Q4 2019 Earnings Call
Please standby the conference call will begin momentarily we thank you for your patience enough that you. Please remain on the line.
[music].
Greetings and welcome to the F T S International fourth quarter and year end 2019 earnings call. During the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question and answer session at that time, it's the other question. Please.
The one followed by the four on your telephone.
If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Thursday February 13, 2020, I would now like to turn call over to Mike Mussina. Please go ahead Sir.
Thank you and good morning, everyone. We appreciate you joining us for the Fts International Conference call and webcast to review fourth quarter and full year 2019 results.
As a reminder, this conference is being recorded for replay purposes.
I think today's prepared remarks, as Mike Doss CEO will also be joined by Lance Turner CFO and body Peterson C.
The Q and a portion of the call.
Before we begin I'd like to remind everyone that comments made on today's call that include management's plans intentions beliefs expectations anticipations or predictions for the future <unk> forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These forward looking statements.
Subject to risks and uncertainties that could cause the company's actual results to differ materially from those expressed in any forward looking statements.
These risks and uncertainties are discussed in the company's annual report on form 10-K, and other reports the company files with the FCC.
Except as required by law the company. It does not undertake any obligation to publicly update or revise any forward looking statements.
The company's FCC filings may be obtained by contacting the company and are available on the company's website ft. Aside dot com and on the Fccs website FCC Dot Gov.
This conference call also includes discussions on non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure.
With that I'll now turn the call over to Mike Doss Upped your size CEO, Mike. Thank you and good morning, everyone.
Despite the seasonal slowdown our fourth quarter came in better than expected.
This was the result of very strong operational efficiencies and tracking ahead of schedule on the 40 million of annualized cost reductions we discussed on our last call.
Revenue was 142 million down 23% sequentially, while our stage count was down 10%.
The drop in revenue was due to the lower activity more customers, providing their own sand and lower pricing, which declined about 5% during the quarter.
Adjusted EBITDA was 22.7 million up from 20.6 million in the third quarter annualized adjusted EBITDA per fleet was 5.5 million compared to 4.2 million in the third quarter.
Its June eight was to 22.7 million higher than in the third quarter due to 2.8 million of accelerated stock comp related to lay offs.
Excluding stock comp SGN, a was 16.9 million in the fourth quarter down from 18.2 million in the third quarter.
For the first quarter SGN is expected to be about 19 million, including 3 million of stock comp.
Net loss for the fourth quarter was 13 million or 12 cents per share [laughter] Capex was 14.9 million up from 13 million in the third quarter with the increase driven by expenditures for dual fuel conversion kids.
We ended the ended the year with five dual fuel capable fleets and we'll have seven by the end of next month.
For the full year Capex was 54.4 million and we expect about the same or approximately 55 million for 2020.
Maintenance Capex is expected to remain at 2.5 million per fleet.
Free cash flow was 19.1 billion in the fourth quarter and for the full year. It was 69.5 million.
Including asset sale proceeds totaling 34 million, we generated 103.5 million of cash during the year.
As of yearend, we had 223 million of cash and our net debt was 237 million and 93 million dollar reduction for the year.
We have a total of 460 million of outstanding debt, which consists of two pieces a 90 million dollar term loan to next year.
370 million of term of senior notes due in 2022.
We're maintaining significant liquidity to increase our optionality, well, we evaluate impossible liability management alternatives to extend maturities.
Our average active fleet count was 16.5 in the fourth quarter compared to 19.8 in the third quarter.
We ended the quarter was 16 fleets and currently have 17 working.
Of those nine are located in West, Texas for in South, Texas to in mid Con one in the northeast and one in East Texas.
We completed 385 stages per fleet in the fourth quarter, an 8% increase over the third quarter, despite more seasonally driven white space and the calendar.
We have steadily increased pumping hours per day and stages per fleet every single quarter in 2019.
We continue to see more customers focused on efficiency, which working together with us allows us to achieve industry, leading performance with fleets that routinely pub 18, or 19 pumping hours a day.
With efficient moves between pads.
These fleets are able to put away 250, plus stages per month.
That kind of performance is only possible due to our crews complete dedication to service quality highly effective operations leadership and our outstanding maintenance team.
In terms of sales activities. The last 18 months have been challenging the current indications are that we are beginning to turn the corner.
Over this 18 month period natural gas prices have fallen and activity and gassy areas, where we had a big presence has declined.
We went from 11 fleets and gas basins in mid 2018 to just to fleets today.
We really relocated several of those fleets to other areas, primarily west, Texas, but that came at a cost to margins as pricing for new work became increasingly competitive.
Also in late 2018, we began directing more of our sales resources towards solidify and longer term relationships instead of chasing transactional work.
We've always had both types of works upward, but the heavier emphasis historically on transactional work has caused us to be more sensitive to market changes in some of our peers.
So I transactional work I don't mean, the distinction between dedicated and spot transactional customers are those primarily focused on using the lowest cost provider.
Rather than engaging in business partnerships that allow both parties to share and successes.
The change in sales strategy is beginning to bear fruit over the last six months, we have placed to fleets with strategic accounts that we view as long term partners.
In addition, we have converted one of our spot customers, which had used us as a swing provider to a more stable highly efficient dedicated customer.
Well the Frac market remains oversupplied overall.
Our operations calendar has firmed up for the first quarter and we are receiving more than usual RFP for this time of year.
It appears that some of our competitors are being more discipline, which has resulted in some unexpected tightness in the spot market.
While we do not yet have pricing power. This is a welcome development.
In terms of pricing, we lost about 5% on contracts that rolled over to the new year.
However for new work.
This year and going into the second quarter, we believe that pricing has stabilized.
Despite slightly lower pricing, we kicked off the year on a stronger footing in terms of results driven by further efficiency gains and sustained cost reductions.
Currently expect to average about 17 fleets in the first quarter and with 18 or 19 fleets active we also expect our annualized adjusted EBITDA to improve to between six and 7 million per fleet in the first quarter.
Next let me give you a brief technology update our automation project, which has been years in the making is now live.
Computer assisted pulp control can now automatically take action to shutdown pumps that show indicators of probable failure.
It will soon be able to seamlessly redistribute the load to other pumps.
This innovation will allow us to get more reliable hours out of our equipment.
Reduced costly repairs caused by excessive damage accumulation and maintain more consistent stage performance for our customers.
Another project recently completed as a significant redesign of our blender, reflecting over 100 improvements the new blender is considerably more durable easier to operate and easier to maintain.
This is a perfect example, one of the purpose of being a manufacturer where we can cost effectively it continually improve our equipment with operations in mind.
Lastly on dual fuel I mentioned earlier that we'll have seven dual fuel capable fleet by the end of next month, we've seen significant interest from customers in dual fuel over the last six months as a way to reduce fuel costs.
We can convert a conventional tier two fleet to dual fuel per capital outlay of only 1.5 million.
We also have the capability to upgrade a fleet with the new cat tier four DGP engines.
They have a higher displacement rate in a better emissions profile, but they involve a more significant outlay of about $10 million per fleet.
We will need a firm commitment from a customer before proceeding. However, there is some interest in the initial field test results. We have on the engines performance look really good.
That's all I have four prepared remarks, operator lets please go to QNX.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you will hear a three to one problem to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by this week one moment. Please for our first question.
Once again to register for a question. Please press the one followed by the foreign your telephone keypad. Our first question comes from the line of Taylor's or occur with Tudor Pickering Holt you May proceed with your question.
Hey, good morning, Congrats on a great quarter first question I had is just on the efficiency performance in Q4, and it sounds like an embedded in the Q1 guidance some incremental efficiency as well.
Probably because there are some reduce white space in there, but could you just frame for us.
How much room, there is left to go on efficiency front moving forward and.
To what extent, maybe customer mix or geographic mix in Q4 played a role and the stages per quarter for fleet that you're able to do.
Sure so as it relates to the fourth quarter the efficiency did tick up even though we did have more white space I think a lot of it has to do with just customer type. The type of work, we're doing more zipper operations as opposed to single well.
Our team tighter time between locations and less time between stages less NBT was really a lot of those factors that resulted in the than that efficiency gain.
Our first quarter.
The main driver for the efficiency gain is just less white space and the calendar fourth quarter I think because everyone expected was was very gabby in terms of.
In terms of utilization just a very typical and lot of customers. For example took off the last couple of months couple of weeks, rather have the quarter and.
So we're going to see that tighten up in the first quarter, but very pleased with operations performance in the fourth quarter and they're continuing to do a great job.
Got it and then as we think about.
2020.
Clearly the profitability is going to be higher in Q1.
No not necessarily looking for guidance in 2020, but.
If if Q1 sort of the status quo for for the first couple of quarters of the year anyway to frame.
Expectations for free cash flow in 2020, and within free cash flow, what sort of impact you think working capital might have over the course of 2020.
Sure I'll make a few comments then Lance you can you can answer on the working capital. So theres always considerable uncertainty in the market, but like I said, we are starting off on a stronger footing.
Higher than we had expected a couple of months ago.
I think second quarter and third quarter are going to be good quarters for us I think second quarter, we may flex up another fleet just get given the RFP activity currently going on.
Reasonable to assume that sustains into the third quarter fourth quarter will probably be some some measure of a repeat from last year.
It's hard to know, but it does seem that that's that's the way MP companies tend to manage their capital budgets is that frontload.
A bit and then really drop off at the end of the year I'd like to change that but.
But that's what we're currently anticipating so I.
I would think just a reasonable layout first quarter.
Better than fourth quarter of last year's second quarter in third quarter, better and then fourth quarter, probably similar to the quarter that just passed.
Yeah answer in terms of cash flow I think working capital year over year, I wouldn't expect a big impact.
Inter quarter I think we'll have a usage in Q1 and.
And then yes, we usually have a release in Q4, so I expect that to be the same.
This coming year and then you obviously, you've got your interest in Capex and so that the expectation is to produce a decent amount of cash.
Got it thanks, guys I'll turn it back.
Our next question comes from the line of John Daniel with Simmons Energy You May proceed.
Hi, guys.
Good quarter.
ACA Taylor's comments.
I just have a couple of here. The first it's Mike you mentioned you might flex up another fleet in Q2 were you referring to essentially a fleet number 20 going out.
Yes, this quarter 18 to 19.
Yep potentially go into 20 by the end of the second quarter.
And that is a bit of a guess, we havent secured that yet but.
Given the momentum that's a reasonable assumption.
That's fine and I mean, I guess the question. We all wonder here is when the activate 18 19, and then potentially 20, presumably you're doing that.
At a rate an EBITDA per fleet that would be in excess of where you are guiding for Q1 is that fair.
I would say is probably right in the middle of of the fair enough.
Okay and.
And then.
As you do the reactivation.
Should we be building into the model any reactivation costs are now.
Now we just cover those throughout the next I mean, there okay, what 500000, maybe a million per fleet.
Just a cost of doing business.
And then the last one for me.
The sound like a jerk, but when you look at an operation and you've got one fleet as you do in say the Northeaster East Texas.
Presumably you guys are looking at what does that make sense to have one fleet in the basin at what point do you go to your customer and just say hey, guys. This isn't working.
We need a significantly different relationship you're otherwise we have to pull out how does that can use walk me through that process.
Yeah, I'll make make a couple of comments and I'll ask Buddy to the comment as well so I think up in the northeast obviously gas prices are terrible and the outlook Doesnt look, particularly good at the moment the customer that we are working for up there of course, that's not their faults and so for me to apply pressure on them to carry the district doesn't really make a lot of sense, but we are.
We are trying to get an additional fleet I would say margins in that area are not very good but just to have another fleet to absorb the overhead we have really made the the district very lean and then as as we possibly can.
In response to the having only one fleet currently and so we're just really trying to manage through I really would rather not abandon the northeast.
I do think it's got good long term potential historically it had been a fantastic district for US I think and onetime we had nine fleets.
Working in the area.
Right, but obviously depressed today, so but as you have anything to add no.
Incur with Mike I mean, there's some social issues in both east, Texas in the northeast that we believe long term as.
We again I echo the sentiment, we don't want to pull out of that just because the social piece the east, Texas haven't won the flexibility with east, Texas, because the proximity to the Eagle Ford is close enough really the the carry cost for the east, Texas pieces and his eyes.
This would be.
Thank you and good quarter again guys.
Thanks, Thanks, Jeff.
Our next question comes from the line of Duston Tillman with Wells Fargo. You May proceed.
Hey, guys. Thanks for taking the call you mentioned liability management.
How are you thinking about your bonds that are trading sell to 60 do you think about going into the market repurchasing bonds now that you see your cash position growing and stabilizing.
You know is something that we're carefully considering and we've been looking at this for a couple of months one thing we want to be mindful of as the term loan maturity next year and so one one possibility is to pay off the term loan.
But it is it is an attractive discount as far as repurchasing notes and so we may consider doing a tender offer.
But that's that's still under consideration Lance any I'd say I'd say all options are on the table at this point.
Is it fair to say that looking out the cash flow stability today versus where you were a quarter ago makes it more likely to purchase bonds.
Yes.
I would think so.
So.
But again, we want to make sure that we've got.
Sound liquidity and that the term loan can be can be dealt with very comfortably and so just trying to balance all of that.
Is really what's causing us to pause and just make sure that we are.
Going down the right path.
Makes sense I appreciate it.
Our next question comes from the line of Stephen Gengaro with Stifel. You May proceed with your question.
Thanks, Good morning.
Two things one just a follow up on the prior question. How do you think about how much cash you actually need to carry on your balance sheet.
Sure.
Well I think probably operating cash around 100, low hundreds probably quite sufficient to be able to handle working capital swings and a rough patches and the business specifically.
So carrying that plus $90 million for the term loan gets us around 200 million and we have a little bit higher than that today, but thats kind of broad thoughts on cash management.
Okay.
Thanks, and then as we think about the.
The first quarter guide and then sort of how you think about the rest of the year.
I imagine based on your comments that the pricing.
You mentioned in the rolling over at about 5% down is already reflected in that one Q guidance is that am I thinking about that properly.
Yes, absolutely it is.
Okay and then just just finally as as you kind of what are your crystal ball over the next 12 months I mean, we've certainly seen some.
Equipment removed from the fleet.
From the industry in total how are you thinking about the market over I know, it's hard to predict the demand side, but how are you thinking about the market over the next 12 plus months and.
Looking at sort of the sort of quality of some of the.
Equipment, which is still in the mix how do you think it plays out.
Yeah, well. This is of course, just my opinion, but I think the announced attrition is very healthy.
Equipment does need to leave the markets can't really comment on the quality of equipment, but I would imagine it's probably the lesser quality.
Or it's just companies just just aren't quite as competitive and just unable to generate sufficient returns.
In today's market I really see the market.
You are kind of stable, maybe slightly better in the second half.
Thats, just intuition that really based on any any careful.
Analysis of macro factors or anything of that nature, but I mentioned earlier on the call. I think we are seeing some more disciplined behavior, particularly on amongst some of our larger competitors and so I think thats a very healthy thank for the industry and that's probably more impactful than the than the attrition story today.
Great. Thank you for your color.
Our next question comes from the line of credit Voya with Wells Fargo. You May proceed with your question.
Morning, guys.
Good morning.
Just wanted to check on the visibility that have for the first quarter and anything beyond that can you give some.
Kind of guidance on how much of the calendar is full in the first quarter and then whether you have visibility into second and third quarter.
Well so its first quarter I mean, we've got a really good read on that the calendar is from at this point in filled out and so I don't think we have any remaining space for the rest of the quarter.
And so right now we're building the second quarter I mean, many of our much of our work is just want to continue evergreen are dedicated.
There is some bids that were currently working on that the could result in an additional fleets for the second quarter, but.
Full for first quarter, so I'm not sure if that was exactly your question, but that's that's where we are.
Yes, I was just trying to get a handle on how much the length of visibility that you have I guess a follow up revenue per stage was down 15% there might be a mix shift in there in terms of the size of stages in the basins as well, obviously, 5% on pricing.
You mentioned a shift in San can you give a little color on how much shift there was in customers writing sand in the quarter.
Yes, quite a bit actually so for the fourth quarter only 8% of the stages. We pump is using sand that we provided in so customers provided 92%.
Which is a high I think the highest ever.
What was it lists and third quarter in second quarter.
It was getting closer to 20%. So it was a pretty big shift down also fuel continued we didnt have we didn't provide fuel for hardly any customers yes.
Yes. So these materials have definitely have an impact on revenue, especially looking at revenue per stage, but it's it's just revenues and cost of sales. We don't we don't put much if any of a markup on the materials. These days.
Doesn't really matter and the big picture.
Got it okay, maybe to just squeeze in one more.
It sounds like you're ahead of schedule and the cost savings are all of those cost savings going to be complete within the first quarter guide or is there a tailwind in the second quarter.
There's a little bit of a tailwind in the second quarter I wouldn't say, it's material in terms of.
In terms of the estimates.
For the a largely realized in the in the first quarter. Some of the DNA reduction will bleed into the second quarter, just takes time to get all those cost reductions push through.
Okay, Great I'll turn it back thanks.
As a reminder to register for question. Please press the one followed by the foreign your telephone keypad. Our next question comes from the line of Vebs Vaishnav with Scotia Bank. You May proceed with your question.
Hey, good morning, and congratulations on the good quarter.
I guess that's.
Okay.
We have already spoken about efficiency, but just trying to think about can you help us beam like alright, let one last 12 to 18 months, how much efficiency gains have we seen.
And if we go move from here, what do you think efficiency gains could be over next 12 to 18 months.
Yeah, you over the last 12 to 18 months.
Yeah, we're looking at.
Yes, 12 months, 20% 18 months.
Larger than that I think one of the one of the big factors for US is the is is it for wells. We had a high is it for well percentage back in 17 that number came down in 18 and now it's come back up in 19, and so that's that's a big driver of this.
Secondly, we've just got more customers focused on efficiency than than ever before yes, 12 months ago 18 months ago, you had the leading edge customers focus on efficiency and now more and more customers are more focused now also realize what is possible.
And achieving those efficiencies and so.
As we look forward.
Hard to say I think the zipper well probably.
Maximizes in Q1, the zipper well effect and I think you are starting to see saturation in the industry in it from that as a driver as well.
And so I expect some improvement in Q1, and maybe modest improvement past Q1, but it's hard to say at this point.
So besides zipper Frac is that I did any of that seems like what would be can shave off 10, 15 minutes here and there on a stage or something like that.
That can still continue to next year.
Yeah, I mean, I think I think right now what we're looking at his time between stages. So you're exactly right can you shave 10 to 15 minutes off the time between stages and.
And as we go to zipper wells that shrinks and I think there's a natural limit to how small that that transition period can be we think we've hit it on a number of our crews.
But but we were still focused on it.
All right.
And it would just wanted to good clarification on the guidance I mean may not have you done it as fast.
So my understanding is you guys. It thinking that Dave would be 17 active fleet, a second 17, working fleets with 18 to 19 being active.
And the 67 million of analysts it'd be double their fleet. That's 67 is that based on though 17.
I believe that's yeah.
So is it 18 to 19.
Yeah, No I'd clarify that so the 17 is the quarterly average.
And so we started out with fewer fleets and we're going to end with 18 or 19 in just the blended average of 17, so that 17 would be what you'd multiplied by the the six to 7 million.
Okay. That's very helpful. Thank you for taking questions.
Sure.
Our next question comes on line of Mattson Duskin with Bank of America Merrill Lynch. You May proceed with your question.
Hey, guys just regarding the two incremental fleets going to work. This quarter are these going out on dedicated contracts are these on spot and can you speak to that pricing difference between the two markets.
Yes. So this would be for a dedicated fleets and so the pricing would be starting now probably in the middle of our of our guide range for adjusted EBITDA per fleet, but but we do think there's room for improvement in terms of efficiency once we get into group.
With the customer and possibly some pricing relief in the second half dependent on where the market goes so.
Good good quality additions.
In terms of customers this quarter.
Okay. Thank you and then I guess just sticking on pricing between markets.
Are you seeing any bifurcation between your pricing potential to your dual fuel fleets.
Or I mean do you expect the market to give you one at some point.
No it would be nice if there was a greater GAAP on that but it's largely we give the dual fuel Kate dual fuel conversions away for for kind of a minimal uplift in the stage rates just allows to recover our capital cost over say 12 months or so and.
In other cases, if they if it's helpful and thats getting.
Access to a new customer customer that we want to partner with.
We just we just throw it in as.
As an addition that really no additional cost to them.
It's like said, it's a minimal capital outlay for us so maybe that gives us a bit of an advantage in some bidding situations.
I appreciate the color I'll turn it back.
Our next question comes from the line of Stan Manny Kim with independent Credit Research you May proceed with your question.
Good morning during the ruble.
Congratulations on the remarkably quarter.
My question is about.
What is the were representation of Enbridge sort of working capital demands.
Each of you do potency.
So.
I would have met estimate incremental working capital but to be in the two to 3 million range.
Per fleet.
Well so.
There is 225 million cash that view Cary Brown shoe.
Hundred meter in those you'll need to meet their needs.
Through the meter conclusion.
Some more efficient sort of.
Capital Digitization potential.
To this.
Peter just.
How sensitive do you think you are.
So the timing.
So the to the visibility of the second quarter.
Do something more.
She is with a barrel insured.
Well I think.
Certainly this year that is a priority.
And how sensitive are we to the outlook.
I think liquidity is a pretty important function of of the outlook.
But.
But I think in terms of priorities is one of the top corporate priorities that we expect to make progress on this year.
In terms of the capital structure I'm not sure if I caught the full question but.
Yes, I can add on a little bit.
Yes, just stay and I think we're just trying to be prudent and take the best course of action.
One option is just that just pay off the term loan just straight which is something that we may well do.
But we're just talking to advisors just wanted to make sure. We we optimize the situation at the end goal is to maintain strong liquidity and then push the maturities out a number of years and I think that would be a more comfortable structure for us.
So at this point, it's clear that you are continuously and some more energetic.
Interesting through shareholders. This part of your.
Sure.
Very little preserve the stock.
And in this regard.
My question is more sort of a barbecue into a few marketing strategy. Obviously you have.
I would be maybe wilson to redeploy into more fleets and dedicated to contractors.
Due to the coming from next and then the question is how successful.
The condition of your crude wondering how competitive is your equipment to the demands.
Long sort of this year, we'll continue to changing this you're using this shift in marketing strategy towards more.
Longer term dedicated contracts rooms with from the spot market because your previous would focus.
The thing that Youre movement. This competitive what do you think is.
From what other drivers at this point that said the prices.
Sort of too.
As Digitization for your fleet.
Well I guess, there's three or four things there to and back. So the first is the condition of the equipment in our ability to move forward into the future.
Our fleets are absolutely well maintained and ready to tackle it anything that we have as alluded in several calls over the last several years, we've talked about the robustness of our equipment based on our Genesis starting in working in the Haynesville. So being vertically integrated allows us to continue to get meeting the customers demands and continue to.
Push the technology window, which we're doing with our automation that gives us additional life an additional.
Advantages that some of the others coming into the market wouldnt necessarily have as far as anything other than price will the reality is the efficiencies that our customers are achieving today through rig lock in zipper and some of the other things we worked hand in hand moving forward.
To help them achieve those efficiencies.
And so we don't necessarily believe that we're disadvantaged at all.
On anything other than than the overall market condition. So we're going to continue to keep pushing efficiencies, we're going to continue to keep pushing and leveraging our customers the blue chip customers that give us.
Long term futures.
And I think we're going to be successful and that strategy.
No that's very helpful in Las Vegas.
I was curious who didn't disclose if your strategic shareholders arm holders or through bonds.
I think I think you'd have to ask them that I'm not I'm not I don't know the answer that question, yes, not aware of any significance.
Good luck congratulations again.
Thank you Stan.
There are no further questions at this time I will now turn the call back to you.
All right well well. Thank you for your interest in FCS and we look forward to speaking you speaking with you again next quarter.
That does conclude the conference call for today, we thank you for your participation enough that you. Please disconnect your line.
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