Q3 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to the tried can well service third quarter 20, <unk> earnings results conference call and webcast.
As a reminder, this conference call is being recorded.
I would now like to turn the meeting over to Mr., Dave <unk> <unk>.
So then and Chief Executive Officer, I've tried conduits RBC. Please go ahead Sir.
Thank you very much barring ladies and gentlemen.
Thank you for attending to try catalog <unk> third quarter 2019 conference call.
Here's a brief outline of how we intend to conduct the call first Robert scale like our CFO will give an overview of the quarterly results.
I will then address issues pertaining to crane operating conditions and they're talking about lot.
Well then open the call for questions.
Like all within our executive Vice President is also available to answer questions.
I'd now like turn the call over in Iraq to provide an overview of the financial results.
Thanks deal before we begin I'd like to point out that this conference call may contain forward looking statements and other information based on current expectations or results for the company.
Certain material factors or assumptions were applied in drawing a conclusion or making a projection has reflected in the forward looking information section of our third quarter 2019 I'm dealing.
Number of business risks and uncertainties could cause the actual results to differ materially from these forward looking statements and the financial outlook. Please refer to our 2018, Oh, yes, and the business risk section of our Mdna for the year ended December 31st 2018, or more complete description of business risks and uncertainties facing try again.
This conference call makes reference to a number of common industry terms in certain non-GAAP measures, which are more fully described in our third quarter 2019 M.B. Riley.
Our third quarter results were released this morning and are available on SEDAR.
We did not see the anticipated sequential industry recoveries in Q3 as a result of work scheduled for the third quarter being deferred to the fourth quarter.
I remember last conference call. We expected the Q3 2019 average rig count as measured by Baker Hughes to increased by 80% to 100% relative to the second quarter ever industry activity to be approximately 30%, although Q3 2018 levels.
The actual rig count however, improved sequentially by 64%, which is down approximately 37% year over year.
Try cans activity was also impacted by our customers decision to move liquids rich and dry gas completions activity in Q4 in order to better align with projected increase in winter natural gas prices.
For these reasons try cans hydraulic fracturing activity resulted in average of 105000 active horsepower, which was less than our anticipated hundred 30000 horsepower.
Some of our second quarter conference call.
Overall, the drop in our Q3 revenue was the result of slow fracturing activity due to customer deferrals.
Lower cement revenue that track the drop in the lower rig count offset by a resilient and improved coil revenue due impart to the recent investments we've made into this business.
In spite of this drop in revenue, we were able to generate positive operations results by keeping utilization high end through cost controls.
Lower industry activity levels required us to evaluate the amount of equipment and number of fracturing crews to be placed in operation.
As a result, we've reduced our average fracturing crew count by one reduced the active crude horsepower by 50000, and idled and additional hundredninety thousand horsepower.
In addition to reducing the field operating crew count we took the necessary steps of reducing our support costs at the end of Q2, we consolidate at certain of our business cement business.
Operations and we have now began consolidating operations in our larger operating regions.
This consolidation and overall cost reduction effort will help reduce our overall fixed and SGN costs.
We anticipate that this would reduce our cost by approximately 15 million annualized relative to our Q2 exit run rate cost structure.
This is in addition to the previously forecast at 25 million of annualized savings.
We also have several lean initiatives in progress that will improve our efficiencies and reduce cost later in the year and into next year.
We will continue to review all opportunities to reduce cost and improved business operations.
Furthermore, we continue to review expected activity levels to ensure that the amount of equipment. We are operating aligns with these activity levels.
The significant Q3 cost saving initiatives did result in six and a half a million dollars severance charges.
The additional potential benefit of our cost reduction efforts is that we will be selling some of our owned and now redundant facilities, which overtime will free up capital that can be used to maintain a strong balance sheet invest in improving our business or repurchasing shares in our company.
Our strong financial position will allow us to prudently evaluate the best options for the cash proceeds from these divestitures.
Our third quiet quarter saw more asset dispositions during the first nine months of 2019, we received proceeds of approximately 22 million from asset sales and realized nearly 6 million and gains on asset disposals. Our Q3 2019 disposal 5 million included the sale of our remaining 520 to 50 legacy pump.
<unk> and other ancillary equipment.
In addition to the 22 million of asset sales. So far this year. We also finalized the settlement of our insurance proceeds related to uninsured fire event in Q1 2018.
The net proceeds of approximately 4 million was received in October and offsets the replacement costs of certain of the current your capital expenditures.
Overall, we have realized proceeds from the disposition of assets and other related items that essentially offset or 2019 capital expenditure.
Well, our capital expenditures continue to primarily reflect activity and necessary maintenance capital. We have made modest investments into items that will offer a quick payback as well as improve our operational performance and meet our customers' needs.
This included the addition of 10 by fuel pumps, approximately 27000 horsepower, which continue to be and strong demand.
Our total bi fuel fleet as more than 145000 horsepower. We also have introduced new large diameter treating iron technology that reduces our costs and improves operational efficiency.
Furthermore, the first quarter 2020, we'll see the addition of new idle reduction technology that reduces emissions and fuel consumption on fracturing equipment, creating further cost savings.
One large fracturing crew will be outfitted with this technology. Additionally, we have incurred modest expenditures to improve our system infrastructure, our field software and data collection systems and are already starting to see benefits from these systems through stronger cost management.
Interject introduction of field data collection systems is allowing us to gather data that will be used to reduce or our NIM expenses going forward.
The company's balance sheet remains strong when they 22 million of proceeds from the expected Q4 asset sales is considered the company is essentially bank debt free we saw typical seasonal working capital built throughout the third quarter as of the company's positive noncash working capital increased to approximately 89 million from the 48 million.
At the end of Q2.
The change in our debt during the quarter was the result of this working capital build.
Liquidity remains strong with significant unused capacity on our revolving credit facility, we maintain our belief in the importance of having a strong balance sheet. During this current uncertain market and will only utilize the balance sheet at the appropriate opportunity as presented.
Despite of the difficult industry environment and before considering changes in noncash working capital. The company generated approximately 17 million of operating cash flow during the first nine months of 29 team.
This combined with other asset sales has allowed the company to repurchase 7.5% of the company's outstanding share. So far this year for approximately 27 million.
Since the commencement of our 2019 2020, NC IB program.
October 2019, we have also repurchased approximately 4.3 million shares.
The company continues to view, our ability to repurchase shares through our modest positive cash flow and through proceeds from selling non revenue generating and non core asset prices approximating book value.
As repurchasing shares at below book value as a reasonable use of these cash flows.
We will continue to allocate funds to buying back shares going forward as we monitor cash flow from operations.
However, our approach to share repurchases will be measured given the uncertainty in the current operating conditions and as always we will we share repurchases against other investment opportunities.
I'll now turn the call over to Dale who will be providing comments on operating conditions and strategic outlook.
Thanks, Rob.
As Rob mentioned, we had originally anticipated steady utilization in the third quarter as bookings recall that during the quarter.
Hey levels, however fell off in the quarter as customers deferred programs for the fourth quarter due to low natural gas prices in the summer.
Hi, kind of was affected by this more than others as a number of our current clients produce a significant amount of natural gas from their wells it particularly during flowback.
It was prudent for them to the for these completions until gas prices recalibrate later in the year.
So far in Q4, we have had very little weren't cancelled and as a result, we are seeing better activity. This quarter than we originally anticipated, which should result in modestly better sequential results.
Second half activity far to assets not changed from what it was earlier. This year. However, there has been a shift to more of this work big completed in Q4 versus Q3.
Alright slate fully booked through October and November with utilization running at the high end of our expectations at approximately 80% to date in the quarter.
Deborah will slow down as is typical due to the holiday season and customer budget exhaustion.
And our fracturing service line, we are pleased with continued improvement in our job efficiencies.
Our most recent lean six Sigma project has resulted in average pumping hours on pad work up 20 hours per day, and leading edge pumping hours of 22 hours on Sundays.
These types of efficiencies will help ensure that we are able to meet peak customer demand with the lower crude cost levels.
Despite anticipating a modestly better Q4, we continue to proactively manage our careers equipment and overall cost structure.
Q3 slow down enough thats caused us to adjust our active crude adequate levels.
As a result, we have realized incrementals cost savings for our business.
Some benefit from these initiatives one state in September we will see the full benefit going forward.
The fracturing industry remains competitive but contract pricing has got a most box stabilize this year correct low levels.
Well the industry was modestly over supplied in the first nine months of 2019.
Believe our approach to disciplined pricing parking cracks and crews will maintain a more stable market and ultimately lead to better financial results as the industry Rightsized itself to the new Alcott.
Since earlier in Q4, 2018, we have reduced our math equipment levels by more than 170000 horsepower and we will continue to adjust our active crews to changing industry demand.
We currently have 236000 hydraulic horsepower that is on staff.
All of this equipment as captain good working order and is not cannibalize, we did not anticipate any fracturing equipment being activated in the near future.
Hi, stocking our equipment and good working harder, we can minimize future liabilities that expenses to the company from any possible future fleet requirements.
We have seen our competitors also idle or move equipment out in the base at which we believe this movie the Canadian market much closer to being balanced from a supply demand perspective going forward.
Our current met market continues to hold despite the lower rate count pricing has been stable and weve right sized this business to current demand. We are expecting Q4 activity to be down about 20% from Q4 2018 due to this that current rates out.
We are pleased when it called testing results as activity of profitability remained strong during the quarter and we should continue to see improved year over year results as activity has been holding at this level by the first part of the fourth quarter again pricing in this service line has been relatively stable.
We continue to have part coil assets that could be activated with little capital and we will look for opportunities to generate acceptable.
Well returns from the addition, so thats equipment at the market.
Our customers remain disciplined with the capital programs, we do not anticipate increases to these programs and our best estimate as we head into 2020 bids for similar activity levels 2019.
Our customers continue to be affected by takeaway capacity hedges for both oil and gas.
We have retained our strong current clients going into 2020, and we expect Q ought to be fully but for active equipment until at least mid March.
Pricing has remained stable going into 2020, and we will continue to work with our clients to approve efficiencies, which will improve operating results.
As Rob discussed we continue to look at ways to monetize non revenue generating credit that noncore assets.
While our financial flexibility will allow us to only sell assets at reasonable valuations. We expect to continue to monetize assets that we did not believe will be active and the database at an X number of years.
Today, we have announced that we have entered into an asset purchase agreement to sell fraction our fluid management service line.
This is a good business with good people at a loyal customer following.
However, we made a strategic decision this business was not a growth service life for us going forward.
I made the most sense for all stakeholders being our employees customers and shareholders the salvage business.
I want to thank all of our staff attraction for their commitment to doing excellent work and a lot of management business as big an integral part of the success of that business over the last number of years.
We continue to remain focused on waste removed static capital if I business and we'll do this by finding ways, whether equipment to either start generating cash flow oil up to divest step.
We will not harm the long term prospects of our business through our asset sales program.
And we'll evaluate various capital initiatives to improve our operations and returns to shareholders with the proceeds from these asset sales.
Despite the average age of market My primary goals for 2019 remain relatively unchanged.
We will continue to focus on finding ways to improve returns and our active equipment increased utilization permanently lowering our costs. This will improve the return on invested capital we generated from our equipment.
We will continue to look for opportunities to generate revenue from parked equipment, our cell idle assets that can no longer be used in Canada.
We will continue to focused on maintaining a strong balance sheet and returning capital to our shareholders through our ANSI IB program, while monitoring cash flow from operations.
Taking a healthy balance sheet is still our top priority.
Lastly, our strong financial position.
Thats the flexibility to examine investing in our current and new service slides.
Well, the quick but actually Karen and a long term improve return on invested capital for the company.
I want to thank all of our staff as we continue to pursue excellence by working safely providing great customer service managing costs.
And improving efficiencies through our lean six Sigma program.
This is being demonstrated by our 20% 22 hours of pumping our success in the fracturing business.
And our recent coiled tubing crashing operation, which we stimulated the well food cost it into a magic to up about 6985 meters and a horizontal lag a slightly over 4.5 kilometers.
I understand that this is a western Canadian record.
Our teams at all service lines have improved safety and service quality and this ultra competitive market, which is why our core customer retention rate remains very high.
I would like to thank all of our staff, including all the support staff are going the extra mile to provide safe efficient outstanding customer service at a cost effective manner to our clients of these uncertain economic times.
Thank you for your attention today and your interest in fact that I'd like to turn the call or to the operator for any questions.
Thank you, we'll we'll now begin to question and answer session to join the question Q. You May proceed Star then one on your telephone keypad.
You will hear it tone and knowledge in your request.
If you're using a speakerphone please pick up your handset before pressing any Keith.
With that all your question. Please press Star then too.
We will pause for a moment as callers join the queue.
Our first question is from Antonio Lincoln with National Bank. Please go ahead.
Hey, good morning, guys as Anthony on for Coleman.
Just nice to see the disposition the disposition of the water management business during the quarter I was just wondering if there's any other noncore assets you're actively looking at disposing of right now.
So weve.
Subsequent to the quarter, we expect to close the sale of one property for $5 million and then it's just.
As we see opportunities of all our service line managers or.
Or looking to sell excess surplus and non core noncore gear. So that's the main focus right now as I noted that prepared remarks.
We're working on other larger base consolidations, which may present incremental real estate as well, we just haven't got all that figured out at this time and and so we're continuing to work through it.
Okay.
So we think about it you've realized about 100 million you monetize a $100 million. So far in the last 12 months 75 million of that is for Keinsley. Other 25 is the non core stuff how would we think about the 25 million is kind of the overall plan is that like just getting started or we halfway through or.
Hi yard so you're talking about the third quarter number of 22 that that mess or sorry, the fourth quarter number of 22 million.
No I'm talking about in the in the in the water management disposal, you talk about 97, and a half million that have already been monetizing. The last 12 months. So if you back out the water management from that lets just call. It 25 for that and then the facility you kind of got you monetize the other 75 is for Keane. So the 25 million how would we think about that as kind of the overall.
Plan, that's all prior Thats all Don.
Okay.
So thats all past stuff and then looking forward.
We don't have specific guidance other than.
Other than what we're talking about the 5 million here for an incremental property and then whatever we can as far as parts and pieces goal.
And if I figured I'd add additional property that is going to cap rate and we don't have a value on that yet okay. No fair enough figured I'd just give us shot.
Moving on and just kind of thinking about during the quarter you moved from 12 million net cash the cash position to $36 million net debt position and mostly driven by the working capital so kind of moving into 2020, how should we be thinking about the trajectory of that working capital and then your debt levels.
I mean, if from the Q3 exit levels were probably not too far off of where working capitals generally going to run might be a slight built here in Q4.
But I think as far as the looking out at the debt levels.
Generally pure maintenance, which you can see through the first nine months is running at about 3% to 5% of revenue.
Thats a reasonable.
Level to to track the maintenance so anything we generate beyond that is.
Because of our low interest payments and modest lease payments is pretty much free cash flow, yes, we should add.
Say that the proceeds from some projects will be applied to that I've heard out too so that that basically reduces us down to.
Not zero, but all of their yes.
Alright got it thanks for that and then just one last one from me.
Past 12 month is kind of looks like your strategy is really been focused on noncore asset sales and Canadian operations are you considering deviating from the strategy by say like buying something or moving into a new geography or are you mainly looking to stay the course going into 2020.
Well, we always look at what's going to be beneficial for our shareholders. We don't.
We don't like I've said, this fall and pass it along the supply demand balance of the fracturing market in the U.S. and have a like that for some time and Thats why we haven't entered that market adequately kind of seeing that now.
Play out in the U.S. with big substantial oversupply and pricing dropping in that market so that tempers our.
Due to asset for entering that market.
We we looked at things I'm not going to say, we're never going to do things and in particular valuations where to drop but overall, we remain focused on our strategy within Canada as being the prime time way to focus on our business.
Okay. Appreciate it guys. That's it from me I'll turn it back.
Okay. Thanks.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Keith Mckey with RBC. Please go ahead.
Hi, good morning, guys.
Mike.
Just one question here.
Notice that the in the financials, we see that you supplied 100% of proppant during the third quarter relative to 47% flat same quarter last year do you expect this to be typical of the of the.
Dynamic going forward or should we expect to go back to that 50% number or maybe just give us some more details on the on the factors at play that affect that number moving from 47% to 100%.
Yes, if you look at our current customer mix.
We're supplying the majority of profits to our clients after the third quarter outlets, we supply 100% of it.
It will probably as as we move customers around a little bit aircard clients are committed to supply their side.
There is there's some new clients.
And some.
Some of our clients that may get into supplies of their sound themselves, but the majority of still probably remain with dry gas supply and the sad.
Unless we there's some tenders so outstandings at some of that some of the bigger ones at protected area and then lastly land one of those tenders that and we.
We anticipate it to still remain.
No not maybe not 100% high percentages of our suppliers that.
Okay perfect. That's it thank you very much.
Thanks.
Our next question is from John Morrison with CBC capital markets. Please go ahead.
Good morning, all up still.
Although there is great fluidity to kind of producer 2020 spending plans right now you obviously have some.
Long term enduring customer relationship that go a long ways Bakken when you talk to those clients do you get a sense that when they do finally from up budgets, they're going to give you something that looks like at least a full quarter visibility or does it feel like it's all going to be smaller subset, so wells and maybe that feels more like weeks.
Sure maybe a month of visibility once you finally do start to answer.
Winter winter programs in front of you.
Yes, we've already had discussions with our long term card clients and actually are our longest term.
Our clients give us their full year visibility for 2020 with the option to change it as commodity prices move and as we saw in Threeq you. They definitely the option to move at quarter to quarter, depending on where they see commodity prices is late.
They will give us an estimate of what they think the full year roby.
I would say that if you go through all of our clients our top five have given us pretty good indications of fall Q1.
And so we've got pretty good visibility on where Q1 is going to land out in terms of actual while bookings crews committed.
We would have while locations already from a lot of those clients and our commentary that six or eight creditors are already committed relationships would be with clients like that that have given us good visibility right through to the mid March.
Thats part of March will be weather dependent.
You talked about the shifting of work between Q3 in Q4 has that actually led to a net increase in what you would expect Q4 book of business to be or are you seeing we're having conversations with some of that Q4 potentially becoming a push into Q1 at this point.
No it's it increase.
Q4, and so we did it.
As I mentioned, we kept our basically a forecast for the second hasnt changed for us, but it shifted to more activity in Q4 and less activity and could say so.
It's a bit unique to this hasn't happened in previous years quite honestly, usually that customers exhausting Q4, more but we had this unique situation.
I think it was mostly with our clients, where a lot of and produce produce a substantial amount of gas.
From their liquids rich wells and they wanted to break that gas back into a better price environment and all credit to on there theyre doing that now and so we're very busy in October November as we're completing wells had our customers are realizing much higher gold price and they would have in the summer.
And so.
Yes, I would say that we're not seeing any of that really being deferred into Q1 at the present time.
Maybe there's something later, but there's more of.
Leading with these clients to get these gas wells on sooner rather than later so they can realize full full winter pricing for more months, rather than differing up mid to Q1 or even deferred into later timeframe. It's get out right now because gas prices are actually pretty good.
Okay.
Can you share whether the returns a fraction over the last 12 to 18 months for relatively in line with a broader platform or meaningfully different and then also do you still plan to coal market and kind of cross sell your completion business with them or is it going to be 100% suffered segregated go forward.
So just on the financial numbers I would say generally in line.
With the broader business, if you exclude out some of the the items like.
Restructuring and severance.
Okay.
But generally in line with with the broader business as a whole maybe actually maybe even a touch better I think as we look outward though.
We knew we would have to invest cash into the business to grow it.
More meaningful level, which we then saw being probably more of a drag on free cash flow into the future given the investment we would have been required to do which wasn't in alignment with US yeah. In regards to marketing, yes, we are going to work pretty closely with the purchaser to market whenever we can together.
We have a good relationship with that company and whenever possible.
We'll work with them.
Going forward.
Were you guys.
Approached for that or did you actually shopping.
We've been.
Kind of hats off feelers out for that business for some time for potential buyers of it and.
This.
He came forward through that process and then we just negotiated a deal with them.
Rob just a clarification the buyback it's fair to assume that it continues to move forward as long as you're below book value and seen net cash generation coming in net of Capex independent or whether that comes from core operations or asset sales is that fair to your earlier remarks.
Generally fair I mean, whether we run all the way up to a full one to one book value I mean that that's a.
Bigger question, but generally at these levels, we will continue on the path we're on.
Okay, maybe just one last one from me.
How do you think of old service line diversification at this point and would it be fair to say that anything that you're looking at it would need to be fairly non completion oriented.
To try to change some of the volatility of the revenue stream, that's just inherent with the pumping business.
That's exactly right. That's what we're looking at kind of two aspects to it.
Less volatile so it wouldn't be as tied to the drilling and completions drill bit we'll call. It and the last other piece is less capital intensive we've got we have enough capital intensive service line, so as Theres a number of.
Non capital intensive lines out there that we would look at.
Okay perfect I appreciate the color I'll turn it back.
Hi, John .
Our next question is from Mike Mccarthy with BMO capital markets. Please go ahead.
Hey, guys. Thanks.
My question kind of got answered.
Given John's question, but.
Just to clarify he was speaking about returns in terms of the fraction business. What about margin contribution was was it meaningfully different one way or the other.
Negatively or positively relative to the rest of the business in other words with it gone.
All else being equal would you see an uptick or downtick margin wise.
No I guess, sorry to clarify that that commentary probably could have been taken to both margins and returns.
And thats kind of what I thought okay, sorry, thanks very much.
Thanks.
Our next question from Ian Gilson with JMP. Please go ahead.
Good morning, everyone.
Good morning.
With respect to the increase pumping time have you seen any meaningful change in crew sizes to support that I guess intensity of work.
And or have you seen h. and maybe I guess have you seen any changes yet in our and im costs or maintenance capital or is it still too early to tell again, given the significant change.
Well actually.
We haven't seen any upward change at all and those things and basically I think we're still working through some of our other initiatives to drive down both repair and maintenance AG and crew sizes and are making progress on that going forward as well, but that suit our seller either efficiency projects that we have underway.
I think just on the maintenance capital of course, if you if you're pumping for longer hours Theres, just a cost to pumping relative to idle time. So there is that but your revenues also higher in that pumping time.
With respect to the CRO business I mean, one of your peers reported today also reported debt pretty good numbers in that business are you seeing anything in particular anyone in particular, capturing market share from as they are just some sort of change in field demand for more coil or I guess, what's changing in that market.
I think year over year, or or maybe year and a half over year and out the big change the call market as a lot of little players have exited that market. So the supply demand balances much better than it has been for a number of years and these are smaller private companies.
Kind of went away in 2018, so thats, probably one of the drivers and then we've had some market share gains as we've added some units it wouldn't be that expensive anyone in particular area. It's just basically.
Various customers that we've been able to grow some market share with.
A lot of that in our case had to do with us reconditioning, some units and modernizing them and making them.
Kind of industry, leading and I think thats helped us.
Ill add to our workflow.
Yes.
Holistically as you think about some of these asset sales in cash coming in the door does it change the view at all on trying to execute substantial us your bed versus just using the NCB.
I think our current plan is just continue to pursue on the NC IB we've got.
Still quite a bit a room under that plan.
And.
Yes, I think Thats, that's the current plan and we'll just watches the business evolves and because there is other opportunities. We look at also so we've got we've got a balance everything everything across.
As to what's going to provide the best return.
Okay, we can't close the door on any opportunity I don't think we're ready to close that door.
Yes on it on some of that Okay, and Rob just last one from me on the asset sales.
Is there any is there any tax impact as a result of sale I view is there any cash taxability on it.
No. This is all.
Stuff building on we've got enough operating losses tax losses to absorb that okay. Just want to make sure. Thanks very much.
I'll turn it back over.
There are no further questions registered at this time I would like to turn the conference back over to Dave Duster Hope for any closing remarks.
Yes. Thank you very much for your interest in China today, and we certainly look forward to talk into our next call, which will likely be in the February timeframe. Thank very much.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant.
And.
Okay.