Q4 2019 Earnings Call
The team conference call.
As a reminder, today's call is being recorded.
At this time, all participants are they listen only mode.
A brief question and answer session will follow the formal presentation.
For opening remarks, and introductions I would like to turn the call over to Daniel Jenkins, Vice President of Investor Relations for next year. Please go ahead, Sir. Thank you operator, good morning, everyone and welcome to the next tier oilfield solutions earnings conference call to discuss our results for the fourth quarter and full year 2019 with me today.
Robert Drummond, President and Chief Executive Officer, kidney tissue Chief Financial Officer, We appreciate your participation.
Before we get started I'd like to direct your attention to the forward looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website.
Our call. This morning include statements that speak to the company's expectations outlook or predictions of the future which are considered forward looking statements. These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control that could cause our actual results to differ materially from those expressed in our implied by these statements.
We undertake no obligation to revise or update publicly any forward looking statements for any reason we refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report on form 10-K recent current reports on form 8-K, and other Securities and Exchange Commission filings. Additionally, our comp.
And today also include non-GAAP financial measures additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our website with that I'll turn the call over to Robert Drummond, Chief Executive Officer of next year.
Thank you Daniel and thanks, everyone for joining us on the call. This morning.
Before we just started I'd like to make a few comments regarding the current and rapidly evolving market backdrop.
We're just 72 hours post the unexpected actions taken by OPEC and the resulting decline in crude oil prices.
While it's too early to determine the impact of these events. We are closely assessing the situation, including potential activity responses are MP customers.
Notwithstanding the recent commodity price volatility.
Next here is able to remain nimble and is poised to effectively navigate these challenges.
This includes a strong balance sheet and liquidity position that allows us to be both offensive and defensive.
One way on our debt maturity until 2025.
Alignment with a base of resilient customers and a track record of adjusting our cost structure in response to market conditions.
I would also like to provide a few comments regarding the evolving coronel var situation.
We take seriously the personal impact this thread has had on so many around the world and our thoughts go out to those directly impacted by the virus.
And next tier.
We are taking all appropriate precautions to help protect the health and wellbeing of our employees.
With that said before we discuss our latest results for the fourth quarter and full year I'd like to start by reiterating next year's value proposition.
We strive each day to help our customers win by accelerating production and lowering their cost per Boe.
When esque executed successfully this drives leading performance for customers.
Provides an engaging work environment for our employees benefits the communities in which we operate.
And generates differentiating returns.
I'm excited about our performance and positioning relative to our peers.
We have a management system built to deliver leading service quality.
And then Satiable drive for continuous improvement and a strong international growth opportunity with lesser.
Also as a result of the formation of next tier and our recent well services divestiture, we have a strong balance sheet.
The ability to capture significant cost synergies and free cash flow generation that will enable us to execute on capital allocation priorities.
In addition, one of the things that I'm most excited about it is our platform for innovation.
That is focused on the application of technology to both reduce cost and improve efficiency for our company and our customers.
Our innovation platform will enhance our ability to achieved industry, leading efficiencies reliability and safety, while further enabling us to implement a very practical approach sustainable operations.
We'll expand more next tiers competitive advantages later in our call.
Now I'd like to provide an update on the fourth quarter.
We ended the year with a strong quarterly performance extending our track record of delivering on our commitment.
While the fourth quarter was expected to be challenging the magnitude of the activity decline was among the most intense the industry has experience recently.
We faced reduced activity from typical year end seasonality.
Compounded by heightened levels of budget exhaustion as our customers remain fiscally disciplined.
The activity slowdown impacted the volume of work across the industry and increased activity gaps in frac calendars.
Resulted in highly competitive pricing environment.
Despite this challenging backdrop, we were successful during the fourth quarter and delivering strong performance by staying close to our customers.
Managing within our control.
I'd like to touch on a few highlights from our fourth quarter performance.
We generated $648 million of pro forma revenue.
And $78 million of pro forma adjusted EBITDA.
Which were within our at the high end of our most recent guidance range.
We generated annualized pro forma adjusted gross profit for fleet.
$15.6 million, maintaining our position as a leader in relative performance.
When including the full quarterly results of both legacy Keane Andean Jay we generated combined adjusted free cash flow of $55 million in the fourth quarter.
When excluding management adjustments, mostly from merger and integration costs.
With that as an overview of the fourth quarter I'd like to review our performance for the full year.
In June we were excited to announce the merger between CNG energy services in King group.
Forming an industry, leading us land completions company.
And our short time since announcement and subsequent closing we've been successful and reaching important milestones and achievements.
First.
We closed the merger with C., and Jay and implemented a well plan and executed integration process.
While maintaining a relentless focus on delivering for customers and ensuring continued safety and service quality.
Including one of the lowest total recordable incident rates and our company's history.
Second we remain on track to realise $125 million of annualized run rate cost synergies by the end at the second quarter of 2020.
In addition, we've identified approximately $80 million of incremental cash synergies, which Kenny will provide more detail on later in the call.
Third.
We completed a comprehensive equipment rationalization program updating our go forward marketed capacity by permanently removing.
A sizable base of equipment details of which we provided on our last earnings call.
And fourth.
We announced our entry into a new World class basin by deploying equipment from the us through the Middle East North Africa region via partnership with lesser.
Demonstrating our ability to remain nimble and responsive to market opportunities.
In summary, I'm very proud of our 2019 achievements.
On Monday, we announced the divestiture of our well support services segment to basic energy services for approximately $94 million of total consideration.
This strategic transaction further positions next tier as one of the largest completion services company predominantly focused on the us land market.
In addition, this transaction strengthens our balance sheet.
Reduces our cost structure and capital spending.
Improves our overall risk profile and increases our financial flexibility.
So now let's move to what we're currently seeing in the marketplace.
As we put our 2020 plan together the market backdrop look very similar to what we experienced entering 2019.
A range bound macro environment with overcapacity of completions equipment and a reduction in overall capital spending by the MPS.
Just this week, we've witnessed a material drop in commodity prices driven by the impact of global supply demand dynamics, which is causing us to reevaluate our 2020 plan.
From an activity perspective.
The first quarter started as expected with levels continuing to increase through early March.
As our customers got back to work early in the year.
However, we expect activity levels going forward to be at risk as a result of the current market volatility.
The full impact of which we are still assessing as facts continue to evolve.
From a pricing perspective, overcapacity and customer spending constraints have resulted in adjustments.
And we continue to partner with our customers on driving efficiencies and deploying innovation to reduce operating costs.
All of which are helping to offset these market headwinds.
This challenging environment provides the playing field for differentiation and we're proud to emerge as a later on this front.
While we would prefer to have a more supportive market backdrop. We are excited about the unique levers we have to drive further delineation versus the market for next year.
Within the competitive landscape.
Companies with a clear operational playbook.
Track record of execution and strong balance sheet, providing financial firepower will outperform.
We keep it simple and focused as further separate ourselves across three main tenants.
Optimizing our cost structure.
Delivering industry, leading efficiency and safety.
And maximizing the customer value proposition via innovation.
So first on optimizing our cost structure.
We maintain an unrelenting focus on cost optimization, and we continue to target opportunities to achieve a low cost position across direct materials.
Maintenance in footprint.
While maintaining exceptional service quality.
We have a track record of making proactive decisions necessary to align our operations and cost with market conditions and now have a larger platform on which to execute that strategy.
The second tenet is delivering industry, leading safety and efficiency.
We have a relentless focus and operating model thats built around optimizing efficiencies, which continues to serve as the foundation of our partnership approach.
They require three ingredients, including.
Working for the right customers.
Delivering a high level of execution.
And injecting innovation.
Our efficiency improvements have been partially driven by the bundling of wireline with our Frac fleet within our completion services segment.
As a result of our integrated management structure, we have successfully incorporated our bundling strategy across a significant portion of our deployed fleet.
I am excited about the progress we've made in the fact that more and more of our customers are reaping the benefit of our bundled completion platform.
The third tenet is maximizing the customer value proposition via innovation.
We believe this strategically deploy new tools and technologies will enable us to deliver step change efficiency improvement and lower overall cost structure.
We continue to focus on technology deployment across three main areas surface subsurface and digital.
Our innovation strategy is simple deliver advancements that provide improved operational performance and enable real time.
Data driven decision making.
These advancements will permanently drop cost out of the system.
And improve reliability to provide tangible value for next here and our customers.
We have a consistent history of successfully capturing efficiencies as evidenced by improvements in pump hours in stages completed per day.
We are proud of these achievements. However, we believe the next leg of efficiency improvement will come from the implementation of innovation, including digitally enabled technologies.
With this in mind I'd like to share recent successes in driving innovation across the organization.
Focusing on digital I'm proud to announce the launch of next hub.
Which enables our transition to an organization that integrates smart real time capabilities into our decision making process.
The construction of our new and expanded did digital operations center combined with the rollout of data insights platform will provide real time operational support and visibility.
In addition, these projects will drive real time operations analysis to make faster decisions and enhance efficiencies.
Streamline our processes.
Further improve maintenance practices and reduce our costs.
Our next hub facility will centralize people and resources to provide a great customer engagement tool that highlights our investment in real time logistics management in the open collaboration of data with our partners.
Our initial rollout has been successful and we now have a portion of our active fleet streaming data with 24 seven operational support.
And by the end of 2020 all of our deployed fleets are expected to be connected to next hub to optimize operations maintenance and logistics.
Another digital initiative that will feed directly in the next hub.
These are recently developed equipment health monitoring.
Our E ATM program.
That is focused on extending major component laugh to improve operational reliability.
Reduced nonproductive time.
And decreased both maintenance Opex and Capex.
Our E. ATM program uses artificial intelligence to predict and reduce premature failure of major component parts.
This initiative has provided notable cost savings as we near completion of the pilot program on a portion of our Frac fleets.
By the end of the second quarter of 2020, we expect to have all the active fleet being monitored by our ATM program.
Sticking with the digital thing we also have been investing to standardize our asset base through the installation of our proprietary equipment control systems.
Branded under the mobile data technologies name also known as MDT.
MDT is wholly owned by next tier through a 2013 acquisition by seeing Jay.
Indeed take control systems enabled us to better monitor equipment.
Streamline maintenance programs and reduce unplanned downtime.
Additionally, one of the most exciting and value added features is that we have access to the programming code and are easily able to make changes to the system, which allows us to better control the advancement of our digital strategy and avoid being reliance on third party providers.
As we progress in our digital journey, we will continue to develop MDT technologies and further integrate them into our operational platform.
So finally.
We have a very practical approach when it comes to managing DSG opportunities.
And our innovation initiatives are driving significant advancements in our SG profile.
With this in mine.
I'd like to share some recent initiatives that we have implemented that demonstrates our commitment to responsible operations.
After successful field trials, we are excited to have recently deployed to rebuilt and upgraded fleets with tier four dual fuel BGB engine technology to an existing dedicated customer.
Next year had been a leading task partner with several large Oems in was one of the first two field test and deploy tier tier four dual fuel solutions.
We are investing in our hibernate engine idle reduction technology, which enables us to target a 6% reduction in fuel consumption once fully implemented on all deploy fleet by year end Twentytwenty.
And finally, the usage of fuel additives in our diesel supply has resulted in reduced fuel consumption and as much as 50% reduction in air emissions.
All of these recently implemented initiatives further demonstrate our practical approach to environmental stewardship.
So now before hand in hand, it over to Kenny.
I wanted to comment on kinases recent appointment as next year's Chief Financial Officer.
Kenny brings more than two decades of industry experience with much of that time Islamist today.
He joined the keen team at 26 team before its 2017 initial public offering and has played a critical role in keen and next tier success to date.
Guineas operational prowess combined with his financial competency makes him a great partners lead the financial efforts across our organization.
Look forward to him taking on his expanded role and working alongside the leadership team as we drive results for our stakeholders with that I'll now turn the call over the Kenny.
Thank you Robert total pro forma fourth quarter revenue totaled $648 million compared to $897 million in the third quarter, which was within our revised quarter guidance range. The sequential decrease was driven by fewer deployed frac fleets and lower activity levels across our service lines due to year end seasonality.
Customer budget exhaustion.
Total pro forma fourth quarter, adjusted EBITDA was $78 million, which was at the high yield of our revised guidance range.
This compared to $138 million pro forma adjusted EBITDA in the third quarter.
We continue to proactively rightsize, our operations relative to market conditions unexpected customer demand, which resulted a lower overall cost structure and higher fourth quarter profitability than initially guided.
And our completion services segment pro forma fourth quarter revenue totaled $510 million compared to $735 million in the third quarter.
The revenue decline was driven by lower deployed fleets and decreased activity levels due to seasonality and budget exhaustion.
Completion service segment pro forma gross profit totaled $106 billion compared to $169 million, let third quarter.
During the fourth quarter, we deployed an average of 30 pro forma frac fleets and when factoring in activity gaps we operated the equivalent of 25 fully utilize fleets.
All of fully utilized basis pro forma annualized adjusted gross profit per fleet, which includes frac and bundle wireline totaled $15.6 million compared to $18.6 million per fleet in the third quarter.
Despite the difficult market conditions in the fourth quarter, our financial performance continues to position us as a leader a relative peer performance and remains a key differentiator for next year.
There are well construction intervention services segment pro forma revenue totaled $58 million compared to $67 million order.
This was driven by lower average deployed unocal and decreased activity levels due to seasonality and budget exhaustion.
Pro forma adjusted EBITDA totaled $7.2 million compared to $9.1 million in the third quarter resulted a pro forma segment adjusted EBITDA margin of 12%.
In our well support services segment pro forma revenue totaled $81 million compared to $95 million in the third quarter. The decrease was driven by the Divesture of the majority of our fluids management assets in the third quarter budget exhaustion and year end seasonality.
Pro forma segment, adjusted EBITDA totaled $9.2 million compared to $12.4 million in the third quarter resulted in a pro forma segment adjusted EBITDA margin of 11%.
Pro forma adjusted EBITDA for the fourth quarter includes management adjustments of approximately $87.5 million.
Consisting of $55 million of merger and integration costs, driven by severance and accelerated noncash stock compensation expense.
Well point $3 million of noncash impairment, mostly associated with the retirement of the keen tradename.
$5.6 million of noncash stock compensation expense.
And $14.5 million of other costs, driven by tax litigation reserves and facility closures.
Of the $87.5 million, a management adjustments during the fourth quarter, approximately $36 million or noncash.
Pro forma fourth quarter, selling general and administrative expense totaled $70 million compared to $102 million in the third quarter.
Excluding management adjustments pro forma adjusted SGN, a expense totaled $54 million compared to $66 million in the third quarter.
Turning to the balance sheet, we exited the fourth quarter with $255 million of cash this compared to just over $270 million a pro forma cash at the end of the third quarter, which was net of the $65 million special dividend paid to the legacy CNG shareholders upon closing of the merger.
Total debt at the end of the fourth quarter was $338 million net of debt discounts and deferred finance costs, and excluding finance lease obligations, which was effectively unchanged versus the third quarter.
Net debt at the end of the fourth quarter was approximately $83 million, resulting in a leverage ratio of 0.2 times on a trailing pro forma 12 month basis.
We exited the fourth quarter with total available liquidity of approximately $559 million, which included cash of $255 million and availability of approximately $304 million under our asset base credit facility.
When it clearly in the full quarterly results of both legacy keynote CNG cash flow from operations was $48 million during the fourth quarter.
Cash flow used in investing activities totaled $54 million driven from our maintenance Capex and further investments in technology.
This resulted in free cash flow use of $6 million during the fourth quarter.
Excluding $61 million of merger and integration of cash costs adjusted free cash flow totals $55 million in the fourth quarter.
We consummated a deal to divest our well support services segment to basic energy services for $93.7 million of total consideration, which were signing closed on Monday March nine.
We received $59.4 million of cash at closing and just over $34 million of basic senior secured notes with a make whole protection feature at par from ascribed capital a private investment firm with over $3 billion of assets under management.
As it relates to the senior secured notes portion of the consideration I would like to highlight a few features of the deal.
The notes are accompanied by a make whole guarantee of par, which guarantees the payment of $34.4 million to next tier of the notes are held for one year post closing.
In the event of a basic restructuring or credit rating downgrade in conjunction with a change in control the make whole protection feature can be trigger which guarantees on those redemption at par.
As note holders, we are entitled the tenant three quarter percent annual coupon paid semi annually during the whole period.
Total deal consideration of just under $94 million reflects approximately five years of free cash flow before taking into account and incremental $6 million of corporate SGN a savings for next year.
In December 2018, we announced the capital return program that is supported by our strong balance sheet and projected free cash flow generation.
Due to trading restrictions associated with our wealth services divestiture, we have yet to purchased any shares and our previously announced capital return program.
Given recent volatility and uncertainty in the macro environment, we are reevaluating our capital allocation priorities.
We believe our strong balance sheet and liquidity position enhanced by the proceeds from our well services divestiture provides us the financial flexibility to execute on multiple priorities.
As we gain more insight on the impact to our business from the recent market volatility, we will refine and execute our capital allocation program.
We look forward to providing updates on the execution of our program throughout the year.
Now turning to our outlook for the first quarter.
We experienced increased activity levels through early March versus the fourth quarter across all of our business lines.
In our completions segment, we expect to achieve an average of 28 fully utilize fleets in the first quarter versus 25 in the fourth quarter.
We expect increased activity levels to be offset by lower overall pricing and the divestiture of our well support services segment on merchandise.
We have always taken pride in our management system that has provided strong visibility into our business.
As a result, we hope routinely provided robust guidance and delivered on those commitments.
However, with the rapidly evolving market conditions, we have decided not to provide detailed guidance for the first quarter until we have been able to fully assess the impact of recent macro dynamics to our business.
[music].
Turning now to Capex.
Next to your has invested in its asset base over the years and has a well maintain fleet.
Well maintenance capex with the focus on innovation and extending the useful life on our Frac assets, we see capex per fleet, reducing to $3.5 million to $4 million per utilized fleet.
For the divestiture of the wealth services segment, reducing the overall capex maintenance capex requirements of the other service lines. Our current activity levels is approximately $25 million.
Strategic capital expenditures for 2020 will be $60 million, primarily focused on converting existing conventional frac pumps to dual fuel capability in order to burn CNG or natural gas from the field.
As Robert mentioned, we have taken delivery of multiple CGP upgrades in the first quarter. So the strategic Capex spend is committed and will be front end loaded in the first half of 2020.
In addition, we will spend $20 million on deal related expenditures to unlock synergies, including harmonize the frac controls business systems and consolidating facilities.
However, based on recent developments in the macro we do have the ability to flex the majority of the Capex budget with shifts in demand for our services as both the maintenance and deal related spin is linked to activity and can be reduced accordingly.
Finally.
We are excited about our cash flow generation prospects with continued cost control measures and expected synergy capture and 2020.
In addition to our previously announced $125 million of cost synergies associated with the merger I am pleased to report that we have identified approximately $80 million of cash synergies that we expect to realize before year end.
We have identified $60 million from targeted incremental working capital improvements.
We expect to realize by implementing best practices for both legacy companies.
Additionally, we have identified $20 million of proceeds from various property and equipment sales that we expect to close this year.
Even though we anticipate an additional $40 million of deal related costs. In 2020, we are forecasting meaningful free cash flow generation.
These additional cost synergies in combination with a cash proceeds from our will support services divestiture further strengthen our balance sheet that position us nicely to execute on our capital allocation priorities.
With that I'll hand, it back to Robert for closing comments.
Thanks, Kenny and before we open the lines for Q in a I want to highlight a few key points.
First we have a strong balance sheet that will help us navigate these challenging market conditions.
The proceeds from the well services divestiture announced on Monday, strengthen our already formidable liquidity position.
Second the integration has progressed ahead of schedule, we're laser focused on achieving the synergy targets that we've previously conveyed.
Third the recent market conditions have been challenging.
But we are focused on controlling our own destiny generating free cash flow.
We continue to focus on Rightsizing, our business in line with market conditions and expected customer demand.
Fourth we remain committed to harvesting innovation and investing in technologies that will fundamentally change the way, we conduct our business and permanently drive cost out of the system.
With that.
Wed now like to open up the lines for Q and eight.
Operator.
Thank you we will now begin the question answer session.
Ask your question in your press Star then one under Touchtone phone.
Are you going to speakerphone, please scrubber handset for personal keys.
Your question. Please press Star then too.
Today's first question comes from Tommy Mall that Stevens. Please go ahead.
Good morning, and thanks for taking my questions.
Hey, Tom.
Robert I wanted to ask about the dedicated customers you've got if you go back to the end of 2018, you guys proactively address.
Some of the pressures in the marketplace, where you.
Basically traded some price for visibility into your 2019 activity, which.
Resulted in a pretty good outcome for you guys all things considered.
Sounds like you did something similar at the end of 19, so I wondered if you could just comment on how that RFP season went in anything we should know there and then to the extent you can understand this is volatile early but.
Just a eight idea you you have about how.
This.
Current environment. They play out in terms of the dedicated agreements were especially dry it now the world has changed in terms of macro outlook.
Thanks for that question Tom.
You know as you point out we were looking at 2020 planning.
It looked a lot like the transition from 2018 to 2019 before the most recent openings the disruption.
So we were a bit unsigned playbook.
You know in 19 over 18, we yielded price and then we call it back through efficiency and cost management as we improved our pumping hours per fleet.
And in 2020 pipe book is going to be very much the same.
As far as the success of 2020 over 2019, I would say we had the usual puts and takes.
You can see our fleet count in Q1 moved up versus Q4.
And our dedicated agreements are not exactly the same but they are but as far as who the four.
But about the same ratio.
So we feel good about that transition in fact.
The bottom for us problems November and our fleet count It was climate in December and January and February and then in March we reached his point, where we have this bit of a disruption.
We already see some impacts occurring.
No on the fleet set we're participating on the fringes of the spot market today, where customers had some discretionary capabilities to slowdown operations.
So thats. The reason we cannot were we didnt really got real specifically for Q1.
But I would also say is that.
Our long term relationships with our customers or.
Let's take a serious as we do and I think that we expect those.
Arrangements to whole fast.
I think all of our customers are in the process right now decide what are going to do and that will be determined you know probably in the common days, then and if not for sure and within the coming weeks.
So were being cautionary and staying focused on in operations and making sure that we we continue to give better.
But that's kind of the story for us.
Okay, well I'm sure there'll be plenty more questions on on the near term outlook, but for my follow up I wanted to pivot to the nuts are partnership that you guys announced.
What can you share with us in terms of how you're partnering with them to go to market. It's some of your core.
Service lines, but just in terms of anything you can share about the mechanics of how that partnership works and then on the financial side.
Can you give us a thing on the magnitude and timing of when it it's expected to hit your PML.
So good question sorry. Thank you look I might boasts just for a minute and say I think this is one of those deals where it's actually a three way when.
It's a win for Aramco because ended the day, they're seeing their efficiencies improve dramatically as necessary and next got together to deliver efficiencies.
Messrs win because that's got to bring you import us.
Formats on Frac in wireline into their own conventional foray and that's been a positive stage counts are up dramatically versus historical.
And then for US is obviously when because we got a low risk entry.
Into an a part of the world Retuned hydrocarbon in for customer base that we got a lot respect for overtime.
And I'd say the dynamics of that's really built around nothing is a unique partnership that built around mutual respect between our next and there are next in next tier.
That will be difficult to replicate so it's important for us we're doing what we do that what we do well and we got our for fracking wireline put together.
And so far operations have been very good I think my had after.
The next year employees who've made that trip track over there and.
We have no safety and efficiency wise had been performing right up to our standards then.
Attribute that to.
Measures.
Leadership related to the facilities and the partnership that we've built so.
On the upside I.
I think it's very much linked to nesters.
Relationships all across the Middle East North Africa.
A region and the further development of U.S. style fracking operations in that region.
So I like where we're positioned and I think you know you will see you see that in our you'll see that in our PNM alarming already in Q4, the impact of of those operation. So.
He asked me about what is going to look like going forward I'm, saying that we're in good shape with the operations, we've got going and we feel pretty good about kind of a growth potential linked directly with lesser.
But certainly a differentiated aspect of the story and one we'll look forward to solid gold sort I will turn it back.
Thank you Tom.
Next question comes from Stephens in Garland Stifel. Please go ahead.
Hi, Thanks, and good morning.
Morning.
I was a very good overview on the on are prepared comments I just had a couple of follow ups and I think.
Well, let's start with is as you think about.
Fleet deployments and and how many are frac feature of active in the US market can you give us a sense for kind of the profitability parameters around kind of go versus no go decision and how you think.
Book for you, but then as an industry. How do you think the industry react sermon, obviously, we've seen attrition already but you think this accelerates number how should we be thinking about both from your perspective and your view of the of the macro frac market assuming of course, we kind of get a.
A slowdown as it seems like we are sort of Obama on a break up here.
Thank you I liked that question and I would say you know how we make decisions.
We were running the business to generate free cash flow. So looking at price that can generate profitability that pace for the maintenance capex.
Of the individual frac fleets, which can be guided a little bit that we expect to take down.
In 2020 versus 2019 as well as each individual fleet share of the SGN a structure of the company.
And then drive our decisions around that in every effort that we have this to lower that operating cost constantly so that we can continuously use that leverage in the marketplace either for margin are for market share. So that's a battle this as ongoing constantly and I think.
We have a bunch of levers that other people don't have right now because of the Luckily timeliness of our merger with.
It was between keen and seeing Jay.
That we've got a little little more cost variables.
Variable cost to address and the synergy aspects of doing that gives us a bit of advantage.
As far as the macro impact on overall I would just say that.
Supply and demand is well documented to be you know oversupplied on on the horse power side.
And you know, it's probably were probably hit it down a path will take a couple of years to get fully sorted out.
Certainly the market has had some attrition in horsepower and concerns.
On going consumption of horsepower as it relates to efficiency improvement.
But at the end of the day it was going to take a lot a significant amount of time I would argue if we do have a major.
Correction or as activity here related to this oil price flux that it's going put a lot of pressure on the system in.
The company's to have debt or have with debt walls, commonly will have different reaction, perhaps how they price in market longer term than they then the and then maybe we're open for so so bottom line is that they may be the scenario, if you're trying to look at the bright side of the situation we have.
With OPEC is that it.
Very likely could accelerate the overall fix a supply demand.
Hope that address your question you know that did thank you and then just just as a as a as a follow up in in in prior periods like this.
Have you guys found that Youre differentiation is.
There's sort of magnified as a positive or do you think it it.
Becomes less important were where are your customers are.
Just ultra focused on price. So how do you have you fig, what have you seen from that perspective historically.
Of course that would vary but by customer what I would say many of the customers who have a very long term view and have many thousands of wells to drill and complete the ultimately.
Producer assets.
Take different value views about how they work with partners and how much they look at the full value equation as it.
Relates to in our efficiencies in how much of getting for what you spend so I think that that varies.
Widely.
Across the market.
But as far as.
How the market is going to react I.
I think is there is there another playbook it looks just like this one I don't know this has been a minded dramatic quick change and how that plays out is you know.
I don't use the word unprecedented necessarily but it's not just kind of close to that.
Great well well. Thank you for your freelancers very helpful.
Our next question comes from thank you.
Our next question comes from Sean.
Please go ahead.
Thank you good morning.
Hey, Sean I don't.
Hi, good Robert So the released last night indicated there's an incremental 80 million of cash savings that you found I think you mentioned on the call earlier, but.
Now let me go a lot of incremental details so far can maybe just give us some granularity on those savings.
When you roll up the the costs associated with integrating the two companies.
With these savings Im just curious how do you come out for 2020, it sounds like the net.
Impact is positive for cash and is that part of what gives you the confidence on that free cash flow profile for this year.
Hi, Sean it's Greg good morning.
Make a few points on the synergies first first the 125 million a piano synergies remains intact with kind of following sequencing for 19 and 20, we had 3 million a synergies in the fourth quarter 19 expect 20 million in the first half of 20 as the as we ramp and then sick.
33 million in the second half a 20 as we achieved 125 million run rate by the end the to Q.
So we expect to deliver that 125 million run rate panels synergies, regardless of the market conditions.
The 80 million of incremental cash synergies the ones that Kenny mentioned are newly identified consist of 60 million from working capital driven by efficiencies not not volume and 20 million for the disposition of excess assets related to a property and equipment and as we consolidate facilities, we have excess properties et cetera.
These are expected to deliver ratably on the cash side throughout 2020, and these synergies do not include the elimination of 20 million, a capex or any other benefits from the well service transaction.
On the deal cost I think we have I.
I think we have a story here, that's that's compelling versus the deals I've worked on in the past the the total cash deal cost we spent $72 million in 19, and we expect another 60 million in 20 of cash in 20, it'll be 40 million through the pay an hour Kenny mention and then 20 million in Capex and.
Makes up the 60, so they get you to a total deal cost cash cost of 132.
On the synergy side, we're going to get a 125 million from the piano 83 million, which will be realized in 2020 80 million in cash all of which will be in 2020, and about 20 million in Capex savings, which is part of what's leading to the reduce maintenance.
Capex that Kenny talked about so that's about 225 million of cash synergies versus the 132 of total cash deal costs.
So you're looking at less than one year payback. So if you look at their total equation.
Through the kind of year 18 month cycle, it's a very compelling payback on the investment.
Thanks for that Greg I guess thinking Thats very detailed very helpful.
So that kind of lead me to back to the capital allocation question. So it's understood that Theres a desire.
Yeah, the dust settles a bit here given the events in the last few days, but.
You know.
Your shares around 70% in the last few months.
90% since the IPO, obviously, you're not alone in the sector, but.
You're trading at 20% of fleet replacement.
Just curious if you Jim.
If you generate the cash do you expect to in 2020.
Even in a more challenging volume environment.
Other better places to put that free cash flow that back in the stock as we go through the year.
Good question, John obviously, one this round the forefront of our mine we have been a restricted through this.
This deal with basic up until now since we announced that 100 million.
And had been a bit anxious to take advantage of it but with the amount of uncertainty that's in the market as we sit here today.
That it just seems more prudent not to take the.
You know them.
It was so tempting to buy to start right now, but better we think to sit on the cash during this period until we can see happening shake out just for the sake not having a regret later do I think there's a better return and then our stock at $2 I do not.
Right, Okay very fair. Thank you.
Thank you.
Our next question.
From Conor line or Morgan Stanley. Please go ahead.
Thanks, Good morning, guys.
Good morning.
I was wondering if we could talk through your cost structure certainly.
I understand you guys don't have a lot of visibility right now, but can you help us think through.
How much of your costs within the segments, our field level or at the crew level versus how to think through how the fixed costs might trend. This year its activities being reduced I appreciate the merger synergies metrics total challenging but any help you get there would be.
That's.
Kenny go ahead.
Hi, This is getting good question. So when you look at the.
Cost of goods sold dynamics I would just say that they know the direct costs as related to the field are going to view very high percentage.
The support costs that are in the fields, we kept very lean over the years and through this integration. So so that percentage as low. So you know the variability in the cost as it relates to activity is very high so as we as we've done in the past we've been able to adjust our cost structure.
Quickly to any market change and and we expect to do that here.
In addition to that you've seen our a reduction in ESG today.
That was both from a synergy perspective, and also from a market driven perspective with the decline in the market that we saw.
So we look at other out of that all angles, we're looking at cost of goods sold direct we're looking at.
The support structure and we're also looking at ESG and eight and make sure that we can be the most competitive that we can.
And generate free cash flow.
One other thing I might it's just said is that.
We had started the up over a year ago wallet, King and investing in our digital program related to equipment health monitoring and using data to help us lower operating costs in general and ER. I think this is going to we factor that into our 2020 cost structure going forward and we want to be.
Well two out of that strategic Capex.
Pool continued to keep that funded because of return is very is very good.
Great question.
Got it but that's helpful and it strikes me that in prior downturns, or even just quarters, where utilization and what would the industry in general kind of gets hurt by the fact that you deploy a lot of assets and people on site.
And your customers aren't in such a hurry.
So you just sort of eating cost him out earning revenue.
Maybe maybe your your model address that somewhat but but how do you think through the ability to mitigate that risk.
Your customers if they decide to slowdown.
Yes.
I'm sorry, we didn't look cut out on the phone there could you repeat that middle part of the question.
Yeah. The question were worth bakery just yeah.
You are having an ability to manage the potential for customers to to be in sort of left or hurry. If you will.
Seems like the industry as.
Suffered previously from Ah.
Deploying assets in people on site not really earning revenue.
Other changes you can make your pricing structure or your compensation structure that that can help you mitigate.
The idle time, so to speak.
Got it thank you.
Look for us for anybody profitability is very much link to efficiency and the management of a of the white space in this in the schedule.
Obviously, working close with with customers to get in the front end of that planning process is very key.
Well, we do have a a history of being able to fluctuate our variable cost.
A large part of that associated with personnel cost.
With the business and I think that goes to planning a bit and ER and having the right amount of.
Spare capacity if you will.
And what I mean by that is it there's plenty of capacity in the market as far as asset, but having hot stacked or hot available assets, mainly the equipments ready to go and its man.
You know the bigger your your scale.
The more leverage you can have there to use that where it's needed. So.
It's it's really about how accurate you can be predicting what is going to look like in and managing cost towards that.
I think you know as we get smarter with the digital information in the data we can make decisions more in real time. That's also an aspect to it and keeping the supply chain right in tune with a with the activity. Those are all kind of factors that are incremental one one decision to the next.
Hope that helped.
Yeah. That's helpful. Thanks. Thanks.
Ladies and gentlemen, we appreciate the question answer session Oh, let's turn the call back to Mr., Robert Drummond for closing remarks.
Thank you very much.
Before we end the call today I'd like to publicly thank the employees of next tier for all their hard work dedication.
Employees continue to focus on delivering excellent service quality to our customers throughout the integration process, while maintaining one of the best safety Records in our company's history.
In addition, I'd like to recognize all the former well support services employees and thank them for their contributions to both legacy Cmj into next year.
This transaction with basic provides an opportunity for our former employees to continue building upon their success delivering strong service quality and safety within an organization fully dedicated to the well servicing business.
Finally, we look forward to updating you on the progress of our and performance on our first quarter call in early May.
Thanks to everyone for joining the call have a good day.
Thank you Sir This concludes today's conference call you may disconnect your lines never wonderful day.