Q4 2019 Earnings Call
Thank you for starting by that's at the conference operator, welcome to the C. S Energy solutions fourth quarter 29, <unk> Conference call.
As a reminder, all participants in listen only mode and the conference is being recorded.
The presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad.
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I would now like to try to compensate the Mr., Tony I want to see no Chief Financial Officer. Please go ahead.
Thank you operator, good morning, everyone and thank you for attending today's call I'd like to note that in our commentary today, there will be forward looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our.
Fourth quarter, and DNA annual information form and press release, all dated March 12, 2020. In addition, certain financial measures that we will refer to today are not recognized under current generally accepted accounting policies and for a description in definition of these please see our fourth quarter and.
DNA at this time I'd like to turn it over to Tom Simons, our president and CEO.
Hi, Good morning, Thank you Tony.
Thank you to listeners for joining todays call.
As is customary we'll talk about the corridor and operations at CES in quarter one to date.
But more importantly.
Well talk about the oil crisis and coal, but 19.
Let's see yes, this management team as battle tested.
Our balance sheet, a strong see yes, it's certainly to survive.
On the call will provide a financial update.
Including specific details around the significant working capital harvest that we anticipate blocks for the business.
In the face to the drilling and completion activity collapse. This working capital harvest is what will save the business.
In the face a tough environment for oil field service companies.
I will update listeners on the different business lines.
We will talk about drawing the update how we would operate on business lines in the face a reduction of customer spending.
Our drilling fluids business will face greater pressure than our production chemical business.
About capex for 2020, which will be modest and very flexible after Tony gifts the detailed financial update.
Take questions, we'll give a short summary, and conclude the call.
We do want to do justice to Q4.
End of Q1 to date Cobot 19, and the oil crisis, well pass we want shareholder step confidence in our standing within North American shale and the oil Sands worth give you the north American energy production. This year to state it will survive these two crisis and.
We want to demonstrate what our position that's what they're not markets.
Our working capital harvest will far exceed our bank wide draw.
Prudent management of the company during the crisis, well I'm sure we had generated enough free cash flow during trying times per industry to meet our obligations, which mainly will be servicing the bond.
Modest maintenance capital and a reduced dividend.
C S will survive as we'll shale and the oil sands, we see our job as needing to get the company through this so our shareholders and employees can reap the benefits of a recovery later.
I'll now get onto the ops updates and go forward plans for each business line.
I'll start with a S. R. U S probably fluid dismissed A.S. had a tremendous fourth quarter and overall made a great contribution to the comedy and 20, Nike It generated significant free cash flow and it started creeping up in market share in the fourth quarter Ada Es averaged 100 and.
Poor jobs through Q4.
To date in Q1, we've averaged 516.
We've done that by adding new accounts, primarily in the Delaware basin that a bit in the Midland Basin.
We've achieved this high market share in the Permian at 20% at 14.5% overall them in the U.S.
Providing customer superior technology, and execution and better infrastructure in the right places that about her adopt a us having almost 15% market share in the U.S. drilling market [noise].
As we've operated and while one hds coming out of the data since 2015 and 16, we were isn't from as low as 40 jobs. When the industry was running 400 rigs to 120 earlier this week.
Activity is concentrated geographically with a diverse customer list, we've stopped the field by design with 50% consultants.
So as we have to adjust head count to match lower activity going forward, we can do that fairly easily through reducing use of consultants also was listeners that are familiar with the oilfield service companies going back eight or 10 years no. There was a class action lawsuit against Sir.
Most companies alleging unpaid overtime.
The fall out of that class action suit was that many field workers for surplus companies are now paid by the hour versus a monthly a wage plus a day rate and if the call. So our field pump for our employees, it's highly variable because of that changed.
So in a market, where there would be reduced activity. Initially we couldn't reduced head count in the field with less use of consultants.
Then if there is less work to do by paid employees those people would trip less overtime lowering gionee.
So our point is that we can adjust with activity.
While maintaining our culture and looking after our customers on the way down.
We operate less locations that we Didnt 2014, so rightsizing will now mean, Oklahoma.
Gets mothball, we streamline elsewhere as required.
Service, our customers without losing money.
We're confident A.S. can protect its culture and ability to be the leading technical mud company in America, while also turning in modest cash flow.
Well go onto U.S. production chemicals, now remind people this business treats existing production.
Oil gas and all the associated water.
Customers will protect this what their lives, it's what will save their businesses, along with new drills to hold leases.
Our vertical integration.
Decentralized leadership novel, Chemistries and application techniques, all add up to get Jae Kim catalyst third largest production chemical business in the U.S. landmark that.
Our infrastructure can support growth as water cuts rise and treatment rates increase you heard that right as the wells age.
Acquired rate or treatments, because the water cut comes up risking the integrity of the well.
Tim works or stimulation chemistry group experienced growth during loyal low oil prices in Canada.
It's a low cost wafer an operator to improve production from old tire wells.
Downmarket may be a catalyst for stem works and the U.S. to expand.
Low dollar spend.
When applied properly to the right wells can be highly accrete up the spends in the range of 10 to $50000, so weighed less than a new rock or darrelle.
Going into a period, where oil prices are on an economic cobot 19 threatens to shutdown society and operators must run their businesses from within cash flow, having our recurring production trading business across the U.S. on this hole drilling guy sleep at night.
Ill move on to Canada now.
Canadian drilling fluids front 56 jobs on average and Q4.
And 100 in January.
And 103 in February and that's 66 running today.
We have managed to lap the field in Canada and market share.
Our better execution correct technologies for deep long reach wells superior technology, and execution and Sag D.
And importantly, a culture that attracts the best in class employees adds up to a great business line to Canada.
We are hopeful we can hold our customers work through this crash.
We believe we can hold or a team of people and not have that being dragged find actually on the company.
Canadian drilling fluids has a great Q1, that's pocket.
We will be sustainable through this process.
In a recovery for oil prices and LNG build out we expect good financial contributions from Canadian drilling fluids going forward.
Pure Ken is our Canadian production chemical business under new leadership, a little over a year ago pure Cam has really stepped up for the company.
Sure improved supply chain decisions rationalize management costs can we started the business with me 19 years ago now runs Canadian drilling fluids and pure Cam what they boroughs.
Managed to grow market share, while improving bottom line percentage results materially.
This part of the Canadian business will help CES get through the upstream crash.
I'll add that stem works in Canada is part of pure cap.
And I think that can be a low cost way for customers to hold production.
They reduce new drills in Fracs, we found that are previous low low oil price environments, and we saw that with curtailment.
So ill co is our reaction chemistry business in Vancouver, It continues to generate free cash flow on its own PML, while making significant technology and supply chain contributions across our entire platform.
Clear continues to tread water Gavin and his team are working hard to create value around water management and disposal technologies and we remain committed to that business.
Before I turn it over to Tony.
For a detailed financial update I want to assure shareholders employees and customers are working capital harvests ensures our company's survival, we will operate the business mindful of our customers' needs without spelling too much red ink and hurting shareholders.
Even more we'll maintain or de centralized sales and service culture and be thoughtful about employees and their needs.
But without a company we can't help anyone.
Investors customers or employees, we think our plan and execution will strike a proper balance.
Ill now turn it over to Tony.
Thanks, Tom.
Actual results for 2019 in for Q4, representing consistent alignment with our key areas of focus including free cash flow generation working capital optimization prudent capex stable margins that reductions.
And superior returns, we're very pleased with the financial pivoting demonstrated during 2019 and believe our resilient business model strong balance sheet prudent capital allocation and unique culture prepared see us for the current downturn.
Weathering the storm and ultimately thriving.
He has generated 360 million of revenue in the quarter and 39.7 million in adjusted EBITDAC represented 12.6% of revenue and record annual revenue of 1.28 billion and adjusted EBITDAC of 167.1 million for the year.
[noise], representing 13.1% of revenue us revenue increased by 7% in 2019 compared to 2018, generating 906 million or 71% of total revenue for the company strong U.S. results were underpinned by CMS is completed.
Vince in key infrastructure and capabilities, achieving 13% market share in our drilling fluids business, despite falling industry counts in the second half of 2019.
And increasing activity in production chemicals, primarily in the attractive Permian and Rocky Mountain regions.
Canadian revenue of 371 million were 29% of total revenue for the year represented a decrease of 12% year over year.
This decrease is primarily attributable to the persistent industry challenges, which resulted in a decline in drilling related activity. However year to date commuting goes through its business has succeeded in maintaining market share of 36% and very difficult industry conditions.
Further despite government mandated production curtailments care Ken's production chemical business model proved resilient as Canadian treatment points decreased by less than half a percent year over year.
And as Tom mentioned, the division continued to realize operational efficiencies throughout the year.
In Q4, 2019, Capex spend was 14.8 million, which represented a 26% reduction from the investments made in Q4 2018 CS continues to be disciplined on Capex in 2019, resulting in a 44% reduction in capex from 87 million.
In 2018 to 45.3 million.
In 2019.
With infrastructure build out largely complete and given the current environment. We currently expect capex in 2020 to be well below 2019 levels as we assess market conditions honor, our maintenance capex requirements of $20 million to $25 million and reassess any expansionary.
Capex needs.
Okay.
CS exited 2019 with total debt of 408 million, which represented a 17% reduction from total debt to 489 million.
At December 31st 2018, excluding the impact of incremental debt in 2019, as the result of I FRS 16 adoption.
Yes, as total debt would have decreased by closer to 20% year over year.
And as such total debt to EBITDA.
Was reduced from 2.9 times, one year ago to 2.4 times at the end of 2019.
As of December 31st 2019, we had a net dropped 76.7 million on our senior credit facility, representing a 53% reduction from $161.5 million on December 31st 2018.
Excluding the senior notes repurchase in Q4 that net drop would have been closer to $68.2 million and would have represented a reduction of $93.3 million year over year.
In November 2019, we opportunistically repurchased and canceled $9 million of face value of senior notes at a discount for a total of $8.5 million.
This repurchase resulted in an annualized interest expense reduction of $300000 per year.
The decrease in net draw was primarily driven by strong operational free cash flow generation in 2019, as we delivered on stable EBITDAC margins disciplined capex and working capital optimization and was partially offset by opportunistic share repurchases through our.
Yes, I'd be program and repurchase of senior notes.
Working capital optimization continues to be a key focus area throughout 2019 and resulted in a working capital harvest of $55 million.
In the context of relatively flat revenue. This was achieved through operational financial and information systems focus and each and every one of our divisions, resulting in an 11 day improvement in cash conversion cycle from 122 days in Q4 2018 to of.
Seven days in Q4 2019.
The surplus free cash flow generated in 2019 allowed us to execute execute on our capital allocation plan, including reducing debt repurchasing senior notes and buying back shares.
In 2019, we repurchased 5.8 million shares at a weighted average price of $2.27 per share.
For a total amount of $13.1 million year to date in 2020, we purchased 2.3 million shares at a weighted average price of $2.07 per share for a total of 4.8 million.
Most importantly, we have the ability to purchase an additional 13.6 million shares under our current then see IB, which expires on July 17th 2020.
And we may seek to increase and or renew our plan to prudently deploy surplus free surplus capital in this low share price environment.
As mentioned by Tom we are adjusting our capital allocation strategy light of this low oil price environment by reducing our dividend to $4 million annualized from $60 million to maintain balance sheet strength.
While enhancing our ability to opportunistically further reduce debt and repurchase shares given the expected downturn in the industry activity levels. We believe this dividend amount will represent the prudent and responsible payout ratio.
While representing a nominal dividend yield at current share price levels.
The new dividend level will allow us to prudently redeploy an additional $12 million on an annualized basis, and we intend to be guided by 70 30 split on debt reduction in share buybacks, respectively, with the opportunity to revisit that strategy as market conditions evolve.
We believe that the efforts areas of focus and strong results achieved in 2019 has effectively position CS to execute and ultimately drive through this period of uncertainty.
Our 2019 enhanced focus on working capital efficiencies, including accounts receivable and inventory strategies will complement our counter cyclical balance sheet and lead to significant working capital harvest in a declining revenue environment.
Okay.
Our Capex light model completed infrastructure spend and stringent capex spending hurdles will allow us to support prudent maintenance capital levels and avoid unnecessary expansionary capex.
Our credit facility.
Has the capacity of approximately 280 238 million Canadian dollar equivalent and matures in September 2022.
95 million dollar graph represents net senior debt to bank EBITDA of approximately 0.8 times versus the 2.5 times covenant.
This draw is very likely to significantly declined in the lower revenue environment as was evidenced in the last downturn during 2015 and 16 during which the line was paid out.
Our $291 million, an outstanding senior notes as a fix in three AIDS coupon and doesn't mature until November 2024, and continues to trade in the 90 plus range demonstrating the strength of the view of the company by the the debt markets.
We're very proud of our financial focus that has led to these 2019 results and current strong position and we will endeavor to maintain that focus as we execute through this period of uncertainty.
Operator at this time I'd like to turn the call over for questions for Tom and I.
Thank you well now begin the question and answer session. During the question Q You May Press Star then one on your telephone keypad.
Your tone acknowledging your request abusers speakerphone, please pick up your handset before pricing any keys.
So your question. Please press Star then too.
We'll pause for a moment this call is during the Q.
The first question just from Aaron Mcneill with TD Securities. Please go ahead.
Morning.
Good morning, Aaron.
I know that you're probably not going to give any segment margin guidance, but I was hoping that maybe if we looked back to 2000 <unk>.
Could you remind us how the segments performed on a margin basis.
Maybe highlight any differences between that time period and now.
We're not going to break segments down we Didnt then there I'll tell you that.
Our number one.
Certain parallel.
Activities in the business today are being focused on a are and then working with our customers.
Same as we did in 14, we proactively went to our drilling fluid customers.
To know, where we would stand in terms of their activity, but also to be with them on pricing rather than hide from that and hope bid ask for less than we would've given.
Drilling fluids is going to take price pressure frac fluids is going to take price pressure and production fluids.
May take some price pressure.
But it's going to become an essential service for the operator if companies go bankrupt.
They are get paid because it's in the central service and if it's not done while businesses in the hands of a receiver direct the assets. So we're going to focus on collections and working with people, but I think you're going to see.
Less to give from service companies that in 14, and 15 and 16.
We're in a little better positioned than most because backward integration of our products has helped us rebuild margin, but there's probably 5% to 10% discounts that are going to happen in the upstream businesses and I think in the production space, they would be quite a bit less than that.
I think you can expect Aaron volume reductions and margin pressure same as what happened in 15 16 that is why we didnt Nok delay what the dividend.
We could have afforded them million in change a month for a couple of months in case, they strike a deal down the road, but in case they don't.
Our priorities are to preserve cash and reduce debt and we can do that best by getting our receivables paid.
And by working with the customer to minimize the damage to margin and it only happens one on one and the ask of course is if you're going to go to a loss position Mr. Operator on what you're doing.
We will support you, while you're losing but when oil goes up.
We need to come back and ask for that really back none of that's going to be contractor there for anybody despite what they might say, it's all going to be a handshake and it's going to be it's going to test the relationship and so if it really is.
End of the silent partnership.
If I remember correctly.
As a lot of pressure on pricing in 2016.
Over like high inventory levels in some of your businesses some discipline in pricing from your competitors do you see that.
Happening again or do you think it will be different given the focus on.
Generating returns.
That's a great question and Thats, one we have been all over four weeks.
To refresh People's memories that artist in earlier with the story in 14 you got.
No it.
2000 drilling rigs.
More.
Thousand 1200 rigs running on looking at Tony for the breakout, but every rig in America had its mud tanks and storage tanks on locations olive oil based mud.
And the whole worlds gone up until the right. So people are competitors were loose with inventory when the rig count collapsed and went all the way to 400, there was more about oil based mud in the field than anybody's yards could store and so big mud the big integrated service company.
These gave that stuff away in exchange for getting work.
After that was you stop.
Slumber, Jay backed out of doing that quickly Halliburton did it throughout the crash and ended up getting up to half for the us drilling fluid market that way they've been actively working to try to raise prices coming out of the crash Aaron.
That's been part of why we've picked up some share in the last year.
The nuance here is that there is not rigs spread across the us as badly as before people live learn from that lesson that not letting inventory not have not led inventory get is carried away, but the big differences those Delaware basin wells.
Build section to those wells is largely being drilled with water based mud called director Molson.
Instead of oil based mud. So we're not sure of exactly the numbers, but we don't think thats going to be as big of a problem because people smartened up from a previous mistake and there was less oil money in the ground as a percentage.
On the rigs that are working then there would have been in 14 and it would be meaningful almost everything in that Delaware basin is drilling to build section with somebody's version of director malls.
Hi, poppy that no more bars than Anybodys, that's why the market share gains in that market. We've got a more robust system that that the and you can actually break the system apart from retail will recover the diesel and the Brian, which we probably will be doing some of us people lay rigs.
Style and don't want to take that stuff to a disposal well, we can turn it into something they can use after if we store for.
Okay. So maybe just to go back to the first question.
I was trying to get AD was more that maybe 2016 might not be.
The right way to look at margins.
In this context, just given some nuance there is that fair.
I think it's going to be just as bad for services now as it was then and arguably worse because the operators are.
Obviously only spending their own money and back then there was probably still some.
I'll hang over effect that you could get money from Toronto in New York, and obviously that ship assailed soul.
I think this is going to be tougher I think that there will be companies go down that didn't go down before we're not going down we're going to have this because this business positioned to react to the recovery and let our shareholders and employees benefit from that but I think it's going to be painful air.
We're very very happy that we paid all that bank debt off last year, the armchair quarterbacks adult we're being too cautious.
And should start buying a lot more shares and get the share price moving or raised the dividend. We're glad that we were cautious this team remembers what happened only three or four years ago and those of us in Calgary, We haven't got out of the penalty box. So I think margins will be hit for all service providers.
And volumes are going to go down.
And perverse lead to faster that happens the faster, we'll recover the working capital and be able to prove that we're going to get through this.
We want to be on the other side of this with our 18, our infrastructure that's already built and the wherewithal to support people as they put rigs back to work and I'll add Aaron that.
We thought we were going to be able to beat our chest that we got into three of the Super majors in 2019 and that was one of our objectives as a company was to diversify beyond the big independence in PE on companies.
Anticipating that there'll be consolidation by those guys because they waited longer to go with shale and now they got a cost to capital benefit maybe this creates some consolidation there and I'm pleased to say we're on location.
For all of the Big Integrateds, except BP in the between Canada, and the less so if they buy people.
We're already working for them and possibly could actually benefit from that.
Okay.
Moving over and maybe just to make sure I heard you correctly you'd mentioned that the Oklahoma facility.
What would the financial impact.
And are there other potential facilities that you could look to close it.
Potential downturn drags on and then in the second question maybe are there any asset sales that you might look at including land or or real estate.
So in 2014, we had 14 months plants working so that meant a warehouse that sox drums totes going.
Paul Bargains that stuff sits under and then there's a way to a mall sify brine and our refined oil and make in Burger oil based mud.
We mothballed half of those in 15 16.
Our expectation is that the facility in Clinton, we'll get mothballed, but theres no cost will have somebody like doing worldwatch keep an eye on that place wallets closed will move inventory relative it over time, but we had a couple of deep rigs running in March.
Kit that are going to shutdown and that was the basis for running that place. So we don't anticipate any of our mud facilities going below the amount of volume it would take to justify them, we fix that last time and I'll add air and that we went into.
15 within employee head count of six people for every drilling fluid job, we had and we got it back to four.
In the trash stocks would it took to get it back to breaking even that 40 rigs and making money at 50 more jobs in the states today, we remain the four to one.
The sort of above that would be contractors that can be reduced quickly. The people that are long term contractors try and give them a few days a month. So they stay in the industry, but there'll be no cost to us to mothball Clinton.
And we would just reallocate the key people in Oklahoma to go do field work and other places.
So they can stay Indians, we can keep.
And on the potential for for asset sales or anything.
Okay.
The opposite I think we'll look around for things, we could buy for 10 cents on the dollar and try and take advantage of it.
Now were 20 million in year of maintenance capital, we can probably squeeze that a little bit and just put a few more miles on trucks, but it's kind of a painting. Our piney later thing and we will not do harm to sort of our assets for their reliability or safety.
And then the 25 or 30 of growth.
We're only spending that money, if we get pricing that justifies the capital.
I'll, probably be an opportunity to take some work that others kind of we use when they go down but our infrastructure.
And support sales of somewhere around 2 billion, our trailing one to five so we don't have to spend any capital to grow the business and we.
We will have the 25 or 30 that likely doesn't go out the door.
And maybe we'd spend a little bit to buy other people's assets. If they are distressed I don't think theres anything we need to get rid of that we could get fair mining Clark.
Okay. Thanks, that's all from me I'll turn it over.
Excellent.
Once again, if you have a question. Please press Star then one.
The next question is from Michael Robertson with National Bank financial.
Please go ahead.
Hey, good morning, Thanks for taking my call does just a couple of quick ones for me.
[music].
You noted in the press release expected downward pressure on margins given the weak in north American activity levels.
Likely softer pricing on the flip side of that are you seeing any help on a raw material input prices given that the followed have grown virus has taken a chunk of demand.
For a lot of things other than just oil.
100% and we're all over our own supply chain, we cook commodity chemicals turn them into intermediate Chemistries and then formulate with those intermediates demand for commodities is down so we're doing what our customers about to do to us we're asking for relief on price.
And a lot of our production chemicals get finished or blended with methanol or was solvents and those will go down in cost sole.
There may be a way to set off the discount we need to give to someone would supply chain improvements.
What you can expect as that inventory dollar amount, we carry can come down a lot because most of the inventory. We carry is for the drilling businesses. It's the contingent products for when you take losses kicks get stuck in the whole.
I have slopping lubert torque and drag problems beyond what you anticipated the production chemical business, we only make things because we know they have a home to go tail. So that is a working capital efficient business. The one that's about to get slower is where all the money gets tied up.
[music].
That's great color thanks for that.
Last one you spoke about the variability of the Capex structure.
And.
Noted in the release that you would adjust planned capital expenditures as required.
You noted the $20 million ish in maintenance relative to what you spent in 2018.
Just just how far down could you go from there.
On the growth side.
Yes.
Even in today's lovely macro backdrop, our other things that you know you're going to need to spend on or already have like just just sort of ballpark estimate.
It could be zero, but.
Something we'll make sense to do we don't know what that's why we getting entered a wide range. This thing could be resolved in a week, it's probably not going to be.
But we're keeping all of our options open but growth capital.
It could be nothing to be clear.
We're five days into this this crisis and we've acted very decisively in swiftly we'd like to be pleasantly surprised a lot sooner than we think we're planning for being able to hunker down when it comes to tick.
To Capex in general.
Up until a few weeks ago, we were looking to disclose the same thing we did last or which was an expectation to spend $50 million or less and as Tom said, we will absolutely on or maintenance capital requirements to run our business keep our assets healthy and keep our people save.
Outside if we do see opportunities that require incremental expansionary capex, because we are picking up some more work with some very attractive customers there might be large customers that require a bit of expansion capex, we will absolutely pursue not but the number is going to be city.
Frequently smaller than we even thought it was going to be a few weeks ago and one of the nuances on maintenance capital. Because we went we went through this a handful of times as management and employees.
If we have less people in the field.
Every one of those people drives it picked up if that pickup gets part than the yard for three months and someone else's truck miles out.
They take that truck that was mothballed sole we maybe able to keep people moving safely and reliably and the 20 can become 15.
Eventually it kind of normalizes, but we will be.
We're working managers were going to watch every penny around here preserving cash.
Is the most important function in the business sort of tied with looking after your customer and respecting each other's coworkers around here.
Got it will take thanks, a lot for the extra color guys look I'll turn it back.
Thank you.
The next question is from the lies.
I was with industrial Alliance Securities. Please go ahead.
Good morning, I've got a a couple of questions.
First one is heading back to.
The last downturn it looked like you Liberator at about 70 million of working capital do you think that it might be possible to do that.
This time around given how lean your operating or or.
You could add any color on that.
Yes, it's impossible.
That's predicated on on earn more forecasts, but I think it's very safe to say.
It's going to be a big range, but it's very safe to say the based on what we think the downturn downturn could look like over the next year that working capital harvest will be bigger than that number.
And it'll be a big range, but it could be in a range between the mid eighties two to low one hundreds.
30 cents of every dollar or revenue this required for working capital. So it's kind of the back of the napkin math most of that's weighted to drilling.
So as a contracts, it's a onetime recovery, but it comes back to the house, but that's why we're focused on a are obviously all that works out of people pay us.
We only have one customer over 10% they are very blue chip.
And then our customer mix, we have 50 places sort of tied for number too. So we're comfortable with a our recovery.
30 cents on the dollar.
We hope that wouldn't be this soon if we had paid the line now by now.
We'd be.
In a very strong position, but when we're done recovering all this we will allow allocated so that the business is not at risk.
And we'll watch the bond market in the share price as money comes in and we will quarter back our fingerprints will be all over the allocation we will be all over.
How many dollars go to the line first before you start creating the mathematical value with shares and bonds, but we're going to make sure that the company survives and there is enough recovery that the bank won't be calling us.
Great. Thank you very much for it for that color one more question that kind of leads on to the last.
Comment Tom which is.
If I take your accounts receivable or your revenue base. How however, you want to look at it and and I pretended pie.
If you wanted to carve that pie into credit quality and I realize you might not have sort of numbers on the fly but think of it as being investment grade clients versus non or or maybe you can think of him a super majors versus independence is it possible for you to get sort of a color on that.
Hi, and if not specifically can you talk about how it shifted in the last year.
No I can start off with with that and alliance as as we articulated in Q2 Q2 of last year. We spent a lot of time trying to understand wire was we were increasing market share.
Beyond some of the customers that they were typically after a little bit higher than us and.
Eric allowed us to take a good luck at our customer base, our customer base. Today. We would argue is is an even higher quality than it was back in 2015, and when you cut through the numbers that were comfortable sharing with you.
When we look through our top 50 public companies and we looked at all the revenue that was generated from them.
About 50% of the revenue generating generated from all of those companies comes from companies that have market caps between 10 billion and 200 billion. So thats. The snapshot. The other thing that we did real quickly with dominant a divisional presidents and finance teams.
We go there has got even smarter on all of our Aer, we've put in place a very comprehensive.
Database looking at our top 50 customers and ranking them all from highest two lowest totally iron and then taking a look at that age the receivables in the different categories. Current 30 days 60 days over 90 days and then we learned that onto industry available informed.
Nation like liquidity.
Leverage levels covenants and free cash flows.
Publicly available information.
And depending on where guys sat on each of those key attributes.
We compiled a watch list that's track every Tuesday morning by the finance teams and.
Every couple of weeks by the senior management team. So we're able to track that but to give you. The other piece that's relevant for you.
And your question.
And we went back and took a look at aged receivables.
When we're going into the 2015 downturn and took a look at it measured by percentage aged receivables over total receivables.
That number that percentage today is less than 50% of what it was back then and back then three that downturn, we only wrote off $2.7 million are tough hey are.
Okay.
That that gives me a pretty good handle on Poland Tait of.
Quality I guess of your of your customer base.
Okay.
One last question and maybe I I heard this wrong, but I.
Right.
I'm going ask it again.
The number of jobs in the U.S. So far this quarter is did I hear the the number 160 or was it 160.
116116, okay. Thanks very much.
Thats, an popped out of with topped out Ironically earlier. This week 121 20, okay. So.
That does give me a pretty good indication of market share at least up to this point in time.
All maybe add a little.
Color to the receivables question because we.
Our also concerned.
In the event of a bankruptcy by an operator production services are deemed essential the receiver pays those vendors.
Often people move through that so quickly you hardly even notice to change our location if half of our revenue is production related.
Then kind of half of the a are.
It's pretty safe, we are watching aer like a hawk on our drilling and production chemical or completion chemical businesses.
I have a red circle around a one customer the number is only a couple of million it's not 20.
Their rate took payment or timing has not changed.
We'll manage accounts like that that's something that's like quick pay discounts things like that but in some cases I've observed that even the drilling fluid provider is deemed essential depending how management and the receiver of that company look at things.
So and then the U.S. you can lean stuff much longer after it's been drilled them in Canada. So we think we've got a pretty good handle on it we're going to get stung by somebody, but it's not going to be enough to take cost out.
Okay.
That's it for me I'll turn the call back. Thank you very much further color.
Thanks Les.
The next question comes from Keith Mackay with RBC. Please go ahead.
Hi, Good morning, just a question around the revised free cash flow allocation and just thinking.
Would be helpful to get a little bit more commentary on why you chose to go with 70% to debt repayment for free cash flow, whereas you're targeting 80% before.
If the goal is.
Terrible time is too is too.
Keep to keep the business safe and and and essentially.
De risk the business as you see it sounds a little bit more color on that would be helpful.
I can start off in a nutshell, our free cash flow before dividends will be higher partly because we will will have.
Decent, but positive EBITDA and operational free cash flow and we're going to have a significant working capital harvests. So so as a result that 70% that that we're going to be allocating our different models get us to or through paying out the the line entirely.
Within the next 12 months based on some of these.
Current forecasts and again, we're in very early stages, and we very deliberately increase the 30% during a focus on potential equity repurchase just because of the levels that were trading at and the amount of bank for the Buck than we can get back in a nutshell that 70% less than 80 per.
And we'll be off of free cash flow before dividends, that's going to allow us to not to pay out that line.
Okay. Thanks. That's helpful. Then you touched on it a little bit.
Prior comment, but do you foresee any issues with managing managing your liquid mud inventory as as jobs come out of the field.
Because so many rigs.
In the Permian are running director Molson, instead of invert and because some of our competition startup to run their business more efficiently as investors in other companies demanded that those my businesses contribute I think it's going to be.
Less than before Keith.
But we cannot absolutely predict what competitors will do.
We're already talking with people about price concessions for drilling fluids.
We don't know how much others will blank, but I don't think the industry will be a walks oil based mud to the same extent it was last time.
What we're seeing.
Anecdotally is that people are saying, we're going to set the rig down, but we're going to keep the consumables on location.
Because of internal when it's going to come back to work if the oil company intends to get rid of that rate forever than everything gets sent back to town, but it's it's a little bit like breakout where everyone's okay stop because we're coming back later, except nobody knows when later is so that could keep that inventory in the fees.
Well it keeps you on the rig.
Keeps people talking about the rig.
But obviously no way to predictive thats entirely how it plays out because we don't know how long it goes but there is less oil mud floating around than there used to be because there's less of it as a percentage in use and.
Competitors.
Have had the wake up to the fact that Theres a cost of working capital.
Got you. Okay. Now that's how I can tell you that we are in auto auction that and if someone wants to kind of pressure test that claim we'll look at how much we tightened working capital last year.
Well the thanks a lot.
This concludes.
The question and answer session.
I would like to turn the conference back over to Tom Simons, President and CEO.
Okay, well to summarize we're going to focus on preserving cash in this business. So that means working with our customers on their a are.
Working with them on their drilling fluids, and Frac fluids pricing what their volume will be what we can afford to give how would go with oil recovers later whenever that is this.
We're going to as Tony said goal was 70 30 allocation.
70%.
Gets us and we've obviously built in a little Oc cushion for ourselves here for maybe a little bad debt, but that'll get this business to extinguish its line, depending how long the activity collapsed last we're going to be long term focused with capital allocation beyond that.
70% to pay off the line.
So whether it's bottomed.
All.
Buying at a discount whether its buying shares we're going to run the production business mindful that we need to generate enough free cash flow that cover or Bob.
And to pay the modest dividend that we have in place.
We're going to work hard to position this company.
So that shareholders in this company and employees of this company benefit in the recovery.
With that we're going to conclude the call and well. Thank you for your time.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
And.
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