
Sure, Yes, so I mean, I think we don't we're not giving specifics, but I'll just tell you generally do you think about completion tools you you're generally thinking about a business that.
You know a 30% margin business and we've taken significant points off that margin.
Significant point and so we're going to put those points back on and that's you know without getting too specific.
Okay, that's where we're going to see that the driver of the expansion.
And again I'll, just remind you we've planned those margins because its composite plugs that then incremental to that.
Also holding hi, temp wellbores with Dissolvable is at much lower margins than we typically would've had until we can get these new products out to market. So we're getting hit on both sides on the completion tools front and then obviously you know you layer on the activity see of reduce the ability to cover that fit.
Cost of absorption that you need and a product line business like this.
And so it's it's very significant degradation in the margin there that weve assumed for these tools.
It's it's it's significant.
Google will conclude the bulk of composite Bose.
Oh, you have all the <unk>, who saluted laterals, what color O'connor real boards or.
Although we were on what would be portable AWS ore body Vogel books.
It's a great question I think the cannibalization.
It will begin a bit in the back half, but where you'll see it be more pronounced.
It is in kind of that that next two to three year period as the adoption rate for Dissolvable as increases. So next year as we think about 2020. The primary story for us won't be the cannibalization because remember we'll be introducing a new composite play, which we actually think we'll gain incremental share.
Our above where we are now.
And so that will complete complete the picture we believe if if we do our job right.
So we at lower hoping to do is his claw into incremental market share in a composite pipe market. While we continue to claw share from other composite cloud providers with Dissolvable.
But again, we don't split out the revenue between composites and Dissolvable, but we have Smith said many times the primary driver.
Of the revenue right now for completion tools.
On is certainly a composite plugs.
Because we want to squeeze and were more real quick and you have a unit perspective or lateral links.
Cures to kinda.
Get your view on how much further using this industry to push lateral.
Oh, that's a very good question and I think we're seeing some wellbores on that are extending beyond even the longest ones that we've done but I think the industry is kind of finding it.
Its footing and lateral lengths and and that's probably somewhere around the 10000 foot Mark and again, you will see north east operators pushing beyond that I think sometimes we see in west, Texas operators are constrained by acreage and so if they don't have the contiguous acreage you know they're unable to.
Pushed beyond those point on but I would say, it's really for US we think about it it's kind of a 10 to 12000 13000 foot lateral lengths and what I always remind myself is when we started building. This company in 2010, you know a 5000 foot lateral was like so long in the Bakken.
And not one of us at the table ever thought we would get to the lateral lengths right now so I just to remind myself that we make heath assumptions and we try to kind of cap things, but on you know anything can change and as you. All know the drilling efficiencies are just unbelievable and seem to keep growing.
So I think a lot of operator are seeing a real plus to their IR ours. When they go out that couple thousand extra feet and if the compression services industry can actually make the completion of those extra few thousand feet easy and decrease their risk popping. Their IR are then you may see them go longer but right now.
On the comes very risky depending what the total measured depth is to get out really beyond that and I think that is constrained a bit of the increase in lateral lengths.
Uh huh.
Furthermore.
Thank you next question is from the line of previous with Raymond James. Please proceed with your question.
Hi, Good morning goes already.
I wanted to ask what follow up on the trials just quick one what percentage of your customer base has has trial, but low temp at this point.
<unk> expenses, but the cadence, but I'm just curious.
I've seen it.
You know, we're not giving out that percentage that what I'll say is that we've been really please with a number of different customers that holds very different perspectives that have been willing to try trial. This tool, but we're not giving out the actual number and if is there and money there on our top.
10 customers make up about 24% of our revenue.
I guess I was curious on the comment that we don't expect any further pricing declines in Q4 or 2020.
So we have heard that correctly I guess is that is it fair to assume then that we've seen the competitive behavior become more rational.
Oregon.
MP customers that are willing to at these prices take on the premium service provider.
It's a good question, what and then specifically by that is we saw a lot of pricing degradation coming into the back half of Q3's, specifically into September . So we will see that impact on a full quarter basis in Q4, but we do not anticipate further declined from that level and I think even saw.
On your G.'s call they came out and talked about.
The fact that they feel service pricing is not going to move anymore on the in order to keep sustainable Fs businesses.
And I think we're certainly seeing that that decline has stopped and people are no longer willing to though lower on so we just don't anticipate further degradation here from price, but where you do see that in our emerging like I said as you see the full quarter impact of the pricing decline that we did take on.
But our teams even in the northeast feel confident that we have reached the bottom here on pricing and not that a feeling you get when your competitors stopped moving it down and fortunately or not for the industry. I think we found that floor sets. If that's helpful. Yeah. That's very helpful. If I could just one more.
More I guess.
You mentioned that basically Q4, you guys expect us to be the bottom Q1, we see a bit of recovery I assume that means you guys are willing to hold onto a little bit of access into this is why Q4 thought a good base rate can you kind of help us quantify how much excess capacity.
Personnel or just unabsorbed cost in Q4, we should recovery just one activity comes back.
I think it's you know I think again will be a lot more on.
We'll be a lot more specific about this in 2020 numbers, but if you looked at the midpoint of our margin of 8% on when I think it out costs and what I think about were hanging onto its probably a couple of hundred basis points.
Perfect. Thank you very much.
Thank you as a reminder to ask your questions Press Star one for your telephone keypad.
Our next question.
Waqar Syed with Feltl. Please proceed with your question.
Thanks for taking my call.
My question the emphasis is on the competitive landscape for the low temp flags are you aware of any of your competitors coming out for the similar product products due to have anything on field.
Anything already being being marketed or soon.
That's a very good question and no we're not aware of anything what car on but we've often said to our investor community and the folks on the phone that we would expect the large cap to play in this space and continue to innovate and they are competitors, we are used to having and.
We plan to have on but no. There's nothing that we see in trial right now that addressing the market the way in which we're addressing it.
Great and then it could view I mean I missed this said you give any DDNA guidance for the fourth quarter.
Oh, we've not laid that out specifically and for the fourth quarter, we haven't witness Ivig, where you can think about as excluding.
Obviously, the production changes about 16 million for the full bore.
Right.
Okay, and then income to the number of cement the units I know you. Yeah. You added one what's the total number of units as of today.
32.
Got it too and so by the end of the year that you'd be at 237, and then sometimes.
Next year. It on 40 is that am I thinking correctly.
That's correct.
Okay great.
It is it possible for you to provide us with the magnitude of pricing changes that you've seen.
You know with last three or four months.
In a different service lines.
We're not going service line by service line Mccur for Q4, but you know we can walk through some of the magnitude of their pricing on that we saw from Q2 to Q3, if that would be helpful.
Anyway.
Flat. It said it was up 2%, but that was really them next of jobs for wireline and you saw the average revenue per stage go down about 10%.
And for coil tubing, we talked about that day rate down about 5%.
And again Thats, the all kind of that pricing pressure during the quarter. So you'll see the full impact of that in Q4.
Very helpful. Thank you very much appreciate it.
Thank you at this level is heard the floor back to add Fox for closing remarks.
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