Q4 2019 Earnings Call
Greetings and welcome to the twin cattle.
Did you services fourth quarter earnings conference call.
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It is now my pleasure to introduce your host for today's call Mr., Ken Dennard. Thank you you may begin.
Thank you operator, and good morning, everyone.
I appreciate you joining us for the Quintana Energy Services' conference call and webcast.
Review fourth quarter 2019 results.
With me today, or Chris Baker, Q, Yes, as President and Chief Executive Officer.
Keep her later Chief financial Officer, and Executive Vice President.
Following my remarks.
It will provide a high level commentary on the financial details in the fourth quarter and outlook before opening the call for questions and answers.
There will be a replay of todays call. It will be available by webcast on the company's website nuts Quintana energy services Dot com.
They'll also be a recorded replay available until March 12 2020.
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Please note that the information reported on this call speaks only as of today March 2020.
And therefore, you're advised the time sensitive information they no longer be accurate as of the time of any replay listening or transcript breeding.
In addition, management's comments may contain forward looking statements within the meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of Tvs as management.
However, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the statements made by management.
Listeners are encouraged to read the annual report on form 10-K quarterly reports on form 10-Q.
<unk> reports on form 8-K to understand certain of those risks uncertainties and contingencies.
Comments today May also include certain non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the Q, yes website.
And that would have behind me I like to turn the call over Q, Yes, as president and CEO Mr., Chris Baker, Chris.
Thank you Ken and good morning, everyone. Thank you for joining us today for Quintin Energy Services' fourth quarter 2019 conference call.
Well, the fourth quarter and to your as a whole proved to be extremely challenging our efforts to rightsize and optimize our operation or having a clear positive impact results.
An example.
Our directional drilling segment saw a sizable drop in revenue both sequentially and year over year, yet adjusted EBITDA and adjusted EBITDA margin came in at or near all time high.
Furthermore, and perhaps the best illustration of these efforts is the fact that we generated roughly the same consolidated adjusted EBITDA in Q4 as we did in Q2, despite seeing revenue declined by $30 million.
Finally, we generated over 14 million and free cash flow during the fourth quarter in the face of deteriorating market conditions and constraint customers that [noise].
These are remarkable accomplishment given that activity and pricing were under pressure all year and the fourth quarter had the additional stress of the seasonal slowdown due to budget exhaustion.
There are a large number of external forces that impact our business and industry as a whole that remain outside of our control. So we are focused on the levers that are within our control. It's between 19, ensuring that Q, yes is best positioned to whether what is becoming the new normal in the oil field services market.
This dedication to cost cutting and optimizing our geographic footprint and operational processes and procedures enabled us to battle through the budget exhausted period and white space in our calendar.
Additionally, in early Q1, we announced a corporate reorganization to consolidate and streamline our completion and production services business under one management team and system. We're very excited about this initiative and believe this is the largest internal value creating project in the history of Q yeah.
Lastly, before I pass the call over to keeper, let me take a moment to highlight our teams phenomenal safety record a cheaper 2019.
We achieved a 2019 total recordable incident rate of 0.87, which represents a new record for Q yesterday. In addition, we set a record for our lost time incident rate at 0.05, and also materially improved our T.N.V. I are driving stat by a significant margin.
I'd like to thank all of our team members for their outstanding performance and unwavering commitment to providing the highest level of customer service in an industry leading safety environment.
We believe that our culture sets us apart from our peers and the proof is in our result.
With that I'll now turn the call over to keeper jewelry review, our financial results in greater detail and I will return at the end of the call to provide some concluding remark around our outlook.
Cheaper.
Thank you Chris good morning, everyone.
Let me begin with an overview of our segment financial performance starting with directional drilling.
For the fourth quarter of 29 team directional drilling revenues of $54.6 million decreased 4% sequentially and were down 10% from the fourth quarter 2018.
Relative to Q3 of 29 gene day rates were up all the utilization and rig days were down.
For the fourth quarter 2019, we had a total of 4357 rig days and a monthly average 59 rigs on revenue of which 52, we're following me rigs.
During the fourth quarter, we successfully drilled 372 wells for 36 customers on 74 discrete rigs across 31 different target formations.
Fourth quarter adjusted EBITDA for the directional drilling segment came in at $9.7 million, which was up 7% from the third quarter 2019, and up over 3% year over year.
We're pleased to announce the directional drilling fourth quarter results were the best quarterly adjusted EBITDA performance since 2014.
Adjusted EBITDA margins for our directional segment increased by more than 170 better sequentially to 17.6%.
Now under pressure control.
Our fresh control segment generated total revenues of $23.3 million for the fourth quarter of 2019, which was down 13% sequentially and down 26% year over year.
Pressure control adjusted EBITDA in Q4 was $2.5 million, which was down by a third from the $3.7 million earned and Q3 and down by nearly half from a year ago period.
The segment's adjusted EBITDA margin also compressed sequentially.
Selling from 13.7% in Q3 to 10.6% and Q4 of 2019.
The margin decrease was driven by broad based revenue declines as utilization and revenue days fell for all service lines, except a well controlled business, which posted record revenues, which is a nice result, given the efforts and inroads. We have made in this business over the last 12 months.
Moving on to pressure pumping.
The pressure pumping segment generated total revenues for the quarter of $10.2 million, reflecting a 63% sequential decrease and an 81% decline from last year's fourth quarter.
The fourth quarter 2019, we saw our average revenue per stage increased 7% sequentially driven by shifting job mix offset by a corresponding 66% decrease in stages completed.
During the quarter pressure pumping frac. The total 235 stages compared to 700 stages in Q3 of 2019 and 1300 63 stages in Q4 of 2018.
The sequential decrease in stages was driven primarily by low fourth quarter activity overall and increased white space on our calendar driving low utilization of our single active spread.
During the first quarter of 2020, we have reactivated another spread and both spreads are currently in service and highly utilized.
[noise] pressure pumping adjusted EBITDA for the fourth quarter was a loss of $3.5 million compared to a profit of $1.2 million in Q3 of 29 team and a profit of $4.1 million and Q4 2018.
Lastly, we'll close out the segment discussion with wireline services.
Wireline revenue for the fourth quarter was $7.8 million, which was down 21% sequentially and down 43% from the fourth quarter of 2018.
The sequential decline was driven by a 20% decrease in revenue days and a 7% decrease in day rate.
Wireline activity was burdened by the same completion slowdown impacting our pressure pumping and pressure control results for the quarter.
[noise] wireline adjusted EBITDA for the fourth quarter of 2019 was a loss of $814000, which has improved from a loss of $2.7 million in Q3 of 2019 and from a loss of $1.3 million and Q4 of 2018.
Now I'll turn to our consolidated results.
For the fourth quarter 2019 revenues were $95.9 million, representing a 21% sequential decline and down 40% from last year's fourth quarter.
Our consolidated adjusted EBITDA was $5.2 million in the fourth quarter of 2019. This was down from $8.7 million in Q3 of 2019 and down from $13.9 million in Q4 2018.
The sequential decrease in EBITDA was largely driven by revenue declines in the pressure pumping and pressure control segments, partially offset by flow through from our cost cutting initiatives and ongoing corporate restructuring program.
[noise] consolidated DNA expenses were $13.5 million for the quarter, which was up 5% from the third quarter of 2019.
This increase was largely the result of higher stock based compensation expense offset by lower sales and marketing expense in the quarter.
During Q4, we recognized an additional $1.4 million and bad debt expense related to revenue generated earlier in 2019.
Majority of which was tied to pressure pumping operations for Ulta Mesa.
Our unallocated corporate overhead expenses were $3.9 million for the quarter, which was up 39% compared with a $2.8 million in the third quarter of 2019 for 2020, we expect our adjusted corporate expenses.
Yeah, good point $8 million per quarter.
[noise] force fourth quarter interest expense was $792000, which was down from the third quarters interest expense of $898000 and up from $626000 and the same period of 2018.
Going forward, we do expect interest costs to be largely consistent with our Q4 levels.
The precision provision for income taxes in the fourth quarter 2019 was a negligible amount and related primarily to state margin taxes.
Our Q4 2019 net loss was $7.9 million, which has improved from a net loss of $47.4 million in the third quarter of 2019 and down from a net loss of $1.6 million in Q4 of 2018.
Now I'd like to briefly discuss our cash flow statement balance sheet and liquidity position.
During the fourth quarter operate activities provided cash of $16 million, our networking capital for the quarter was $39 million, which was down approximately 15% sequentially as activity slowed in Q4, we effectively manage disbursements and were able to unwind approximately $9 million on working capital.
Going forward, we will continue to proactively manage our working capital and optimize free cash flow.
Gross capex totaled $6.2 million during the fourth quarter of 2019 compared to 7.6 million in the third quarter of 2019, and 11.8 million in the fourth quarter of 2018.
During the fourth quarter capital spending was driven primarily by maintenance spending across all segments. We also had asset sales of $3.7 million in the quarter, which were largely driven by the monetization of some of our obsolete assets. This yielded a net capex of $2.5 million and the fourth quarter.
Which when netted against our combined Q4 operating cash flows of 16 million, we generated free cash flow.
Over $14 million during the fourth quarter.
[noise] I'd also like to note we have two additional mid con facilities categorized as assets held for sale on the balance sheet going forward, we expect to continue streamlining and monetizing assets no. The amounts involved are not expected to be as material as they've been over the last two years.
For 2020 full year gross capex.
We are forecasting $20 million to $30 million for the full year, most of which will be tied to maintenance or sustaining capex as always we will remain highly disciplined and evaluating our capital spending I will just these amounts as conditions and activity warrant.
Other cash flow items of note in the fourth quarter include the repayment of $12 million on a revolving credit facility as well as $472000 in share repurchases totaling 198000 shares, bringing our total year to date share repurchases to 771000 shares to date.
We have spent $2.8 million on share repurchases, leaving $3.2 million available under the plan approved by the board in August 2018.
We ended the fourth quarter with a total debt balance of only $21 million and $14.7 million of cash on hand, yielding a net debt balance of 6.3 million.
Our balance sheet remains one of the strongest in the sector and we ended the quarter with $37.7 million, a net availability under our revolving credit facility, bringing our total liquidity to $52.4 million.
Finally, I'd like to remind everyone that beginning in the first quarter 2020, our financial results will reflect our new reportable segment structure, reducing the number of reportable segments from four to two and going forward will consist of drilling and completion and production.
In conjunction with this new segment structure, we've begun to reorient and streamline our completion and production segment in an effort to further drive efficiencies and cost savings.
Specifically, we're combining support functions for our new completion and production segment into a single headquarters and Oklahoma City.
Therefore funds functions, such as accounting HR HST sales and other administrative roles will be centralized. Additionally, we're streamlining our geographic footprint our systems, our processes and our procedures.
Prior to this these activities were de centralized across three segments that were legacy independently run businesses with this new arrangement, we can better align our operations eliminate redundancies and work more efficiently.
Keep in mind that the restructuring of our legacy completion and production business segments should be completed by mid 2020.
And is expected to yield annual cost savings of $4 million to $6 million once personnel systems and facility migrations are completed.
This range of expected savings is up approximately 25% at the midpoint from our previously released range of $3 million to $5 million due to increased efficiencies being identified as we've begun to implemented changes.
With that I'll turn it back the call back over to Chris.
Thank you keeper looking out towards the first quarter, the mark stabilized in the beginning of the year as our customers replenish their budget only completion side, we've seen activity bounce back from Q4 lows well the directional side things got off to a bit of a slower start as the market has been hesitant to add rigs.
In the last two weeks, we have seen tremendous volatility in commodity prices and the broader market in general in response to overarching concerns regarding the spread of the Corona buyers.
We have not seen this market volatility impact our business today better monitoring the situation closely and we'll react quickly and appropriately to any market shifts.
In our completion and production segment, our pressure pumping business has to have it spreads running at healthy utilization.
Although activity has rebounded somewhat pricing and margins remain depressed.
Revenues will improve from fourth quarter level, but will likely be below third quarter levels.
However, this revenue increase coupled with cost cut should be enough to return adjusted EBITDA back to positive levels.
Our pressure control business is likely to experience continued softness in Q1, the completions related drill activity lags frac work.
Given the weak frac market in Q4 and budget exhaustion slowdowns, we expected drilling out activity to start very slow in Q1.
And we have seen exactly that thus far.
Despite a challenging pricing environment for coal tubing, we believe that the large diameter units will stay largely utilized through the quarter.
Wireline activity with somewhat soft to start the year, but activity as it has improved the blade and the team has done a great job of increasing utilization and high grading our activity to higher efficiency customers.
Given the current trends it appears that the business will be positive EBITDA run rate by the time the first quarter is completed.
For the full year 2020, we're not expecting meaningful activity improvements over 2019 level and believe the market will continue to be challenging and highly dependent on the duration of the current macro challenges.
Nonetheless, we remain optimistic about our ability to successfully navigate the environment in light of the meaningful progress, we've made and optimizing our cost structure streamlining the organization and adapting to adverse market conditions.
Throughout the year, we will continue to critically evaluate our cost structure and focus on driving improved returns.
As I've touched upon what we strive to operate as efficiently and cost effectively as possible we have to balance the possible short term benefit of reducing our cost with longer term need to effectively serve our customers operate safely and pursue growth opportunities.
Maintaining this balance is challenging but we have the right people the right strategy and the REIT asset as well as a healthy balance sheet to whether these difficult time and emerge stronger when the market recovers.
We are faced with a challenging market today, but curious is well positioned with strong core businesses and an industry leading balance sheet.
Well our number one priority is safety and execution in the field. Our team is acutely focused on opportunities to create significant value through strategic consolidation.
Our customers continue to consolidate but we have yet to see widespread consolidation in the oil field services industry.
We believe that service industry needs to consolidate in lockstep with our customer base in order to create larger platforms that are better position to not only provides services to larger ERP operators, but also to better position companies in terms of size scale float and liquidity.
To that end, we continue to evaluate numerous strategic opportunities and believed that our balance sheet positions us to be a first mover in consolidation.
We acknowledge that investor interest in our space. This challenge, but that does not deter us from executing our strategy of delivering safe high quality services to our customers.
As always we will continue to maximize EBITDA and free cash flow wont be prudent stewards of capital and preserving the strength of our balance sheet, well also pursuing accretive strategic consolidation opportunities.
With that we will now take your questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one.
On keypad and confirmation Talmer indicate your line is in the question Q you May Press Star Twoq, we like to remove your question from the Q4 participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.
One moment, please why we pull for questions.
Our first question comes from Georgia, Larry with Tudor Pickering Holt.
Please proceed with your question.
Hi, guys.
Good morning, George or on that on the M&A front, just since that's where youre going to ended the call. How would you describe how bid ask has progressed over the last.
Six months have bid ask spreads kind of compressed at all and currently have their current a virus fears causes to widen back out and then.
Is there anything that you guys might be willing to just divest rather than go through some sort of a corporate transaction and how that kind of.
Andy market, if you will within that space.
Yes fair questions George and good morning, This is Chris.
I guess a couple of points.
Look the bid ask spreads are still in my mind all over the place so they're they're somewhat volatile they're pretty wide and I think every potential party has some degree of uncertainty or hair around trading that kind of fourth quarter multiples right historic loads. When you lose when you look at the onset.
I think it's too early to say, what's going to happen with regards to Corona and how that shapes People's opinion, but I will say I think we have found there are some parties that are starting to see the merits of a combination they're starting to see the merits of strong balance sheets and partnering with those with strong balance sheet.
I think we're going to be able to move the needle in that on that front pretty said.
Okay.
Oh, no keeping everything else on M&A.
With regards to divesting look we have those conversations that our board all the time keep are not discuss opportunities that we've seen some of our peer groups.
Peer companies go through kind of some two and three way spin merge type transactions and we're open to evaluating all of those possibilities I would say with regards to divesting for cash.
I don't think there are many cash buyers, there's a lot of competition with assets trying to be divested right now for cash and so I think that difficult and when you look at what we're doing all the consolidation front on the completion side of the business.
Yes, I think when we exit that we're going to the as lean as anybody out there cost structure standpoint, so we're highly encouraged and optimistic that the business lines that we've had losses and we can turn those around pretty quickly.
You know those those issues have been really white space on the calendar I mean, I'm I'm very pleased with the team's execution in the field across the board, especially in pressure pumping we continue to execute at a very high level and we continue to see that today.
Great. That's very helpful color, Chris and then.
Capex budget you guys just laid out at wondering if you could frame what sets for us that the upper and lower bounds of that Capex budget and then from a I realize most of that will be maintenance capex based on your commentary but.
From a gross capex perspective in which businesses do you expect to deploy the lions share of that gross capex.
Yeah. George this is key for all jump in on this one so we communicated the range of $20 million to $30 million on the call.
Also indicated that that that capex spend is predominantly going to be focused.
On the maintenance and sustaining side of things.
On the growth Capex side, it's largely going to be nominal this year, primarily focused on the directional drilling side of the business just given the continued success, we've seen there and the results in terms of EBITDA and EBITDA margin levels.
In terms of what's going to drive the flex between the bottom end top end of the range, that's largely going to be kind of activity driven.
And largely focused on pressure pumping activity could drive a swing there between those two numbers so.
As activity plays out over the course of the year, obviously that drives the majority of our maintenance spending.
And just given its so early in the year.
And line of sight on calendars and activity levels into the back half.
Remain murky.
We've kind of guided to a broad range right now.
Got you Okay. That's super helpful deeper and then just lying in the press release Cotton I Wonder if you could peel back the onion, a little bit on the directional drilling side I get that fewer stanbury, that's pure days on standby rate as pretty self explanatory, but from a hiring tools perspective can you just describe what.
Types of things guys are asking where did you say.
Before we are tool they want more rotary steerables what wed.
What what do you guys seeing there from a technology uptake perspective, and kind of is that something that may recur. In 2020 are these tools that your customers have decided they like or was it just kind of a random Q4 mix issue that was that kind of.
Emerald tailwind to results.
Yes Fair question George look we've seen a continued migration throughout the year and I think you would have seen a higher percentage of specialized tools at rig count not roll the way. It did right. So you have to kind of.
Adjust your mindset own specialty tool days in the face of a 19% rig count decline kind of across the year.
But what we're seeing across the board is.
Increase in rotary Steerable increase in pressure will and drilling as the gamma we have some IEC on the fly et cetera, as well as just much higher demand, especially in the Permian in South Texas for our Q series performance Motors and so we've had tremendous success with those motors as we roll out over the years think thats, a big portion of what drives.
It has to be.
One of the top quartile are number one DD companies for most of our major customers and so it's been a combination of all those things and of course, we're tracking that behind the scenes that we we kind of can see what percentage of our overall days.
Specialty tools are associated with.
How that plays out with commodity prices, where they are is clearly TBD, but at the end of the Dave What we know is performance drilling performance in the field is would holding up our market share and driving rate and performance across the board right.
Great. Thanks, very much Chris Thanks cheaper.
Yes. Thank you George Thanks, George.
Our next question comes from Ian Macpherson with Simmons. Please proceed with your question.
Thanks, Good morning, guys.
Similar questions.
When I look back on your 2019 performance.
Talking about.
The consolidation.
Landscape I mean, what what stands out as being.
Potentially vastly undervalued, we think Montana is is DD right based on the franchise strength there but also.
Frankly to EBITDA results relative to the rest of the business and I'm wondering when you're thinking about.
Options for.
For consolidation if asked directional drilling in the rest of Montana, our our natural.
Brent or if you think that may be your best option from unlocking value would be a separation of your drilling in your completion businesses.
Yes, well first of all good mortality in the scripts, it's a very fair question and as I think we alluded to with Georgia into the day all options are on the table and if there's something that gives us a critical mass flow liquidity and scale, where are we potentially spin off completions layer in drilling or vice versa.
We're open to all options if the valuation works out if it worked out for the board.
I take your point with regards to on the face of it completion and production Doesnt have the necessary critical math, but I think if you look at the losses within pressure pumping in wireline in context of even the midpoint of the range, they keep or alluded to with the cost savings.
That in of itself would have turned it back to positive and we're moving very quickly. We're very proud of the team and the team work they've done on the consolidation efforts to kind of streamline that business.
We're also seeing what I would deem.
Maybe.
More pricing discipline, especially on the spot market work within pressure pumping and we're seeing better utilization across the calendar. So we're pretty confident that those businesses are going to turn EBITDA positive pretty quickly.
Understood.
Thanks, Chris the key for your free cash flow was good in the quarter.
You had a pretty good working capital release there.
And that was a large pivotable pivotal element for your free cash flow profile for container for the full year. So.
It seems to me that that's a that's a big element as we think about your ability to maybe generate free cash in 2020 in an uncertain environment do you have.
Any guidance on working capital for for this year.
Yes, and thanks. Good question, obviously, I think really proud of the team's efforts.
To effectively manage working capital over the back half the year, particularly as we saw.
Activity levels decline and Q3 in Q4 from a top line perspective.
I think we did an admirable job of turning our working capital investment into cash and turn use those proceeds to immediately pay down the credit facility and our really happy with where we ended the quarter end the year from a net debt perspective.
I think we continue to have one of the stronger balance sheet and our space certainly look to.
Continue to lead.
In this area as we go forward.
We think about working capital for 2020.
I would think about kind of assumptions on.
Our in 80 days are working capital as a percentage of revenue.
To be kind of inline.
With where we were in the back half the year.
We will kind of flex up our working capital investment here at the beginning of 2020.
We've obviously deployed a second frac spread early in January.
And we're going to see the topline bump back up.
As we work through Q1 relative to where we were in Q4, so that will be a little bit of an incremental investment, but we're going to remain diligent to manage.
The payable side.
To make sure that we are harvesting as much free cash flow as we possibly can out of the business.
Understood. Thanks, Chris Thanks Cooper.
Thank you thanks again.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
That concludes our Q and a session for today at this time I'd like to turn the floor back over to management for closing comments.
Thank you and once again for joining us on this call and your interest sequencing energy services. We look forward speaking with you again next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.