Q3 2019 Earnings Call
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Our discussion today may include forward looking statements based upon current expectations that involve a number of business risks and uncertainties.
Factors that could cause results to differ materially include but are not limited to political economic and market conditions crude oil and natural gas prices foreign currency fluctuations weather conditions, the company's defense lawsuits and the ability of oil and gas.
Companies to pay accounts receivable balances and raise capital or other unforeseen conditions, which could impact on the use of services supplied by the company.
Additionally, our discussion today may refer to non-GAAP measures such as adjusted EBITDA, Please see or third quarter earnings release on SEDAR filings for more information are forward looking statements in the company to use of non-GAAP measures.
That will pass on tomorrow.
Mexico, a quick recap here good afternoon, everyone. Thank you for joining us today.
Oh, the dividend is the obvious headline news this quarter quite simply the board decided to address the dilution made the drip.
While at the same time returns substantially the same cash payout.
Cash payout ratio drops are very conservative 12% of free cash flow. That's still provides a healthy yield.
We're happy to report this quarter that we substantially completed the full integration of Trinidad into the hands on organization that are really starting to catalyze the benefits of the consolidation and the benefit so great strategic expansion of the key markets vis-a-vis, the Permian and Middle East.
Acquisition, obviously contributed to the year over year topline and EBITDA growth up 50% year over year for the quarter and revenue up 80% year over year for the quarter on EBITDA.
We're very proud report that are operations teams around the world achieved a record safety result, this quarter and year to date.
Well its financial results on the operational search results or Telsmith downsides proven track record of levering off acquisitions to drive benefits for both our shareholders at our employees.
Enzymes diverse global footprint also continues to de risk our business I'll point out that only 17% of our business in Canada with our international business outside of North American now, surpassing our Canadian business unit with 20% agree but Doug.
The U.S. has grown to 63% of our worldwide efforts.
Globally, we have about 125 drilling rigs operating today with 50% of these under long term contracts ranging six month to five years.
I also have 35, well service rigs operating North America today, along with about 15 directional drilling jobs.
In the U.S., we have 68 rigs operating today of which 40% or still tied up on long term contracts won two years in duration.
International running about 21 rigs today, most of which 76 to be exact are under steady cash flow generating long term contracts or three to five year duration.
Canada has about 35 rigs operating today with about 50% tied up under long term contracts I'll go into a little more detail on those later on.
Third quarter was a bit lumpy as we have half our U.S.S., which is our southern group and trying to turn that active fleet come off contract in the third quarter.
Update 29 rigs I came off contract seven were immediately re contracted with the same clients 11 were recon tragic with new clients, albeit with about a week or two downtime between contracts 11 were stacked out without contract. This event caused an obvious blip in revenue and EBITDA for the quarter now with sales in contracts all core.
Unaided under one team in Houston before cadence for contract turnover will be more in tune with how enzyme has typically spread out its contracts in the past.
In September and signed deployed what we call the enzyme virtual store www Dot go inside dot com, that's not the RA RA site, that's our virtual store side, which has an online store designed specifically for our rig managers worldwide, it's kind of or Amazon enzyme. It was rolled out in the U.S. in September and will help to reduce operating costs.
So for the 10% to 15% annually plans are to roll out worldwide through 2020. So there's no question that headwinds prevail, both U.S. and Canadian markets with a slight tailwind in our middle East and Australian business here and it's the balance that bullish we continue to find ways to enhance our operational efficiencies through our edge technology, our field teams sort of professor.
Sales approach, so I'll turn over to Mike for a third quarter financial recap.
Bob.
Operating there's overall were higher in the third quarter 2019, with Canadian operations experiencing a 54% increase.
States recorded 6302 operating days up from 3330, and international operations, showing a 17% decrease compared to third quarter 2018.
The increase in days was largely due to the turn of that acquisition with international days down to us down due to Latin America.
The company generated revenue of 393.5 million in the third quarter 2019, 36% increase compared to revenue of 288.7 million generate in the third quarter the prior year.
For the first nine months of 2019, the company generated revenue of 1.2 billion plus 50% increase compared to revenue of 810.2 million generated in the first nine months of 2018.
Adjusted EBITDA for the third quarter of 2019 was 97 million, 41% higher than adjusted EBITDA of 68.6 million in the third quarter 2018.
Adjusted EBITDA for the first nine months of 2019 totaled 312.9 million, 80% higher than adjusted EBITDA of 174 million generate in the first nine months of 2018 to three and nine month increase in adjusted EBITDA was primarily a result at the turn out acquisition and the realization of the synergies from the transaction.
General and administrative expense in the third quarter 2019 was 19% higher than in the third quarter of 2018 increase in DNA rose from the turn it on acquisition and the negative translation impact on non Canadian operations of the strength in United States at all.
Total company does not have cash balances decreased by 25.8 million on the third quarter of 2019 to 1.597 billion at September Thirtyth 2019.
The company is targeting net debt reductions approximately 100 million for the year, which could be impacted positively or negatively by foreign exchange rates.
Net purchases of property equipment from the statement of cash flow for the third quarter 2019 totaled 35.1 million.
Net purchase is probably come in during the first nine months of 2019 totaled 78.7 million. The company continues to be selective on capital expenditures in the net capital expenditures for the year will be approximately 100 million.
The company announced a fourth quarter dividends of six cents per common share and the termination of the dividend reinvestment plan determination of the drip will stop the dilution Walters reduction on the dividend per common share will ensure that the cash paid remain similar to the previous quarters when the triples in place.
I'll now know what I will turn back to Bob.
Thanks, Mike So we'll start with an operational update in the U.S., we have for operational areas in the U.S. the Permian.
And the legal for California, and the Rockies.
In the Permian, we operate 61 rigs we have about 40 active today, we run about 9% market share in that market.
In the Haynesville eager for an area, where we have 25 rigs we have 10 running today about 5% that market, California, we own about 60% of the market share there with nine out of 20 rigs running and the Rockies, we have 11% market share was about 10 of the 28 active today.
No question that 25% year over year drop in your boss rig count has put pressure on rates from our last reported second quarter, we have seen pressure on rates on all four over on all four of our areas, but most predominantly in the Permian.
Super spec rigs are obviously still most desirable and are hanging in north of $20000 a day for day rates. All in we continue to maintain our market share in each market, albeit with writes off about $1000 would take quarter over quarter.
In the California, and Rockies markets rates did not appreciate as quickly as it did in the Permian. So while we certainly cannot move right. So we're not under the same pressure as in the Permian.
Despite the headwinds we are finding anecdotal evidence that our clients a sensing a bottom theres a case in point in the last few months, we signed up a handful of rigs in the Permian onto your contracts.
On the 21 to 22 range.
Well most calls are for annual contracts were starting to see a bit of the shift to term.
We're also getting traction with their ads control technology, we've actually had a breakeven point this year with her Wellsite technology Division and are expecting that positive EBITDA contributions into 2020 m. beyond.
The rollout of our ends on portal a cloud based client portal that allows our clients to directly interact with the rig and our advanced performance management team should be rolled out in first quarter 20.
I will have a notional $90 a day FY two attached to it but we are discovering is that operators in general are not willing to pay a drilling company any premium for rig for automation, but they are willing to pay for technology like or edge products that focus on enhancing downhole metrics like maximizing RFP reduce downtime, let's turn to philosophy on the web.
Okay, and less bit dysfunction, with us and wind we have focused our attention to our edge autopilot, which like conductor of an orchestra pulls together are already tried and tested optimization apps into an integrated interactive platform that synchronizes and automates dropout process.
Put in simple terms you input the well past plan in the edge autopilot will activate controls on the rig that will maximize the RFP reduce tortue, possibly reduce but dysfunction and keep the wellbore and path all while the driller in our real time operating center keeps an eye on the process the edge autopilot will charge on a $2700 a day as isn't.
Cups as a handful of apps.
The directional driller will not be required to be on location anymore and we are beta testing. This on a rig in the U.S. at this time and expect to be commercial in second quarter 20.
The initial market for edge autopilot will be focused on to our advanced performance management contracts, where we will benefit the most from application technology.
The United States directional drilling our US DD Division continues to have a strong market presence on the Rockies 10 directional drilling jobs on the go we were recently successfully cracking the California market with our duty services and we'll be rolling out on a two of our California rigs.
With our integrated model, we have great margins when applied on to ends on rigs, but the competition just can't touch whether edge autopilot you can see how we'll utilize our hands with directional drilling experience in concert with regimen tool or edge rig controls experience to excel in the advanced performance management contracts space.
The United States, while servicing.
We operate one of the newest fleets in the U.S., we have 50 rigs in the fleet was 70% of them active today in the Rockies, California, Permian and Eagle Ford combine our long reach horizontal completion rig, which we have eight of them recently constructed in the last three years.
Have been fully utilized in the Permian and Eagleford areas still to this day.
We see notional pricing pressure, but generally plus or minus 5% range quite normal market.
Moving to the international area, we have three areas, Australia Middle East Latin America, and the Middle East we operate in.
I am on Kuwait, Bahrain areas, Latin America, Argentina, Venezuela, let's start with Australia currently at 60% of utilization are going to 70% in fourth COVID-19, we enjoy about a 50% market share in the Australian market, we generally drill most of the wells in Australia.
All of our Capex projects are behind US now in Australia with all the big Selma field, having commenced their long term contracts. Our most recent Greg 974, which has a new rig to the market. It was an AC rig and our Canadian fleet that was on reserve. It was completely refurbished upgraded from Australia market.
And placed onto a two year contract.
Middle East both dark weight rigs are now on the payroll also our second 100% on the rain rig recently spudded. So we have both rigs running and brain.
Quite rigzone five year contracts bring three year contracts.
One is steady with three rigs, which have had their contracts also extended out another two years. So access expect steady year over year cash flow generation from the area as we settlement or long term contracts.
Latin America, Argentina's recent elections have pushed the country back to the all too familiar populous policies in the past we've got about 15 years of experience in Argentina. So we've seen both sides of this coined well prepared for it we on your operated two rigs in the area.
We run.
As I mentioned to radio our 2000 horsepower class rigs in Argentina, both have our edge controls technology on them one of them setting records in the new can area, both under long term contracts past 2020.
In Venezuela, we continue to run two of our rigs in Venezuela for a major who as special dispensation from the U.S. State Department to operate.
Moving to Canada, while Canada still remains challenged will take away capacity. The minority federal government has pledged at that is fully committed to the new TMX pipeline.
You talked to someone today that actually saw some movement.
Along the pipeline so it is actually happening.
The Enbridge line three replacement is also expected to be running by year end, which will help take away capacity.
Whilst the provincial government, Alberta still has curtailment in place they just announced a plan to encourage new wells to be drilled here last Friday.
Those wells being except from curtailment that will encourage some operators to put a few more enzyme to breaks to work this winter.
Happy to report that to settle bad news enzyme was just awarded a three year contract or two over 80, our 15 hundreds with as controls technology.
With increased rates from where they were before we also signed up one of radio 1000 pad rigs on a two year contract with increased rates.
This is certainly not the enormous most three categories are witnessing rate pressures with market taker is especially in the oversupply and extremely competitive super single intently double market.
The 15 Hundredc market on the other hand enjoys a healthy 70% plus utilization rate and hence can attract reasonable day rates.
With Canadian directional drilling are exceeding direction drilling business continues to slowly expand its client base when integrated with an enzyme rig it becomes very hard to compete with us.
Currently have a jobs running and expect to run 50% more than that this winter getting up to 12 jobs as our integrated model continues to gain traction. Unlike say well servicing side, we have 55, well service rigs in our Canadian well service fleet, mostly focused on the heavy oil market much like the drilling fleet we have about.
25% of the fleet active today rates are generally not moving up or down success of the being defined by how many rigs you can keep steadily active and plan your overhead accordingly, our while service businesses Rightsides continue to make reasonable margins with fleet capacity to absorb upticks into them, so with that I'll turn it back to the operator for today.
Thank you at this time, if you would like to ask a question. Please press star one on your telephone handset, we'll pause briefly the compiled acuity roster.
And our first question comes from Dave Billets from Sea IVC capital markets. Your line is open.
Afternoon, everyone.
So.
So on the dividend could you maybe just walk through your thoughts behind the cod, specifically trying to get a sense of how much that was driven by concerns on forward activity and payout ratios versus a desire to allocate more dollars towards deleveraging.
Good question.
Yes, because a combination of all the above I think that.
The first issue was.
Finally at the prior payout ratio, we're quite comfortable with continuing to pay that but looking at 2020 being.
Probably somewhat more similar to 2019.
Perhaps.
Perhaps a hopeful uptick in the back end of it.
I think the board was concerned mostly about dilution, where the best put the capital.
We've got no concern about our forward Capex, we can run the business a $100 million moving forward every year for the next three to five years were quite certain of that we've got a relatively young fleet.
When we think of activity running in that 120 to 140 range moving forward.
Okay. Okay. That's very helpful and I guess, maybe along the same lines and get it's tough to pinpoint one or two things or give exact measures, but what would you either need to see from an activity perspective or like a target leverage your payout ratio to see incremental dividend bumps going forward.
Well.
Our routine response to this has every quarter the board looks at the current and the future.
Activity.
Viewpoint at that point in time and makes the calls.
Thank you you see in how we have behaved in the past I don't see any reason why would behave any differently into the future with that respect so.
It's a combination of we think we can put the money back to work.
And reward shareholders.
In the long term more appropriately.
Giving out where we work with a dilution effect of had.
Understood. Okay switching gears to the U.S.. So you talked about day rates being flat to down heading into 2020 and he has some comments earlier on your opening statements, but when you think about the go forward incremental pressure you could see with those comments be talking about an incremental thousand two 1500, a day magnitude.
I've possible pressure or would it be any larger than that.
No I don't see it being any larger than that we've seen.
Our first sign of things bonding mail just want an operator major comes to US and says Hey, I want to sign up for two years and we just recently signed up the last week two rigs onto your contracts with a certain major under discussion with some others.
So I my sense is that haven't been in this business and while it's kind of leveled off we're running about 70% utilization in the in this kind of rig category, which.
Tells us that.
It is.
Really strong.
Market you don't have to be price takers too often you are probably not a price maker, but you're certainly holding on the other thing. We're finding is no. One is and this is no surprise to anyone is no one's building new rigs and pumping them out there people are maintaining their fleet and when you. When you look at the amount of capital that's been invested in the Bay.
Yes in the last seven eight years, it's not a surprise there there is an active newly constructed 1500 horsepower AC rig fleet that can.
Ron forward and generate free cash flow for some time to come.
Understood. Okay, that's very helpful.
And then just maybe sticking with the U.S. specific to the fourth quarter can you give a sense of how activity is shaping up heading into the year and maybe more specifically you know what do you expect for the typical year end slowdown and do you think that could arrive earlier than typical this year.
Well it's.
Yes, good good question because is.
Probably little doubt that anyone will be able to bring any 2020 cash into 2019 and spend at everyone's very cognizant of that we're running about 68 rigs today in the us.
Looking at our forward book, it seems to be leveled off around there.
We had as I mentioned before in my earlier comments that we had.
A good chunk of those turnover contracts in the third quarter most of them in August over a six week period of time, which is very rare for us it just happened to be.
Question.
There was a lot of.
Serendipitous timing that.
We had a whole bunch of rigs coming off contract that we had to re contract.
Re contracting rigs of course, you have to generally.
Tougher market come off a little bit so I think that the fourth quarter.
We'll be.
Relatively stable with a little bit of headwind because I don't think.
See it.
Anyone expand any projects.
Plus you're getting into getting into Christmas you always was a couple of weeks or anyway.
The same went probably hold true in Canada, I mean internationally it's.
We're just cranking away now.
Probably I'd say.
We will be the first month that we've got everything kicking out.
Kicking out invoices and all of the capital projects are completed.
Understood. Okay last question for me in kind of following up on your last statement.
Given some of the strength that you have been seeing industrial end market any desire to add new rigs there or do you kind of see that capital.
Already been an event in that region.
Yes, yes, we I mean, we started with.
Putting basically 12 new HDR.
One hundreds and two hundreds which got modified into three hundreds over a period of time.
So we have a relatively young fleet there we put a I think three or four new 15 hundreds into the area. We just through finished a.
Generally an operator funded capex upgrade program on about four rigs so.
And we have six or seven other rigs to take up capacity, if the market where to get a little more frothy, but.
I think it's we know Australia, well and we don't see another wave of happening, we've got 70% of our rigs tied up.
With with contracts and the two to three year range and up there were up from where they were before four to $5000 today.
Understood understood. Okay. That's great color for the appreciate then I'll turn the call backs.
Thank you.
Thank you and again, if you would like to ask a question. Please press star one on your telephone handset.
And I don't show any Oh pardon me, we do have any additional question from Ian Gillies from GMP.
Your line is open.
Afternoon, everyone.
Hello again.
Could you maybe talk about some of those dynamics that maybe thank you switch from buying back your bonds in the open market versus paying down the credit facility and how you're thinking about.
Got a capital allocation strategy.
Yes, I think it's I mean, thats really is going to depend on where the bonds are trading so right now they're sort of between about 70 87 to to 90, Ryan So given it's a 9.25%.
Interest rate compared to a lower rate on the facility.
We will make decisions pretty easy as you sort of start to line up between the two so it's really going to be on just minimizing our our cash interest in our interest costs on a go forward.
And with respect to Capex as you look into 2020, I mean, I think the number that's been alluded to we're been talked about is $100 million.
In 2020 is that a net net capex number inclusive of asset sales or do you think thats. The number in 2020, even if you don't sell anything at this point.
Yes, that's the number in 2020, even if we don't sell anything so obvious obviously.
We have $50 million of.
Redundant assets of which we expect about 5 million to close here in the fourth quarter.
All of that will go directly against debt. So that 100 million is a clean number.
It goes down when we sell those other us and that's just real estate assets. We also have.
On an ongoing basis roughly.
$5 million to $10 million of assets, where.
They've had their useful life and they have a secondary market somewhere in the world with third tier contractors.
That kind of happens on an ongoing basis as well.
Okay.
And then with respect to the dividend I mean.
Obviously decision was to have it.
But what precluded you to taken it taken it down to say, a penny a quarter or something along those lines and just taking all that cash in redirecting it didnt.
I guess, how did you end up at 24 cents.
Well I think it was.
Again.
Robust conversation with the board and the balance approach that we always find the things we.
We do respect there have been lot of.
Dividend, guys and hold us with as a yield there around eight or 9%, which is still reasonable.
That may have been part of the conversation for a floor.
Okay.
Thanks, very much guys I'll turn it back over.
Thanks, Jim.
Thank you. Our next question comes from John Bears from Canaccord. Your line is open.
Thank you Hello, everyone.
Hi, John .
Just looking at your consolidated GE in a pretty big step down sequentially, how should we think about that going forward here.
Yes, I think on the go forward, we're probably.
It'll be a close that's 50 million on a run rate I think on an annualized basis kind of what we're seeing right now so lot of timing of expenses coming through but I think in 2020, we should probably targeting around there.
Got it appreciate the color and then just looking at the JV could you give a sensitive kind of what lies ahead there here in the coming quarters.
Yes, if you look at the the JV I mean in Q3.
It's becoming more of what you're going to see as a run rate go forward.
Q4 will be really.
I would say quarter by quarter run rate that you can use on a go forward with both great rigs running and the bar and Reg.
As a one delay on the Kuwaiti rig.
Miss some days.
Due to really the customer not having sort of a site ready that would have pared back some of the day as we saw in that quarter. So Q4 is really going to be I think the realistic what you'll see on a run rate. So Q3 was missing probably I'd say 40 to 45 operating does.
Got it.
Okay I appreciate the color that's it for me. Thank you.
Thanks, Jeff So.
Thank you and there are no further questions in the queue. At this time I will turn the call back to Bob just for closing remarks.
Thank you operator.
So thank you for joining the third quarter call by the way as promised we've successfully driven our $4 million of annualized cost savings out of the business through the acquisition, we've already established $5 million the supply chain savings and expect to push up to $10 million annual savings going forward. We've also identified $50 million.
Adam facilities in North America, which we expect to be rationalize over the next 12 months approximately 5 million occurring in the fourth quarter.
We have managed capex through the year and have success have been successful in pushing and we'll continue most upgrade capital cost to the operator, none of these operated funded upgrades, we expect to be exiting right at $100 million range. As we previously mentioned with a relatively newer fleet, we expect to be able to operate to maintain the fleet moving forward and 100 million dollar maintenance.
Capex range for the foreseeable future enzyme teams days laser focused on differentiating through technology application to generate best in class margin levering its global purchasing power to drive cost efficiencies applying all free cash flow to debt reduction and executing all this while maintaining one of the best safety Records in the business. Thank you for attending the call will.
Chat in three months.
Thank you very much for joining us today, ladies and gentlemen. This concludes our call you may now disconnect.