Q3 2019 Earnings Call
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I would now like to hand, the conference ever comes Catherine Hargus Senior Vice President General Counsel and Secretary. Please go ahead.
Thank you Nicole and thank you all for joining key energy services for our third quarter 2019 financial results Conference call. This call includes forward looking statement a number of factors could cause actual results to differ materially from the expectations expressed in this call including risk factors discussed.
In our 2018 form 10, eight 10-K and our other reports most recently filed with the FCC, which are available on our website at www <unk> Anarchy Dot com.
This call May also include references to non-GAAP financial measures. Please refer to our previously posted earnings release, which can be found on our web site for a reconciliation of any non-GAAP financial measures provided in this call to the comparable GAAP financial measures for reference our general Investor presentation is available on Keith.
By I cannot be dot com under the Investor Relations tab on the call. This morning, as Rob Saltiel Keys, President and CEO and Marshall Dodson piece of the CFO I'm now going to turn the call over to Rob. Thank you Catherine and good morning to everyone joining todays call.
Before covering our third quarter results I wanted to touch on October 30, Onest announcement concerning key strategic review and our forbearance agreements.
The current challenging market conditions have limited our company's ability to generate sufficient cash to both maker interest payments and support our operations. As a result, we entered into discussions with our lenders with the goal of realizing a stronger and more sustainable capital structure that would allow us to invest more the cash that we generate from operations into.
Sure equipment and our people.
Our company has made tremendous progress on our safety and environmental stewardship and the last year, we've become a more disciplined organization and our already strong service quality is improving by the day on the financial front, we've closed a number of non core and underperforming yards over the past month in order to concentrate our strengths and more.
Actually deploy our people in assets, where they can create the most value.
Also we have reduced our corporate and regional overheads to improve our cost competitiveness and provide our clients better value in this challenging market.
I'll provide more color on these moves later.
Beyond the yard closures and organizational streamlining we expected to be business as usual for operations in key.
We remain focused on providing our customers the same safe and efficient services to which they become accustomed.
As we continue our discussions with our lenders, we expect that our employees and vendors will continue to be paid as always.
I know that people want to know what our capital structure might look like upon completion of this process. However, given the discussions with our lenders are ongoing and not yet finalized we won't be able to provide any details on this call.
Turning to our third quarter results I'll stay at say at the outset that we had a very difficult quarter. Our revenues came in $106.5 million, which represented a decline of $6.4 million from the second quarter, we saw reduced activity across each of our business segments, especially in rig services in the Permian basin as the.
The industry reined in spending in response to faltering oil prices and growing investor sentiment for financial discipline, our net loss for the third quarter was 25, and a half million dollars as compared to a net loss of $18.3 million in second quarter with an adjusted EBITDA loss of $3.7 billion. This represented a decline of $5.3 million.
As from the $1.6 million of adjusted EBITDA generated in the second quarter Yearnings underperformance was largely due to a general fall off and activity in all business segments that was not accompanied by a parallel cost reduction.
We did reduce direct head count as it became clear that the market for our services was contracting but this was largely in arrears to the fallen demand.
Demand has remained generally stable since last since late September in fact October was a better month for us operationally that August or September .
For the third quarter, our rig services segment generated revenues of $64.5 million as compared to second quarter 2019 revenues of $67.9 billion the quarter on quarter revenue decline was driven by activity declines in the Premier Permian Basin, where rig hours fell 12%, we averaged 156 rigs.
Working in the third quarter versus an average of 172 rigs working in the prior quarter.
Rig hours fell 8% to approximately 142000 total hours with fall off in the Permian accounting for nearly 80% of the quarter on quarter decline.
Our 24 hour average rig count fell to 211 average rigs in the third quarter.
Completion hours comprised about 15% of our total rig hours flat to the same percentage as in the second quarter.
Revenue per rig hour increased 3% to $453 an hour in third quarter from $441 an hour in the second quarter, largely due to geographic and job mix as overall pricing remains generally stable.
As I mentioned previously our rig activity fell ahead of the corresponding adjustments to our labor costs, which impacted our margins quarter on quarter about 400 basis points. Adjusted EBITDA. In this segment was $8.4 million or 13% of revenues for the third quarter as compared to adjusted EBITDA of 11.6 million.
Dollars or 17% of revenues in the second quarter.
Revenues in our fluid management services segment were $18.2 million in the third quarter down slightly from 18.5 million in the prior quarter.
Truck activity increased with our truck hours, improving 4% to approximately 145000 hours in the third quarter. However, the better revenues from trucking activity were offset by lower revenues from our salt water disposal wells due to lower rates charged for disposal in our central marketplace.
Adjusted EBITDA for the segment fell to $1.4 million from $1.6 million in the second quarter.
Revenue per truck, our fell to $125 per hour in the third quarter compared to $133 an hour and the second quarter on revenue mix and the lower salt water disposal pricing in our central marketplace.
Revenues in our fishing and rental segment were $14.1 million in the third quarter as compared to second quarter revenues of 14.8 million lower activity in the Permian revenues declined 12% quarter on quarter, we're not out offset by the improved revenues in our central and Gulf Coast markets.
The revenue declined in the Permian basin and the associated impact on margins resulted in adjusted EBITDA declined to $1.6 million in the third quarter from $2.1 million in the prior quarter.
Our coiled tubing services segment generated revenues of $9.7 million down from $11.7 million in the second quarter.
Our average number of working large units was flat at approximately two and a half large diameter units per day with the revenue decrease due to geographic a job mix and another quarter of low to mid single digit price erosion.
Our adjusted EBITDA remained fairly flat for a second quarter results at negative zero point $3 million. We've recently implemented significant changes to our staffing and labor cost structure in the coiled tubing services segment, and we've exited multiple locations, where we could not maintain steady utilization to cover our labor and repair.
Maintenance costs between jobs.
As I said at the outset, we've undertaken a detailed review of our operations presence that we believe will strengthen key for the future. This has led us to exit those locations were due to low levels of demand an intense price competition has become very difficult to see a path to consistent profitability.
It all we have closed 23 districts across all of our service lines, primarily in East, Texas, and Oklahoma in our central marketplace and in our Gulf Coast marketplace.
These locations in aggregate contributed about 13% of our third quarter revenues about 9% of operating loss and a half a million dollars in EBITDA in the third quarter of 2019.
Exiting these locations has facilitated further reductions in our overhead costs and we expect these savings to be between eight and $10 million a year on an annual basis. So the net effect should be an improvement of $6 million to $8 million in EBITDA annually.
With the yard closures, we have freed up a large number of assets to redeploy unhealthier markets and we expect this will reduce our capital expenditure needs in 2020 and beyond.
We expect severance and other closure related costs of around $2 million in the fourth quarter and we should see the majority of the savings from these changes benefit us in December with the first quarter 2020, getting the full effect.
Marshall will now provide a few more details on the financials before I return for closing comments Marshall. Thanks, Rob Our third quarter 2019, consolidated revenues fell 6.2 million to 106.5 million from 112.9 million in the second quarter 2019, our consolidated operating loss increased with the loss of $17.4 million.
In the third quarter 2019, as compared to loss of $14.4 million in second quarter of 2019, I'm not going to go back over what Rob covered on the segments. So on a consolidated basis DNA for this.
Team was 21.4 billion as compared to 22.5 million in the second quarter 2019.
Good day for the third quarter 2019 included 1.2 million of equity based compensation as compared to 1.3 million in the second quarter 2019.
DNA in the second quarter 2019 also includes a $2.2 million fee associated with the onetime project to receive a tax refunds.
Excluding this fee in the equity comp Jna was 20.2 million in the third quarter of 29 team as compared to $19 million in the second quarter 2019, with increasing due to the timing of the legal settlement in some increase in our bad debt expense, our DNA run rate for Q4 before the impact of the reductions Rob mentioned is around 21 million inclusive the.
And 1 million in quarterly equity based compensation.
We will see some benefit in Q4 from the cost reduction measures, we've taken and expect the full benefit in 2020.
Depreciation expense was 14.6 million in the third quarter 2019, slightly up from the 14.3 million in the second quarter 2019, we expect depreciation expense to be fairly flat in the fourth quarter to the prior quarter.
Interest expense for the third quarter 2019 was 8.4 million as compared to the 8.5 million in the second quarter 2019, as we announced on October 31st we did not make are scheduled 7.8 million dollar October interest payment to our term loan lenders.
Cash flow used in operations was 5.4 million in the third quarter of 2019.
$18.8 million for the nine month ended September 2019.
Capital expenditures were 4.1 million for the third quarter, 2019, and 16 and a half million for the nine months.
We also had 3.6 million and proceeds from asset sales in the third quarter and 8.4 million of proceeds from asset sales over the nine months ended September .
Our capital expenditures, none of the asset sales were $8.1 million for the nine months ended September 29 team on a gross basis, we still expect around $20 million capital expenditures in 2019.
At the end of September our total liquidity was 38.5 million with cash at the end of the third quarter of 2019 of 22.6 million.
As detailed in October 30, Onest, 2019 release, which I would refer you to we've entered into forbearance agreements with our term loan lenders and ABL lenders as the company elected to not make that October term loan interest payment as a result, we are unable to borrow under our ABL facility as Rob mentioned discussions with our lenders continue and at this time.
Enabled to discuss this topic further I'll now turn it back to Rob Rob Yes. Thanks Marshall. This is clearly a challenging time for our industry with uncertainty over future oil prices intense competition, among well servicing players and MP companies, who are facing their own headwinds on free cash flow generation invest and investor sentiment are companies made.
Excellent strides over the past year as I mentioned in improving our safety or service quality and our client focus while our progress has been promising profitability has been elusive for us and our cash flows have been severely impaired by significantly quarterly interest payments on our debt, we believe that narrowing our focus to markets, where we can generate consistent.
Service activity is the right coal is allowed us to reduce our overhead concentrate our best assets and people and it will ultimately improve our financial returns the process of restructuring our balance sheet and gaining forbearance from our lenders has obviously been very difficult for our equity investors. However, we believe that the expected.
Resulting capital structure for key energy services will be more sustainable across industry strike cycles, and free up capital for investment in our people and our equipment off the road ahead will likely not be smooth, nor easy, but I'm confident we're positioning key for future success.
Nicole This includes that concludes our prepared remarks, so we'll open the call up now for questions.
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One moment for the first question.
First we have John Daniel with Simmons energy.
Hey, guys ill avoid the debt questions.
Rob I don't know if you would if you can answer this but I'm going to ask could you give us a shot the all of the facility rationalization that you guys you're doing.
Can you walk us through sort of where the major.
Eric quantify the number of yards you've got in terms of.
The rig business and coil business.
I am trying understand like had to how the scale has changed from maybe two three years ago, where it is today.
Yes, just to give your rough numbers and we didn't disclose all the areas.
Where we've made changes and we're not going to do that on this call, but to give you a rough idea.
We've gone from slightly over 80 districts to something in the high Fiftys now with the changes that we've made.
We have closed.
The.
Youre is really the across all all lines of business for the most part.
So as I mentioned in the prepared comments.
The coil business, we've really refocus that to where we think we can.
The successful got out of some areas frankly that were.
More gas gas oriented.
Markets markets that frankly, havent been good for wall, and where they are still intense price competition.
On the on the rigs side.
There were some select areas again more gas oriented areas, where the activity just wasn't really sufficient to have scale.
In the rigs lot of business. So clearly when you look at this company strengths.
You have to start with really the Permian the Bakken in the West coast when it comes to our rigs business and these closures and concentration of people in assets really allow us to focus on those.
And really to.
Use those is springboards for growth and profitability going forward, Yes, John I'll add a couple of things just just we kind of gave the overall percentage of Q3 revenue that this represented and just kind of taking it down to the segments. It was around 15% for coil, 60% of that was rigs in 2000.
4% was fluids and about 1% was fishing and rental and also add that have taken in those areas, where the market remains strong you haven't really seen that much of a change.
Particularly through this in the density.
Of service coverage and in many cases would tend to operate operate satellite yards today.
Where we will maintain a facility, but it won't have the same levels of overhead staffing as kind of the main districts that we operate data but.
To your point the footprint has changed.
Over the past many years right, but it does kind of core Permian back in California areas. Some parts of the Gulf Coast, we maintained its still maintain a good strong presence okay fair enough.
I.
Shamelessly I got distracted during the call Marshall did you provide.
Any type of revenue guidance for Q4, given the moving parts and no if not hazard would you be willing to hazard a guess.
It's really tough to nail down there so much uncertainty right now around what's going to happen in the fourth quarter on.
On the completion side.
Obviously, thats a that impacts a lot of our businesses.
In India.
The seasonal effect I think we October October is up as it should be given given that that's historically the best if not one of the best month to the year given the workdays in the weather.
But as we go into Q4.
Broadly speaking I would expect more than a seasonal downturn given the uncertainty around completion activity.
Fair enough fair enough guys. Good luck with the process and.
Well chat soon.
Thanks, John appreciate it.
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