Q4 2019 Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to the Calix Energy Services' fourth quarter 2019 earnings conference call. At this time all participant lines are in listen only mode. After the speakers presentation. There will be a question answer session. So that's a question. During this session you would need to press star one of your telephone.

Please be advised that today's conference is being recorded.

If you're for any further assistance. Please press star Zero, Oh, now I tend to cost so to speak for day, Ryan Taylor, Vice President corporate development financial planning and analysis. Thank you. Please go ahead Sir.

Thanks Shannon.

Morning.

Today.

Scott.

Energy services financial results for the fourth quarter ended January 31 2014.

For comparative purposes, we have presented our financial results adjusted to exclude costs associated.

These major downsizing program.

Service line introduction and related costs.

These costs are collectively referred to as costs as defined.

Company's earnings news release, which was issued earlier this morning.

Events or results.

If you haven't really received that you'll find the coffee on our website.

We will begin with remarks from even Corey Chairman and Chief Executive Officer of Calix Energy services.

On the call. This morning pump Mccaffrey, senior Vice President and Chief Financial Officer.

For todays call we've prepared a few slides to help you follow our discussion.

And find our presentation on the Investor Relations page.

Energy services web site.

Alex Energy Dot Com and.

In addition copies of supplies are posted on our website for you to refer to.

Where we begin we had some additional information to cover.

Any forward looking statements that we make are subject to risks and uncertainties.

As always and our remarks indoor responses to your question.

Who rely on the safe Harbor exemptions under the various Securities Act.

And our safe Harbor statements in the company's filings with the Securities and Exchange Commission.

It will address questions following our prepared remarks.

At that time, the operator, we'll provide you an instruction.

Now I will turn the call over team inquiry.

Thanks, Ryan and good morning, everyone.

Thank you for joining us today to discuss our fourth quarter and full year financial results.

So I'd like to.

I'd like to veer from the script for a couple of moments given what's happened over the weekend and.

So a quick quick analysis over your view of where we were earlier in the year, where we are now and how the outlook may have changed here.

So during the first half of the year.

We were operating at about a 622 million dollar annualized revenue run rate.

With an adjusted EBITDA margin of about 19% that's after all corporate cost allocations.

By the fourth quarter of this year revenues of $99 million roughly represented an annualized run rate of about $395 million, that's about a 38% lower annualized run rate and more importantly, our first half EBITDA margin of 19 per.

Adjusted EBITDA margin.

Decreased to about 1.5% of revenues.

So.

First half versus where we were running in the fourth quarter dramatically reduced activity.

We have a business, which is gaining market share, it's gaining new customers, it's gaining share customer spend with solid businesses and essentially all of the important shale plays.

But which cannot perform well at Q4 NP activity levels.

Management is doing what we can in this environment, we've reduced head count by 360 people are about 22% and Weve attack cost in every aspect of our business, we've substantially strengthens and broadens our service offerings in each of our Geo regions, and we expect to be able to.

We continue doing so but our current activity levels.

Industry consolidation is an absolute imperative.

The announcement over the weekend that the Saudis will cut prices an increase output to gain share will not only bring Russia to it to these it will also bring the us oil and gas industry to its knees.

Clearly all empty companies are in reassessment mode. This morning, but in any event there will be a further sharp reduction in S&P investment in coming months, and Oh fs demand will be further reduced.

That background I think will just get into our script.

Run through our obligations here with respect to the fourth quarter and full year, and then do a queuing day.

So the decline in the end demand in the fourth quarter was a continuation of the abrupt deterioration in industry conditions, which began in the third quarter.

The decline in demand was principally due to the MP companies.

Abrupt cessation and activities and their intense focus on capital discipline and free cash flow generation.

In addition to customer budget exhaustion of of course.

The severity of the decline in the second half and year ended January 31.

By the MP companies led to a sharp decline in us land rig count and an unprecedented decline and operating frac spreads from the second quarter through the end of the calendar year.

As we reported last quarter, we initiated an ongoing comprehensive business review and cost rationalization program targeted at aligning our cost structure with customer demand.

Specifically, we intimate implemented an approximate 360% or approximately 22% reduction in force, we warm stacked our Permian based wireline assets, we aggressively cut costs in every area of our business. We will continue to carefully monitor our staffing and cost structure.

We began to realize the benefit of our cost rationalization actions in the fourth quarter. This year and despite the 27% reduction in revenues as compared to Q3, we generated about 1 million and a half and free cash flow.

During the quarter and ended the year with approximately $124 million in cash and a 100 million Undrawn credit facility.

While we have reduced our personnel level substantially we have also recruited experienced coil tubing personnel to join the company in both the third and fourth quarters.

We have received and are currently deploying the last of our five new large diameter coil tubing spreads.

Cost of the startup activities wasn't approximately $2.3 million drag on Q4 operating results.

We believe the company's coiled tubing services strategy, which both increases the number of customer service and gains greater share of customer spend by pulling through our broad range of asset light services.

Together with continued tight cost controls and a focus on free cash flow generation should enhance the company's position as a broadly competent proven value added partner to our clients with strong liquidity a history of providing value added services, while maintaining superior health safe.

The and environmental standards.

On today's call will review the current oilfield services market.

Discuss our fourth quarter 2019 financial performance.

And we'll comment on our outlook.

Okay.

Let's turn to slide three.

And begin by reviewing the current oilfield services market environment.

You asked land market to continue to be under intense pressure during the fourth quarter as exploration and production companies reined in spending while maintaining an intense focus.

This resulted in significant sequential quarterly declines in completion activity rig count price spreads across all major U.S. shale basins.

Many of pay scale back or completely shut down operations during the fourth quarter.

The decline in activities, even more pronounced in the natural gas plays as natural gas prices have multiyear lows and growing supply concerns continue to weigh on activity.

Clearly conditions in the second half of 2019 were extremely difficult.

Slide three reflects this sharp reduction in demand.

Lexi revenues adjusted EBITDA and adjusted EBITDA margin.

The first half of this year for 311 billion in revenues $60 million and 19%, respectively as compared with second half revenues.

Add adjusted EBITDA, and adjusted EBITDA margin of 233 million.

19 million and 8% respectively.

It has a for the fourth quarter, our EBITDA margin was about 1.5% and we were operating at a rate that was 38% lower than the first half.

Turning to slide four and review our fourth quarter consolidated results.

Q4, 2019 revenues of approximately $99 million decreased approximately 27% as compared to Q3.

Adjusted operating loss was $19.5 million compared to third quarter adjusted operating loss of about $4 million.

Adjusted EBITDA was approximately $1.3 million compared to third quarter, adjusted EBITDA of approximately $17 million or approximately 13% of revenues.

Adjusted net loss was $12.9 million or negative 56 cents per diluted share for the fourth quarter compared to third quarter, adjusted net loss of $5 million or approximately 22 cents per diluted share.

The full year the company reported an adjusted net loss of two and a half million dollars.

Or 11 cents per diluted share.

That was for fiscal 2019 as compared to fiscal 2018, adjusted net earnings of $58.6 million or $2, a 90 cents positive per diluted share.

So for the full year the company reported an adjusted net loss of two and a half a million dollars.

Before we review our fourth quarter 2019 segment financial results.

We'd like to mentioned that the company allocate all corporate cost to its three segments.

Total cost allocated to our three segments during the fourth quarter were approximately $12 million.

Cost allocated to each segment for the three month period ended January 31.

In October 31 were as follows.

Rocky Mountain segment.

5.8 million in Q4 at 6.9 million in Q3.

Northeast Midcon segment $3 million in Q4, and 4.6 million in Q3, respectively, and southwest segment trading a half million dollars in Q4 at $4.7 billion in Q3.

Let's now turn to slide five and review our third quarter Rocky Mountains financial results, which include a $5.8 million allocation of corporate costs in Q4 of this year.

Fourth quarter 2019, Rocky Mountain segment revenue of $46.7 billion decreased by $10.9 million or 18.9% as compared with a third quarter 2019.

The decline in revenues was primarily due to a number of customers substantially curtailing or even suspending operations for the balance of the year due to budget exhaustion and the NPS intense focus on capital discipline and free cash flow generation.

Adjusted operating loss for the fourth quarter was $1.1 million.

Compared with adjusted operating earnings of 4.4 million in the third quarter of 2019.

Operating results of the current period were negatively impacted by the approximate 19% decline in revenues and resulting negative operating leverage.

Adjusted EBITDA was $6.3 million, resulting in adjusted EBITDA margin of 13.5%.

Compared to third quarter, adjusted EBITDA, and EBITDA margin of $12 million at 21% respectively.

And first half 2019 revenues and adjusted EBITDA margin of $112 million.

Revenues $26 million, an EBITDA and a 23.4% EBITDA margin.

Let's turn to slide six and review our fourth quarter Northeast Midcon segment performance.

Okay.

Fourth quarter ended January 31, 2020, northeast mid Con segment revenues of $24 billion decreased by 37.5% as compared with a third quarter 2019.

The decline in revenues was primarily due to a number of customers substantially curtailing or even suspending operations for the balance of the year.

In this case, along with dramatically lower activity levels, particularly by naturally natural gas customers.

The northeast Midcon segment has the highest exposure as a percentage of revenues to natural gas customers.

Natural gas rigs declined by almost 43% as compared with February 2019.

Northeast Midcon segment, adjusted operating loss was about $9.9 million compared to third quarter adjusted operating loss of about a half a million dollars.

Fourth quarter 2019 operating results reflect the approximates 38% decline in revenues and weaker pricing.

Fourth quarter 2019, adjusted EBITDA was a negative $3 million as compared to third quarter, adjusted EBITDA and adjusted EBITDA margin of $6.6 million and 17.2% respectively.

And first half 2019 revenues adjusted EBITDA and adjusted EBITDA margin the $87.3 million.

$22.3 million in EBITDA, and a 25.5% EBITDA margin after all cost allocations.

Let's turn to slide seven a review fourth quarter results for the company southwest segment.

Fourth quarter ended January 31, 2020, southwest segment revenues of $28 million decreased 27%, driven primarily by lower activity levels and a decline in wireline revenues as the company elected to warm stack.

The vast majority of its wireline assets in the Permian due to the weak pricing environment.

Adjusted operating loss was eight and a half million dollars compared to third quarter adjusted operating loss of about $7.9 million and adjusted EBITDA was negative $2 million compared with third quarter, adjusted EBITDA had negative $1.3 million.

Take a moment and review our financial position on slide eight.

Cash flow provided by operations for the year ended January 31, 2020, plus approximately $58 million and the company ended the year, where the cash balance of approximately $124 million.

Capital expenditures were approximately $71 million.

Total long term debt of $250 million.

Less cash resulted in net debt of approximately $126 million.

The company's net debt to net capital ratio was approximately 29%.

Net leverage ratio was approximately 1.6 times there were no borrowings outstanding under the company's $100 million credit facility and there are no debt maturities until November 2025.

We remain committed.

The deploying capital, where we believe it will generate the highest potential return to our shareholders.

And evaluate share or debt repurchases or capital investments and our product service lines.

Through the same lands. Moreover, we believe our strong financial position will allow us to continue to explore strategic combinations.

I'd now like to take a moment to comment on our outlook.

So demand began to improve in the latter part of January any improvement continued in February.

Before this morning, we were expecting an increase in revenues and improved financial performance and our first quarter ending April thirtyth as compared to our fourth quarter ended January 31 2020.

We are continuing to recruit additional experience coil tubing personnel to join the company in the first quarter.

And we're currently deploying the last of our five new large diameter coil tubing spreads.

The coil tubing startup cost related to the deployment that these new services are expected to be a drag on our first quarter earnings.

We do however expect to have all 13 of our large diameter coil tubing spreads in operation by the end of the first quarter of 2019.

We will remain focused on serving the needs of our customers and both winning new customers and gaining share of customer spend.

By providing a broad portfolio of services and equipment across all major basins, while maintaining a healthy level of quit liquidity and prudently managing our capital expenditures.

In an operating environment, where our financial strength as a key different differentiator, we believe that our ongoing cost reduction efforts along with the anticipated positive impact from the rollout of our new large diameter coil tubing services.

And the pull through of our broad range of asset light services will allow us to continue to gain market share.

Both increased the number of customer service and gain greater share of customer spend with a goal of generating free cash flow through 2020.

Nevertheless, oil and gas demand destruction being caused by the Corona virus pandemic.

With Wi Fi and natural gas prices now having moved to the lowest levels decades.

Could cause further deterioration and DMP spending and investment and the coming months.

With that I'll turn the call over.

Two Ryan.

Thank you Amy.

I'll now turn the call over the operator for the acuity works of today's call operator will provide instructions on how to ask the question and then.

As a reminder to ask the question you would need to press star one of your telephone to withdraw your question press the pound key please standby lose compiled acuity roster.

Great.

Our first question comes from John Watson Ascendance Energy Your line is open.

Thank you good morning.

Good morning, John.

I appreciate it's an increasingly fluid situation.

I was hoping you could speak to your approach to cost in how you might be able to further cut costs.

In 2020, given the macro backdrop.

Well I think you're asking us to discuss plans that we havent happened yet developed this morning based on activity over the weekend.

We have a tank cars in every part of our business.

But the ended the second quarter, we have reduced our our head count by 316 painful for 22%.

Now we've added a.

Certain number of employees to.

To implement our coil tubing strategy and we're currently in the process and rolling out the last of our five new.

Coiled tubing spreads and that's the heart of our strategy.

As to.

Pull through.

Our asset light services.

Based on the coil tubing assets. So there are many coil tubing companies, but none of them go to market with a range of.

Asset light services, and thereby pulling through higher margin services and there are lots of companies moms and pops that offer some or many of the services, which we offer and specific GE or regions.

But they don't have capital or position.

To be able to offer both coiled tubing spreads services and the pull through that goes along with US we are implementing our strategy. It's a strategy that we absolutely. No works question is what will the level of demand.

So we have we have really built solid businesses in each of the shale regions, which we serve and we have been gaining share consistently adding customers and gaining share of customer spend.

So we know that our strategy works, but in the current demand environment current meaning the fourth quarter demand environment. There's not much we can do really to further reduce cost way, we had cut costs to the point or so were.

We could offer the services.

In quality and fashion and with environmental.

And.

Hello, environmental and safety concerns.

At a minimum level, meaning that we we have to maintain.

Certain level of safety at a certain level of quality and to do so we're basically near a cash flow breakeven.

That's where we were in the fourth quarter, if demand further declines which it appears that it will based on what's happened over the weekend will be developing further plans to further reduce headcount and capacity.

In the over in the near term to deal with what is very likely to be.

A significant reduction further reduction and NP activity and investment in the near coming months.

Okay, great. Thank you for that I appreciate that the difficult situation.

On a similar front and understanding it's subject to change, but can you help us think about the 2020 Capex budget.

Well, it's going to be.

Dramatically reduced.

Thats compared to the.

Hey, 2020 budget, you're talking about our next fiscal year. So our next fiscal year Capex.

Both the dramatically reduced from the 70 million or so that we invested in capex this year.

I don't want to actually given numbers. This morning, because I think it's all subject to change and we will be.

We will be.

Looking very very hard every single Capex requests.

Okay, Great I appreciate that it's not an easy question. Thanks for taking a stab at both mines I'll turn it back.

Thank you and I'm currently showing no further questions at this time like turn call back over to Brian Tyler for closing remarks.

Thank you Shannon and thank you everyone for participating on this morning's call. We look forward to speaking to you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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