Q1 2020 Earnings Call
Good morning, ladies and gentlemen.
Welcome to the try kind of well services first quarter Twentytwenty earnings results conference call and webcast.
As a reminder, this conference call is being recorded.
I would now like to turn the meeting over to Mr. deal. That's their health President and Chief Executive Officer I've tried on welfare visit service. Please go ahead Mr. that's tariff.
Thank you.
Ladies and gentlemen.
I'd like to thank you for Italian if I can well service conference call. Here's a brief outline of how we intend to conduct the call first Robert skill that our CFO will give an overview of the quarterly result.
Well that address issues pertaining to current operating conditions and near term outlook.
Well then open the call for questions, Mike <unk>, our executive Vice President of operations is also available to answer questions I'd now like to turn the call over to rock to provide an overview of the financial results.
Thanks, Dale before we begin I'd like to point out that this conference call may contain forward looking statements and other information based on our current expectations our results for the company.
Certain material factors or assumptions were applied in drawing a conclusion or making a projection as reflected in the forward looking information section of our Q1 2020 M. DNA.
A number of business risks and uncertainties could cause the actual results to differ materially from these forward looking statements and financial outlook.
Some of these risks and uncertainties are further amplified due to the current global health crisis caused by the cool <unk> 19 pandemic.
Please refer to our 2019 annual information form and the business risks action over Mdna for the quarter ended March 31st 2020 for a more complete description of business risks and uncertainties facing Tri County.
This conference call also makes reference to a number of common industry terms and certain non-GAAP measures, which are helpful. We described in our first quarter 2020, M. beginning our first quarter results were released this morning and are available on SEDAR.
The results of efforts to improve the profitability of our business continued to be seen in the first part of Q1.
And you were in February and the start of March all saw strong equipment utilization and therefore strong margins as we had better alignment of our fixed cost structure to recruit equipment levels.
By lower revenues compared to Q1 2019, our adjusted EBITDA would've been 24.8 million or 13% margin, which was net of 4 million of fluid and expenses.
This compares to Q1 2019, adjusted EBITDA 26 million were 11% margin, which was net of 1.6 million for fluid and expenses.
This normalized Q1 2020 margin improvement was a result of reducing or fracturing crew count and fixed cost structure to better align with anticipated activity levels.
The slot higher fluid and expense in the quarter was a result of a number of fluid ends becoming do for replacement in the quarter and not necessarily reflective of a typical run rate quarterly expenditure level.
However, as we noted in our April 620, 20 news release, adjusted EBITDA was negatively impacted by cold at 19, and the announcements in March by Russian OPEC to increase production.
These events required us to reevaluate our cost structure, we have implemented substantial cost reduction measures, which resulted in more than 4 million of severance costs. Additionally, the dramatic drop in oil prices required us to establish a provision against our receivables.
Initially, we anticipate an allowance of approximately five.
1 million however, one of our customers with a current account receivable entered into a court supervised creditor protection process.
Although this individual customer account may still be collectible the speed with which the banks that required us to reevaluate our initial assumptions for our provision against our portfolio of trade receivables.
This resulted in a recognition of an incremental $5.5 million receivable provision.
The effect of these two items resulted in reported adjusted EBITDA being 9.5 million.
These marketing events also result in try candidate Valuating the carrying value of our long lived assets as anticipated in our April six news release 131 million dollar impairment of goodwill was recognized in the first first quarter. The company also identified approximately 10 million of specific asset impairments.
Totaled these Q1 charges of approximately 157 million were the primary driver of our net loss of 155 million.
Absent the effect of these items and despite the significant levels of parked equipment continues to be depreciated try Canada's beginning to see a path to positive net earnings as evidenced by our positive earnings of January February.
Prior to the falloff in March when Colgate 19 began affecting the market.
Our continued focus on our core businesses disciplined pricing and equipment activation strategy and ongoing optimization efforts have been resulting in improved overall profit margins.
And then even in this challenging market, we will continue to focus our efforts on improving our business.
The company's business continued to see positive cash flow generation before considering changes in working capital operating cash flow is approximately 10 million in Q1. Despite continued significant Canadian industry headwinds that were prevalent even prior to the cobot 19 events.
Additive operating cash flow combined with eight and a half million of positive cash generating investing activities. As a result of by our divestitures of non core assets allow try cat to build and cash surplus of approximately $28 million at March 31st and further improve our liquidity position.
Our 2020 capital expenditures of 5.9 million were approximately 3% of revenues.
This spend was comprised of required sustaining capital and infrastructure expenditures, we will continue to limit capital expenditures in 2020 to those expenditures necessary to sustain our equipment.
While we do not anticipating spending on any growth items, our strong balance sheet affords us the flexibility to invest if an appropriate opportunities available.
During the past 24 months, we have monetize nearly 60 million of stranded and non core capital through our ongoing us asset disposition program.
Hi, recognizing the Canadian industry was generally Overcapitalized. The company was able to monetize significant amounts of equipped equipment, which has contributed considerably to our relatively strong financial position.
This is also helped us purchased more than 22% of our shares over the past 30 months, including approximately 4.8 million shares repurchased in Q1.
Substantially all of these purchases were made in January and February.
The company continues to view share repurchases as a good long term investment opportunity for the use of any excess capital.
However, the near term market uncertainty will result in us being very cautious and deploying are modest cash flows.
Approximately 40% over allotment under the current NC IB program remains which corresponds to the approximately 40% remaining time and teller and see I'd expires at the end of September.
We entered this latest downturn strong financial position at the data very mdna, our cash position approximated $23 million.
Against the debt balance of approximately 15 million.
This combined with our noncash working capital balance of 80 million results in our forecasts show in compliance with our covenants despite expecting the lowest well count in recent western Canadian history.
I'll now turn the call over to Dale who will be providing comments on operating conditions and strategic outlook.
Thanks, Rob.
As we noted in our press release from April sex, we have already taken a number of steps to ensure the safety of our personnel.
We have had no cases of cold at 19, our company and have implemented a number of procedures in the field and in the office to ensure the safety of all of our staff.
Although second quarter activity as light the safety protocols, we implemented in our field operations for cold that 19 to protect our people and our customers has allowed us to continue to perform job safely and successfully.
Additionally, all support functions continue to operate effectively from remote operations, allowing us to continue with our business, while ensuring the safety of all of our people during these unique guidance.
As Rob alluded to we have already made significant adaptations to our business due to this.
Let me get industry slowdown.
We have reduced our fracturing vats and cloud crew costs, and adjusted our fixed and overhead cost structure.
Additionally, we have made seasonal cost structure adjustments, which should help mitigate second quarter negative operating results.
Considering the positive effects of the Canadian latency wage subsidy program.
This Q2 will be the most challenging for the Canadian market, we have seen in a very long time.
Although there were some work today, Paul most of our customers are planning very little work in May and June so revenue for the quarter will be the lowest said is being in a number of years.
We have therefore being very focused on lowering our cost at all areas to minimize the loss in the second quarter.
We are utilizing the federal government waste subsidy program and are also having numerous discussions with our clients.
With respect to a media spending work in relation to federal well abandonment program.
Although well abandonment program is not likely to be material to the overall business. This program will help offset some costs and keep some of our people working in our SMET service line.
A positive of that that we're seeing is that natural gas prices have sean relative strength to oil in particular compared to last year.
Curtailed North American oil production.
As reducing.
Associated gas supply and is positively affecting the supply and demand valves for natural gas, which when combined with improvements in western Canadian storage and transportation infrastructure as provided quite constructive natural gas market.
Well, we do not expect this to add significantly to the second quarter, we do expect gas basis to support a base load of activity in Western Canada, and the second half of 2020.
Activity combined with our first quarter should allow us to cover necessary sustaining expenditures through 2020.
Pricing for pressure pumping services was competitive prior to entering this downturn.
For this reason, we do not anticipate significant pricing pressures, we believe companies will talk to cram, it rather than electing to cannibalize our own market or were not equipment negative cash returns.
We will remain focused on working with our customers to improve daily pumping efficiencies, which will reduce their cost far more than minor pricing concessions.
Through our partnership with a number of clients, they're achieving pumping efficiencies of 20 to 22 hours per day, and we have operations teams within the company working to move all of our clients to higher pumping efficiencies.
This effort will also generate more profit from our existing asset base.
The North America pressure pumping business remains competitive and companies that can improve efficiency.
And our low cost high efficiency safe service will retain the best customers, while generating the best relative return for our shareholders.
Currently we have low visibility of our client second half programs, but expect to have them confirmed in the next month.
The moment and based on discussions with our long term clients, we expect around three fracturing crews as compared to eight that we ran in first quarter with similar reductions that are sent in coil service lines.
We will finalize our operating equipment complement as customers converting their programs.
Our company's cost structure is much improves heading into this downturn and we continue to make cost reduction gains throughout our organization organization. We have a number of lean six sigma projects underway that will lower our cost through automation data tracking better efficiency in our operations as previously discussed.
Better pumping efficiency on location.
Despite all the mark to that certainly the strong balance sheet, Rob noted, while our company to continue and invest to pursue permanent business improvements.
Since 2015, we have made a conscious effort to significantly de leverage and restructure our business and have remained focused on our strengths in our current market.
A big reason for the focus on returning funds to our balance sheet through debt repayments and share buybacks was due to our strict economic hurdles thresholds for investments.
These thresholds helped ensure we did not continue to pursue a strategy of further overcapitalized thing in an already overcapitalized dentistry.
This disciplined now uniquely positions Tri county to come out of this severe downturn in a position of significant strength.
With the added benefit to be opportunistic through this severe downturn.
We anticipate that I'd like to downturn that started in late 2014, there will be significant fracturing equipment attrition within the industry as equipment as older more likely to be retired and brought back into service. After this downturn.
The ability to replenish every place equipment will be significantly diminished from any of the industry.
We will be an advantage for organizations with relative financial strength.
And we'll provide the potential opportunity to improved business performance significantly coming out of that's incredibly challenging market.
Despite these market challenges our primary goals for 2020 remain consistent with those we presented previously.
First we also tended to focus on how the top quartile returns in our sector by increasing the returns our core business lines to strong utilization and a prominently lowered cost structure.
This will improve the return on invested capital we generate from our active equipment.
We will continue to pursue opportunities to generate funds from parked equipment to idle assets that can no longer be used in Canada.
Maintaining a healthy balance sheet is still our top priority. We will continue to evaluate returning capital to our shareholders through NC IB program, while monitoring cash flow from operations and not compromising our financial strength.
Our strong financial position affords us the flexibility to evaluate divestment opportunities that may permanently changed industries, such as funding cost reducing technologies and programs.
This ensures we can continue to improve our efficiency and cost structure in a highly competitive market and at the same time lets us explore investments in our existing business that potentially new service lines that short term financial returns combined with long term improve return on invested capital for the company.
On behalf of the bar to the Tri County, Executive I want to thank all of our staff for their hard work dedication.
Silver lining around the challenges we face as a company as being how our team has taken to heart the company's overarching guiding principle of safety.
Our employees have adopted their approach to work and continued to deliver at a very high level in all areas of the business.
Additionally, the challenges faced by our team has been that people are starting to together.
So once again, thanks to all of our value people for staying safe and working hard through this downturn to make us a better company.
Thank you for your attention today and your interest in drag on and I'd like to turn the call back the operator for any questions.
Thank you Sir we'll now begin to question and answer session to join the question Q You May Press Star then one on your telephone keypad.
I will hand, atone and knowledge in your request.
If you're using a speakerphone please pick up your handset before pricing any Keith.
So with that all your question. Please press Star then too.
Well above 40, mohlman callers join the queue.
Our first question is from painter darker with Tudor Pickering Holt. Please go ahead.
Hey, good morning, and thank you first question I just wanted to ask them on the competitive environment up in Canada and down here in the US we've seen a number of players just shut down completely and.
You can re purpose, they're pumping equipment from for some other purpose.
I realize the Canadian markets, a whole lot more consolidated than it is down in the U.S., but just curious if theres anything.
You are seeing of note from a competitive dynamic are positioning standpoint from Canada.
You made the comment on pricing that there really isn't much more room to give.
To the downside DSE your competitors following suit with that sort of pricing discipline.
Montreux, where where pricing sits today.
Yes, I guess two parts to that the first part as.
We've had we've seen some competitors basically shut down their operations during the second quarter by Cat say, whether they're going to rate fire up again.
And if they're quite as probably depended on how much work.
Comes into play for them at that point in time, but in a little bit of equipment shuttering this quarter the.
I would say, though the majority of our competitors are still intact.
Planted to operate on for US, we don't really see a material change in our competitive environment at this point in time.
Hey, Bob as we get further in the year on pricing I would say that response, we're seeing the marketplace is consistent with our approach that.
People are more willing to park equipment, rather than to chase prices down at that.
Levels and we're out right now and so we've seen that approach from all of our competitors.
It is rated trying to grab market share in this environment.
Okay, that's helpful and.
That sounds like the Frac fleet.
Side of the business has been re size to about three fleets for the back half.
Realize it the visibility into the back half of the year is.
Super Limited if not zero today, but with the three fleets in place you have today and similar sort of activity reductions on the other side of your business and if we think about some of the cost reduction initiatives. You've now put in place with that size business can you do you expect it to maintain positive.
But on the back half of the year is that just.
Something you can't comment at this point.
I think.
Just as easy as we kind of set in the prepared remarks, there like we're we're targeting for full year to have a business that sustains our capital expenditures, which includes Q1.
It's pretty tough to.
See the the whole second half, but but I mean thats. It is really as best we can provide at the moment Taylor Q twos going to be tough still.
We have that seasonal cost adjustments as Dale said, but it's still going to be a pretty pretty tough Q2.
Okay.
Last one from me you talked in prepared remarks about some of the macro tailwinds on natural gas side and.
Maybe that'll longer developing tailwind but.
As we think about the back half the year I think you said that that.
Some of these natural gas opportunities would support a baseline of activity are these jobs or projects that that were already there two three months ago or are these things that are just coming to light in light of.
Some of the recent macro developments on the gas side.
I'd say that our current customers.
Basically has had an in place for a couple of months that was really around natural gas prices holding and the foreign straight through the summer inspecting going on.
Where gas is in the two range and so at that point of time.
Some of that natural gas and in particular dry gas players.
Firmed up their programs and then we've seen some increases in the last month to even a couple weeks.
To those same players that are just adding a few more wells because they got gas prices are holding and.
Well the ambition.
I would say there is.
A few with some clients that gas prices will actually improve as we get into October November timeframe with storage levels, whether or not that associated gas falling off and so.
So that is also driving some of the some of the decisions our clients are making.
Understood well I appreciate the answers guys.
Hi, Thanks.
Our next question is from Dane They look would see IVC capital markets. Please go ahead.
Good morning, everyone. So I guess just starting off.
Granted I only get the visibility is really tough right now, but when you look at the back half the year and the relative strength in the gas market is the current expectations for Q3 to Bury the majority of the Euro your year over year softness relative to Q4, just kind of curious in.
Ken mentioned this a little bit, but if you expect to see similar dynamics, where customers trying to time smell completions for the stronger gas markets.
Oh, it's hard to say right now it really I think our customers plans for Q4, just not yet defined yet so I.
I don't want to go out and say that that that we'll see a ramp up as year goes on yet.
Let's say that if gas prices continue to add move upwards going into the later than we are going to see that our view is that we're probably going to starts.
With.
In July with.
Got it relatively muted activity as customers are still pretty cautious and add.
If commodity prices hold on the gas side in particular and even on oil if you see an increase at all the second half as year goes on any are going to see some increase programs, but it's very patented on.
It all the things that are out there.
Related to commodity prices.
Right right. Okay. That's fair enough. That's good color. Thank you and I guess just following on some of their earlier comments on pricing concessions can you share was was there any pricing discounts in the first quarter either by yourself or did you see any of your competitors engaging in price and.
Price discounts through Q1.
So we didn't see any anything in Q1 at all.
Like relative.
Sure.
Right got you. Okay. Thank you and then just lastly from me and I'll turn the call back any sort of color you can give on working capital harvest over the balance of the here.
Yes, I mean, we kind of gave a little bit of a sight line with the disclosure we provided showing our April thirtyth working capital there in the release.
The.
Given the low activity three hydraulic fracturing crews, we are certainly not expecting a massive rebuild and receivable so it's going to be a net.
Cash inflow for the year for sure.
Great. Okay fair enough well appreciate the color guys open the call back. Thank you.
Our next question is from Ian Galileo So with Stifel. Please go ahead.
Right as anyone guys how are you doing.
So lets you recall I add on the phone and now you're.
And Galileo so yeah, you just keep changing your name on SCS.
[laughter] App.
Rob I wanted to start with bad debt expense I know, there's probably still some chance of recovery. There as you go through the bankruptcy process with your customer can you maybe just provide some insight on how that process looks in how you go about doing that and then maybe as a follow on that question Theres.
Within a few other GMP instead of.
We entered into a core barents agreements rather than CCW and I'm, just curious of whether that charge. You took in Q1 was just trying to be really conservative for things that may happen or whether you're expecting any more bad debt expense given what you know right now.
Yes, I think.
And it's all to do with the timing or we get all the work at the beginning of.
January February and then mid March late March you get these events so.
We've collected a ton of receivable. So we obviously have site light on that and the one that you know what theyre actually not okay in bankruptcy.
Before.
Protection process, we're still able to lean the wells. So there's there's maybe some avenues.
Okay.
That puts us at a reasonable physician to collect that later so.
Call It Conservative just call it prudent I guess is just.
Well the approach that we want to take with it.
And I guess, just going back to the second part quickly I mean, as you look around and you look at their receivables piece.
How how are you feeling about that right now are you seeing your customers try and stretch even further or.
I guess, how he's behavior.
No I mean, it's kind of reflected in our cash balance.
We were expecting to be stretched out a little bit more and I got to be careful as customers are listing on the side to stretch us but.
We haven't seen it.
So.
I think it's come along as we would have expected like our April collections were right in line with what we were planning.
Okay.
Yeah.
Dale with respect to operational parameters moving forward.
Given.
Lower equipment demand.
Can you do much from a fleet set up standpoint to reduce our in an expense and perhaps even maintenance capital.
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Just through less wear and tear on the equipment by bigger Frac fleets.
Yes.
The answer so we'll be I mean is the number of initiatives we have underway right now that are.
Part of our kind of our lead program that will help us reduce our repair and maintenance expenses, but also just the amount of equipment complement that we have in the company allows us to route takes to stress that as much.
Basically lower our are down probably too much lower level than they normally would have.
Got it.
Hey.
We haven't broken record, but strategically as you think about M&A and.
The strength of the balance sheet and I know things are pretty dire at the moment across the industry.
But how are you thinking about that part in that part of your job in the context of the strength of the balance sheet.
Well, we are number one is we want to maintain strong balance sheet. So taking all the data, which I've said before isn't something that appeals to us, but absolutely. We believe we're in a position that we could do some things if it makes financial sense and were accretive today. This type of market Aptiv area.
You have to our shareholders as it can't be a smaller patient level, it's got to be something that really makes a lot of test before you move on it and a lot of strategic sense for the company down the road and so.
I would say probably looks like it hit before.
That we're open to it but it has to meet our our hurdle rates and it has.
Making sure that we don't put ourselves about deposition.
Okay. That's helpful. Thanks, very much I turn the call back over.
Yes.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Keith Mckey with RBC. Please go ahead.
Hi, Good morning, Thanks for taking my question hope everybody seeing well.
Just a just a question apologies if I missed it do you have an indication is the analogy and funds you might expect received from the emergency wage subsidy.
We didnt put a number out at this point.
We're not doing it we just we want to see a couple payments coming and make sure we've got everything dialed in their Keith.
Got you okay.
Okay and just the.
Reduction of equipment and the 60%.
Expected activity reduction you mentioned.
Do you think about that is relative to Q1 or maybe relative to.
Second half of last year.
Yes, essentially to Q1.
As our base base level there.
I mean, technically we're running about a cruise through the back half last year. So I guess I guess you could look at it too.
Got you okay.
Well that's it for me so thank you very much for the color.
Thanks, Keith Thanks.
Yes.
Our next question is from Jeff federally with Peter Peter Cinco. Please go ahead.
Morning, guys just to round and ones for you.
The assets held for sale as current assets, what's your expectation or visibility around those dispositions.
Well I mean, it's solely requirement to remain there's 12 months given its real estate. We felt it was reasonable to keep it there will obviously evaluate a quarter by quarter to see if that changes.
Right.
That was the primary.
Recently, we left there Jeff.
But safe to say you don't necessarily have any agreements in place to sell it at this point.
Not with the third party, although there's there's still been.
Still get calls on it even through this.
Type of environment.
Okay.
And then as you said, thank you for the updated debt and cash commentary as was the end of April just curious when you look at May and June given as you said deal to the.
The activity is going to be fairly low.
How much more working capital do you think you could harvest from the balance sheet before the end of Q2, given you still have 80 million sitting there.
Yes, the $80 million includes that 14, and a half million or through so of assets held for sale Jeff.
It's really tough to say like were April in the beginning.
Part of me is always best timeframe for that.
So if we even if we try to water we'd be sitting at a plus 10 position, but you're obviously.
You are then still sustaining a pretty strong working capital balance that's in existence, but.
Given how slow it's going to be.
We may see further on Wyman that we've already seen.
Okay and.
And Rob your comment earlier about expecting to remain compliant with $2. Your with your covenants and 2022 did I hear that correctly.
Yes, I mean, it's.
Yeah.
Yes.
And.
To remain compliant with those covenants.
Should we be thinking that your bank debts, you're not going to have any bank tests or you just that contemplating all the adjustments that would be reflected in your Q1 EBITDA number.
I think Jeff what I'd say as most of the largest organizations to dance around your question most of the largest organizations around the globe aren't providing guidance.
So thats the maximum level of guidance all all give at this point.
Hi, just clarify I don't want to add backs through the banking debt agreement. There are certain things like severance that are that have always been added back.
And there's just there's no other items that we we present in the statements that kind of give a little bit of color there.
Great. Thanks.
Thanks, Jeff.
There are no further questions registered at this time I would like to turn the conference back over to Dave Dykstra for any closing remarks.
Yes. Thank you very much for your interest and try can we hope that everyone remain safe we ask everyone in the public to continue to track to safe Kogut 19 related precautions.
Even though we're starting to come back to work its very important that we get through this virus as a as a country and as the province and analysts as a company in our case.
So thank you very much and we will look forward to talking to you at the end of July. Thanks.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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