Q4 2019 Earnings Call

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Good day, ladies and gentlemen, and welcome to your answer co 2019 year end earnings call. All lines have been placed in the listen only mode and the floor will be open for your telephonic questions. Following the presentation. If you should require assistance during the conference. Please press star zero on your telephone to reach a life operator.

At this time and it's my pleasure to turn the floor over to Jay fiber, Sir the floor is yours.

Hello, and welcome to ensure goes 2019 yearend conference call presenting on behalf. The company today are you didn't get concerned CEO in Margie Heartbreak she up well as a reminder, matters discussed during this call may include forward looking statements that are based on management's estimates projections and assumptions as of today's date and are subject to restaurants.

Good news disclosed in the company's most recent Jan Kees wells other filings with the FCC.

Company's business is subject to certain risks that could cause actual results to differ materially from those anticipated. Its forward looking statements and Servco assumes no obligation to update forward looking statements the become untrue because of subsequent events.

I'll also point out that management's ability to respond to questions. During this call is limited by FCC, Reg FD, which prohibits selective disclosure of material nonpublic information the website a webcast replay of todays call will be available at in Serco Dot com. After the call. In addition, a telephone replay will be available beginning to price.

Let me two hours after the call instructions for accessing.

The webcast a replay are available in today's news release with that I'll turn the call over the end Dickinson and please go ahead.

Thanks, Jerry welcome everyone and thanks for joining the call.

Today, we issued our 2019 fourth quarter and full year financial results press release after the market close.

I'll provide a brief review of our 2019 performance as well some comments on recent macro events and what we're seeing so far in 2020.

I'll, then turn the call over to margin per a recap of the numbers.

We certainly had a strong start.

2019, after two consecutive years of delivering high higher revenue and profitability in 2017 in 2018 recorded a 19% increase in revenue and positive adjusted EBITDA to the first nine months of 2019.

Unfortunately, a sharp decline in activity in the fourth quarter offset most of those gains we closed the year with revenue up only slightly.

Positive EBITDA came in below prior year levels. In addition to the overall decline customer activity in Q4, we experience unseasonably warm weather in Oklahoma, and Pennsylvania, where demand for Frac water heating services, so far off other areas of operations, whether whether it was more cooperative.

It's no secret that the oil and gas industry is facing some serious challenges right now in Q4 sharply lower drilling and completions activity had already put pressure on us our competitors and other players in the oilfield services space.

Add to that the first quarter decline in oil prices due to the Saudi Russia price war, coupled with fears of an economic slowdown relayed the corona virus.

We have all found ourselves in a place that I don't think getting one could have envision.

To provide further perspective oil started the year in the mid Sixtys and is now hovering around the mid Twentys. This in turn.

Has required us to make in certain cases margin eroding price concessions in order to retain an ad customers.

Having said all that I believe it's important to recap some of the good things be accomplished in 2019.

Because I think they put us in a better position to operate more efficiency more efficiently once the macro environment turns back in our favor.

Our first and foremost we grew our market share in 2019, primarily due to our acquisition of Adler Hot oil services.

Previously our largest competitor we added some new employees to our customer base and close the year with more customers than we've had at any point in company history.

In the process, we further distance ourselves from the competition has nations largest provider frac water heating services.

Is there an absolutely critical component in the drilling and completions process.

In addition, we took decisive steps to reduce our operating cost step one was to complete the integration of the of the Adler acquisition and eliminate redundant cost totaling approximately 1.1 million per annum.

Step to what the closure of our water transfer business, which was noncore and had contributed 1.2 million EBITDA burn.

2019 alone.

Step three which actually occurred here in Q1 or 2020.

For the further reduction of overhead through the closure of our Oklahoma facility and the redeployment of equipment and so several skilled operators.

More active basins.

To be clear this does not mean, we are abandoning oklahoma or our customers there.

We have a highly mobile fleet and workforce and intend to service them remotely at a lower cost from our larger Colorado operation.

On top of the thing that bench and just mentioned, we will continue to evaluate our discretionary spend and implement other cost reduction initiatives.

It makes sense.

The closure of our water transfer business allowed us to refocus on core competencies in the areas of production and completion services in order to increased fleet utilization and now optimize our fleet deployment.

In this regard we've made investments and process improvement initiatives over the past couple of years that are designed to increase efficiencies and better leverage our expanded fleet and national leadership position.

Now more than ever we recognize the importance of a strong balance sheet Delevering is and will continue to be a very high priority for us until we get our ratios back in line.

Of course this objective is heavily dependent on a rebound in the price of oil.

Right now we have no more visibility that process than anyone else.

In closing I want to say that I'm I'm proud of and appreciate our administrative and field teams, who despite the difficult environment have remain laser focused and continue to work hard to provide our customers with a world class service.

And with that I'll turn the call over to Margie for a few for review of our financial highlights margin.

Thank you in the fourth quarter and full year results I'll be discussing today reflect the reclassification of prior year results of our delco water hauling business and our water transfer segment as discontinued operations.

As such certain year ago figures will differ from those referenced on past calls. In addition, you probably noticed a new presentation of revenue on the face of our income statement. This quarter. We are now breaking our revenue into two segments production services and completion services. We think this presentation better describes our business.

And better communicate the fact that we are engaged in both major aspects of our customers wellsite activities.

Total revenue for the full year increased slightly to 43 million from 42.8 million a year ago production services revenue grew 1% year over year to 14.7 million from 14.5 million component of production services included Hot oiling up 6% to 12.

Point 4 million from 11.7 million Acidizing down 20% from 2.3 million.

Two 2.39 from 2.9 million the production services segment generated a profit of 1.1 million in 2019 down 1.7 million in the prior year completion services revenue increased approximately 100000 year over year to 28.3 million from 28.

Point 2 million.

Completion services generated segment profit of 7.9 million in 2019 versus the segment profit of 7.69 in the prior year.

Total operating expenses in 2019 increased 6% year over year to 46.6 million from 44.2 million.

The increase included higher direct variable costs associated with increased activity and growth investment in South, Texas, and Wyoming 1 million in first quarter cost overruns in our since discontinued water transfer business and higher SGN and depreciation and amortization expense.

DNA increased 18 point, 18% to 6.2 million from 5.2 million last year due to an increase in bad debt reserve higher personnel and overhead related to the Adler acquisition higher DNL and professional fees and investment in infrastructure.

As noted earlier by early third quarter, we had eliminated approximately 1.1 million in annualized overhead associated with the Adler acquisition.

And we're now seeing the benefit of that as well as lower cost moving forward related to other cost reduction initiative.

Depreciation and amortization expense increased 17% to 5.7 million from 4.9 million due to our larger fleet.

Our operating loss in 2019 increased to 3.6 million from 1.4 million last year.

Net loss from continuing operations, including a 1.3 million dollar gain from the April settlement agreement with the sellers of Adler increased to 5.3 million from 4.1 million a year ago.

Net loss from discontinued operations.

Total 2.39 in 2019 versus 1.8 million last year.

Net loss for 2019 increased to 7.7 million or 14 cents per diluted share from a net loss of 5.9 million or 11 cents per diluted share in the prior year.

We reported positive EBIT adjusted EBITDA of 2.8 million down from a positive 4.7 million a year ago.

And Sir Cogenerated, four and a half million in cash from operations in 2090 up from 1.3 million in 2018.

Q1 capital spending will be primarily related to maintenance and for the foreseeable future. We anticipate capex to be in the range of approximately one to one and a half million dollars annually.

Turning to our fourth quarter financial results total revenue in the fourth quarter declined approximately 39% to 8.1 million from 13.3 million in Q4 last year.

Production services revenue was flat at 3.5 million and included Hot Oiling at 3 million and Acidizing. A 455000, both also essentially flat year over year.

Production services generated a segment loss of 116000 versus segment profit a 468000 a year ago.

Completion services revenue, consisting primarily of Frac water heating in the fourth quarter was down 53% year over year to 4.6 million from 9.8 million.

Completion services generated a segment profit a 404000 versus a segment profit of 2.7 million in Q4 last year.

Total operating expenses in the fourth quarter decreased 17% year over year to 10.5 million from 12.7 million, primarily due to a decline in variable costs related to supporting production and completion services.

SGN expense declined 7% to 1.4 million from 1.5 million last year due to efficiencies, we achieved related to the Adler acquisition.

Depreciation and amortization amortization expense grew 14% to 1.4 million from 1.3 million due to the increased fleet size.

Loss from operations in the fourth quarter was 2.5 million compared to income from operations of 544000 in the same quarter last year net loss from continuing operations was 3 million compared to a loss of 141000 last year net loss from discontinued operations with 300.

40000 versus a loss of 376000 last year.

Net loss increased to 3.3 million or six cents per diluted share from a net loss of 517000 or one cents per diluted share in the same quarter last year.

We had positive adjusted EBITDA of 168000 in the fourth quarter versus a positive $2 million in Q4 last year.

[laughter] another front, we continue to work closely with our lender east West back on a potential amendment that would resolve our current over event status.

Recall that we received notice a default on our loan agreement in January regarding a fourth quarter over there as well as minimum liquidity and fixed charge covenant fixed charge ratio covenant violations.

We had hoped to have made more progress towards resolving these issues by now however, with the terminal turmoil in commodity prices and global economic upheaval that impacting the debt markets. The process is taking longer than we had had anticipated.

More details on this I've laid out in our 10-K, and we will keep investors the product once we have something more to report.

Regarding the New York Stock Exchange American listing [laughter] excuse me.

Since we last updated you on our Q3 conference call. The NYSE American informed us that they approved our plan to regain compliance with their continued listing standards as it relates to stockholders equity.

We have approximately 14 months from now till June Threerd 2021 to be precise to satisfy the equity requirement as long as we demonstrate progress towards that goal, we're not able to share a further details of our plan at this time, we will keep you posted on what we can share as the process continues back.

Concludes.

Our prepared marks remarks, and now I'll turn the call over to the operator for questions operator.

Thank you Sir the floor is now open for questions.

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Again, ladies and gentlemen, if you have a question. Please press star one on your telephone keypad at this time I will pass just a moment to give everyone a chance to think now.

And our first question comes from Bhakti Pavani with Alliance Global. Please go ahead.

Good afternoon guys.

My question you know given the market do we should have been oil price volatility and nothing else.

Lead down they then Greg and how's that.

Selling and completion activity.

No.

How are you guys were firing in all that and what kind of back you have seen on your business.

Finally in Q1.

But you kind of the next highest revenue again for you right.

Yeah, Hi, Balky thinks of the question so.

You know the lay down in the reduction in drilling completions activity you referenced in the prepared remarks has had an impact on our Q1.

As we move into Q2.

Through Q2 in Q3 the business I'm.

Realized primarily on production related activities.

And so.

The reduction in drilling completions work will be less impactful to our.

Q2 in Q3, but it's certainly had an impact on Q1.

Got it.

And given the you know, but now I guess situations, which I don't know spending pretty rapidly as a company. How are you embedding yourself and what the caution you have taken debate if you could expand on those please.

Well, we're taking all the appropriate precautions accompany policy following the CDC guidelines.

I'm, a little different dynamics between our corporate office, which is working from home and what we're able to do still from field operation. So our locations, we're continuing to operate close normal.

Paying attention to social distancing et cetera, but.

So we're continuing to operate across our locations.

We're watching this by the by the day by the hour.

And staying close communication with our customers on their policies and any changes to their scheduled work and so it's an ongoing process of monitoring.

But we're following all the.

Appropriate procedures.

Got it. Thank you you did talk about.

No no Oklahoma.

And our that any of that operation you know.

Thank you I want to take anything.

You would do something that I know.

No.

That you did in Oklahoma could you maybe talk about those.

I think Oklahoma for Us and we've done this in the past, where we provided heating services remotely ought to Colorado.

So that was a opportunity for us to eliminate some overhead costs. What I would say is generally speaking we're going to continue to monitor activity levels and then look for ways, we can be more cost efficient.

But we're going to make the moves that makes sense for the business based on the workload and demand.

But at this time that was the the only correct moved to make from a location specific perspective, but we're evaluating all options.

Oh, that's it from I think you made a much higher.

Thanks, Buck you [noise].

Yeah.

And our next question comes from Ed Woo with Ascendiant capital. Please go ahead.

[laughter]. Prior question, how is that correct that your field operations and relatively benign.

Unaffected by the run a virus relatively.

Yeah at this stage as you know this is a rapidly developing processes everybody I.

I think is aware so we are as I mentioned that just actively monitoring our policy to make sure that we're staying.

Up to speed speed with the CDC recommendations.

Well.

Top priority us to us as the safety of our employees and folks customers we work with.

And so we're taking all necessary precautions.

At this stage, we are still operating across all of our locations.

And as I mentioned, we're monitoring customer activity in staying in close contact with them to the extent that changes and we'll just respond accordingly.

Great and then my question is I know you talked a little bit about you know obviously the oil outlook is pretty grim right now, but what are you hearing from your customers now it seems like people are are predicting armies hi, hi. This is.

$20 barrel oil, it's going to be.

That's one of them all hall is that what are your customers our international.

Yeah, I don't think anybody know I'm sure we're.

What I would say is what we're hearing.

For most of our customers is that do you expect a major drop off in drilling and completions activity, but that.

The production related work or hot oiling in Acidizing services.

There will be continued demand for that I expect.

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Some of our customers, who are going to ask us to sharpen our pencil.

But from the feedback we've been receiving.

We've been told to prepare to continue.

Production related services I think for Visium piece as are laying down their drilling completion regs.

Even at these lower price points.

Maximizing the production out of the producing wells.

There's going be important for them so.

You know, it's impossible for us or anybody to know exactly.

You know, what's going to transpire here in the weeks and months in quarters ahead.

My sense is is that.

We'll have sustained demand for the production services and.

We hope to see some <unk>.

<unk> rationality come back to the market.

As we exit third quarter and had back into fourth quarter, where.

Oh completions activity becomes important to us again for the Frac heating services.

But we're going to be proactive and continue to manage.

The company and our cost structure.

Two to handle whatever is thrown our direction to the best for our ability. So we're in very proactive we're in constant communication with our customers and our employees and are actively managing the situation.

Great and then my last question I have is just on the competitive landscape now you know, there's now a little bit of turmoil.

No wonder you seem to competitors are you seeing anybody you can you maybe the competitive landscape will get easier and less cars go out of business or our what do you what do you see out yeah.

Well I think it's tough for everybody.

You know as I'd mentioned in the prepared remarks, we took.

Additional market share here heading into this seat this heating season. In addition to the market share that we picked up from there.

Adler acquisition.

And so I know we've placed some additional pressures on our competition.

In our core heating markets, we continue to take market share.

In Texas as well as we've.

Grown that market consistently year over year.

I think this is gonna be difficult for everybody I prefer not to comment specifically on what we're seeing with our competitors, but it's my sense that.

You know.

The competitive landscape could be improved for us as we move forward I mean, the reality is as you know and environment like this.

There are going to be some casualties and.

You know, we're aware of some folks need the club Stakes and we're taking advantage of that where we can we've got you equipment to do that we've got the operators to do that.

And as part of the decision to redeploy some assets out of Oklahoma to other basins, where.

We've got work.

And can put those units immediately.

In the actions so.

I think it's its going to be.

To our advantage as it relates to competitive.

Situation.

Great. Thanks, Good luck.

Thanks, I appreciate the questions.

And as a reminder, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad.

And we'll pause for just a moment.

And I'm showing no further questions at this time, so I'll turn it back over to you and MRT for any closing.

Thank you and as always we appreciate everybody's time and attention on the call today, we look forward to talking again.

Following the close of our our first quarter had a nice afternoon, I hope everybody stays healthy and say.

And that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and have a great day.

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