Q1 2020 Earnings Call
No.
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Thank you for standing by this is a conference operator.
Welcome to the C.
<unk> first quarter 2020 conference call as a reminder, all participants I listen only mode. At the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question Q you made press Star then one on your telephone keypad.
Sure do you need assistance during the conference call you May see one operate up by pressing star and zero.
Oh now I turn the conference over to Tony always you know Chief Financial Officer. Please go ahead.
Thank you Steve Good morning, everyone and thank you for attending today's call I'd like to know dinner commentary today, there will be forward looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our first.
Quarter Mdna and press release dated May 14, 2020, and then your annual information form dated March 12 2020.
In addition, certain financial measures that we will refer to today are not recognized under current generally accepted accounting policies for a description in definition Beach. Please see our first quarter Mdna at this time I'd like to turn the call over to Tom Simons, our president and CEO.
Hi, Good morning, Thank you Tony and thank you to everyone for funding into today's call.
On today's C. S quarterly call, we're going to provide an update on the companies.
Plan to survive cold it.
And the resulting oil collapse.
I will give us a cement operations overbuilt Q1.
We grew our market position in all four major parts of the business in the quarter. So U.S. drilling fluids U.S. production chemicals Canadian drilling fluids Canadian production chemicals.
Well, we're not gonna dwell on Q1, a lot since the world has changed since then we would suggest that Q1.
Results show C. S. This potential when the world resumes post covert life and energy demand increases.
Tony is going to talk about financial results for the quarter, including some write downs he'll also provide details and historical context of our counter cycle working capital recovery, which has now begun.
We will outline our strategy in goals during the crisis and downturn.
Well provide a our outlook on what the company could look like on the other sidedness. So we're going to talk about how and why will survive.
We'll talk about what we could look like in a recovery.
I will then take questions and provide a short summary, and wrap up the call.
So I'll start with a shored up ops overview for the quarter.
And I'm going to go a little a out of cadence and say that in light of the great Keystone pipeline news, we're gonna be getting Canada.
Canadian drilling fluids had an excellent quarter.
We averaged 84 and a half jobs through the quarter I'm going to 50 in March So January February and the normal market for Canada.
We were kicking some buck our customer mix.
Expanded our Ah well types were deep long reach hawk horizontal impulse. It included in the quarter work in Canada for three of the Super majors are unique expertise utilizing brines lower cost better performing oil base mods.
Blended with superior execution in service add up to a dominating position in the deep long reach Canadian drilling fluid market. We also are very dominant in the Sag D market, because it technology history and strong relationships of trust.
In the Canadian chemical market, we continue to make financial and operational gains through the quarter.
Your Cam our Canadian production chemical business, we started from scratch a decade ago has been reborn over the last year.
We're proud of expansion across the basin in the deep hot long reach Horizontals and growth into Saggy, which we believe will pay the company on the other side of this crash.
Our people our products are strategic infrastructure, a pure Kim now have pardon the pun tremendous chemistry.
Stem work Synesael Cowen Canada had great first quarter's I'll remind listeners stem works is a nice stimulation chemical line we operate.
Rehab old wells to make them economic versus being abandoned that liability.
Say Alco is our reaction chemistry business in Vancouver, Mike and his team gets C. S supply chain strength in Canada, new technology across the platform of the company.
And some diversification outside of energy.
Clear continues to keep its nose above water as our environmental services business line and we may get some traction with the two Canadian government programs to abandon old wells.
We'll now move into the U.S., where two thirds of our revenue happened in the quarter.
Pretty equal contributions again from drilling fluids and production chemicals.
Burn and Richard or having a good race S. R. U S drilling fluid business line ran an average of 114 jobs through the quarter.
We expanded our customer lists into super majors and gain in the U.S.
I'm, particularly in markets, where drilling is trickier.
Which is part of why we got hired the better the drilling fluids perform in a tough drilling environment, the easier and more cost effective overall drilling goes so we've expanded in the places that are tougher to drill which makes the work you get more defensible and easier to keep long term.
Yeah.
That's it became clear in March that a steep drop in activity was about to happen, we expanded liquid mud storage in the Permian to accommodate returns from rigs that we knew were about to be released.
Today. He asked is pleased to be running 49 drilling fluid jobs in the U.S.
When we won some new customers during the crash.
I can't emphasize the importance of having an outlet for the liquid mud inventory that you built to support the 114 jobs over the first quarter.
Having 40% of that being able to recycle and reuse that inventory is very helpful to the business today [noise].
A U.S. production chemicals Jae Kim catalyst Q1 was another steady quarter end or first couple of months of the quarter in January and February but like all of industry. We saw changes start to happen in March.
Jay can catalyst grew treatment points through the quarter and today is pleased to report that were actually responsible for more wells now than before the crash.
We've been able to work with customers on price.
They manage their vendors and what to shut in in the U.S. versus leaving producing.
This will serve us later very well.
Tim works.
The need stimulation business continues with this expansion in the U.S. and I'm pleased to report contributed positive financially through the quarter, while barely in its infancy for growth in not huge market.
So we'll move on to the important part of the call. How are we going to get through this and what will we look like on the other side.
We've made significant cost reductions in the business to the tune of 70 or $80 million annualized.
For competitive reasons.
And out of respect.
To the good people in the families that we buy there had to release or for low or go to jobs sharing or cost or pay reductions, we're not going to provide head count numbers, and we're not giving that Intel to competition.
But we want to assure listeners.
That we're going to do everything that's possible.
You get business through this financially while retaining the ability.
To do more true levels of work once the world goes back to consuming energy.
Today, we have enough business going in Canada, and the U.S. not to be swimming in inventory.
We're growing our customer base through the crash.
I'll reemphasize, we have more wells, we're responsible for two day in the U.S. than before the crash.
We've been able to offer concessions.
And service and technical solutions that the competition CAD offer and have won work when all the operators are looking to spend a little or no money.
We're going to retain our people, we're going to maintain our assets, we're going to maintain our capabilities to grow in a recovery.
During the crisis, our objectives are to pay order align with our working capital harvest.
To build a cash war chest.
To watch for obvious indicators of a recovery, which unlike other energy crashes, we're actually getting to know when it's going to get better because we believe it gets better.
Months after society resumes using energy, we obviously are aware that there's going to be an overhang of oil supply for the a world to work off but there will be an indicator. Unlike the previous crashes that this management team has got this company through.
We're going to be very mindful that the war chest that we're going to build a through working capital harvest and we're going to as management in aboard watch for the best way to create long term value for shareholders. So back to include deploying that money the inventory next year in a recovery.
It could include buying underpriced bonds. It could include buying shares but today.
Cash is king will pay down we'll pay out the line will build cash and will sustain the business and service the bond.
We think on the other side of this we can be the pre eminent my company or drilling fluids company in North America.
In Canada, we are by far number one at 30% to 40% of the market with competition falling away through this crash.
In the U.S., we're number two and we believe based on the infrastructure.
New business, we want technology, we can offer that competition doesn't have the balance sheet of the business. The we're gonna go to number one on the other side this thing.
Chemicals.
We have the capability to thrive in the North American production market and I think this is a nuance that is important for people to note.
There's lots of speculation of Walt will stay shut in.
And what will be brought back on by our customers and whether those reservoirs will be impaired whether the physical equipment that pumps. The pipe in the oil will be damage from corrosion from scale that position held out will affect the ultimate recovery and when these wells come on.
But what history has shown one and anecdotally what we're hearing from customers.
Is that likely how this unfolds to some degree.
Is that most of the shut ins or verticals and the ones that stays shut in forever.
They will be the verticals.
Those are the wells that the chemical companies use treater trucks to sustain with chemistry those trucks are expensive.
Our capex annually most of it goes to rolling stock or those trucks, we need to get them on the road to treat these verticals that actually aren't that economic for the chemical company, but what is economic is the horizontal well decided that has continuous injection of chemicals.
That happened with equipment at the wellhead the chemical companies role is to drop the product monitor the performance downhole monitor a water conditions metal conditions in the whole and production conditions those horizontal wells in our estimation.
Are the ones that will either be left on or come back and recovery.
Versus the verticals so for the entire chemical industry could be looking at a scenario in a couple of years, where more of your work is continuous injection into big horizontal and less of it is old vertical wells that are high and capital needs so that nuances import.
And for us to know about.
The plan for to capitalize on.
And then benefit our shareholders and time.
We think in a normalized market.
C S can resume generating free cash flow.
We think between now and then we'll reduce debt and we'll be looking for ways to reduce the share count.
In other ways to enrich our shareholders I'll now turn it over to Tony for a financial update a then we'll take some questions and I'll give a quick summary.
Thanks, a lot Tom.
As Tom mentioned, our Q1 results demonstrated the company's true potential normal markets CS illustrated its ability to capitalize on existing infrastructure and grow market share in key end markets improve adjusted EBITDAC margins and generate significant free cash flow, although our strong January and February rich.
Holds for negatively impacted by covert 19 related developments in March we were still able to generate near record financial results.
During the quarter. She has generated revenue of 349 million and adjusted EBITDAC of 51.1 million, representing a 14.6% margin compared to 12.6% last quarter and an average of 13.1% during 2019 revenue.
Generated in the U.S. was 228 million, representing 65% of total revenue for the company, we experienced record drilling fluids market share in the quarter at 15% up from 13% in Q4, despite deteriorating drilling counts.
Especially experienced a towards the end of the corridor.
Production chemical activities also increased over prior year, primarily in the Permian and Rocky Mountain regions.
[noise] Canadian revenue of 121 million or 35% get total revenues for the quarter, representing an increase of 12% year over year. This increase was primarily related to the strong drilling activity in the first two months of year and continued operational and financial strength in pure cash.
James production chemicals business.
As Tom mentioned in light of they deteriorating industry conditions and low price environment realized toward the end of the corridor.
We recorded the following nonrecurring items.
11.1 million dollar.
Noncash write down of certain petroleum based inventory products to net realizable value driven by the significant decline and the price of oil, resulting in an associated increase to cost of sales 1.1 million dollar increase to bad debt allowance is driven by increased uncertainty around.
Some collections and the 0.7 million dollar restructuring charge for the Rightsizing initiatives that were executed in March.
Further in the quarter, we recorded goodwill impairment charge of $249 million in her to cash generating units as or I have furnace impairment analysis, which was based on significantly severely depressed market conditions indicated that the recoverable amount of the net assets.
Where these CG use did not exceed their respective carrying values.
In Q1, 2020, Capex spend was $12.4 million or 3.5% of revenue with infrastructure build out largely complete and given the current environment. We have suspended non essential capex and reduce their 2020, capex estimates from $50 million to up to three.
$80 million comprised of approximately 20 million for maintenance Capex and 10 million for expansionary projects that are either considered essential or previously committed to.
C S exited the first quarter with total debt of $426.6 million slight increase from December 31st primarily as a result of working capital build to support higher drilling activity levels in the quarter and a strong U.S. dollar.
Total debt to adjusted EBITDAC at the end of March was 2.4 times, consisting with levels seen at year end.
C. S is focused on financial attributes such as balance sheet management, working capital optimization and prudent capital allocation have resulted in a relatively strong financial position as we would stand current industry conditions with the name to preserve our industry, leading position to benefit from an adventure.
All stabilization and improvement in end markets.
Our balance sheet has benefited from prudent structuring and maturity schedules of our credit facility and her senior notes total debt at the end of Q1 2020 was primarily comprised of the drawn or senior facility and the outstanding principal on her senior notes as at March 31st 2020.
Had a net draw $92.9 million on their senior facility, which does not mature until September 2022.
And currently that net draw is closer to $75 million as the working capital harvest has already begun that the company.
The maximum drawn or senior facility is approximately 250 million dollar Canadian equivalent providing us with approximately $165 million in availability today as at March 31st 2020, we had $291 million.
In senior notes outstanding at a 63 age coupon, which do not mature until October 2024.
From a covenant perspective, while our senior notes or Covenant light, we are subject to two financial covenants under senior facility or senior debt to EBITDAX maximum Covenant is 2.5 times for which we are currently below 0.8 times and as mentioned in experienced before we expect.
Drawn that she infinitely to decline is working capital harvest continues.
Our interest coverage minimum coming into 2.5 times for which we were at 6.5 times at March 31st 2020. Furthermore, our existing senior facility already provides us with an optional step down to 1.5 times, if we need it hard to threeq insects.
One of quarters subject to an asset coverage test in summary, we feel very confident in our current <unk> strong financial position, our ample liquidity and our covenant considerations.
Our focus on companywide working capital optimization resulted in additional free cash flow surplus during 2019, despite flat revenue as and we expect our working capital discipline counter cyclical balance sheet and declining activity levels to result in significant working capital heart.
In 2020.
For reference during the last downturn.
From 2015 to 2016, we experienced a significant working capital recovery going as activity levels fell and our counter cyclical balance sheet significantly minimize liquidity concerns that we're facing most of the oil and gas industry I could tell him from Q4 2014 to Q2.
2016, CSR reduction in working capital surplus of $152.7 million, which allowed us to fully repay our outstanding senior facility and grow cash balances to over $110 million as at June Thirtyth.
2016, and Twentytwenty, we expect to harvest a significant amount of working capital once again, and that's already begun which we believe will allow us to potentially pay down her line and reduce total leverage.
We continually monitor our capital allocation options in the context of market conditions outlook and the levels of her surplus free cash flow generation in Q1, 2020, we made it difficult yet calculated decision to reduce our dividend and as industry conditions continued to worsen we and.
Instead or monthly dividend was suspended on April 16, 2020. This decision will conserve approximately $60 million in cash on an annualized basis in Q2, sorry. In Q1 2020, we also spent $4.8 million undercurrents Yaghi program.
And repurchased 2.3 million shares at an average cost of $2.07 per share.
That repurchase representing approximately 1% diverse shares outstanding.
We will continue to assess share buybacks and bond repurchases in the context of our assessment of market conditions on certainty around our surplus free cash flow levels. We expect both repurchase programs to be muted until we have a better grass that stability and recovery or end markets. We.
We remain responsibly cautious on our outlook for 2020 and beyond in this low price environment. However, we came into this downturn from a position of strength with an excellent first quarter and a strong balance sheet.
In addition to the dividend and then see I'd be suspension, we proactively implemented rightsizing measures, including reductions to executive and board of director's compensation levels reductions in person personnel and overhead costs and elimination of non essential capex our goal through this downturn.
From a financial perspective, just to preserve balance sheet.
Our best very strong balance sheet and to optimize our industry, leading operations and employee base to weather, the downturn and maximize or potential sure when industry conditions improve we remain committed to the safety of our employees. So part of our customers defense of our strong financial position and preservation.
Shareholder value.
Operator at this time I like to turn the call over to you.
To allow us to take any questions.
We will now begin to question answer session.
Joined the question to you May Press Star then one on its like you bet.
Youre, telling it Bosnia request.
Sure there speakerphone, please pick up your handset.
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I would really question. Please press Star then too.
Well pause for a moment as Paul is during the Q.
The first question comes from deal with TD Securities. Please go ahead.
Hey, Good morning, guys. So bureau doing well based on the prepared remarks, it seems like one of the he's a quarter was.
You picked up in your customers across different business line, you called out casing drilling fluids in chicken specifically.
That's a pretty strong margins.
Got there on price, but you also mentioned that you're working with your customers <unk> for that works. So couple of questions on that first I guess did some of the pricing concession, but you made.
Is that more of a Q2 it and it can you get a sense of magnitude and then second have you been successful and retaining some of the new customers you picked up in Q1 as activities falling away and starting to be shut in.
Oh, so Tony and I aren't in the same physical place. So as we answered the questions might to talk over very little to start guys I'm not unlike.
15 16 Aaron.
510% discounts.
On certain types of work and product they might be more than not.
The customers and the vendors or.
Pretty rehearsed on how fast this can change as everyone. On this call knows it is social convention in the oil field.
To renegotiate price every time oil drops and then the service companies fight together back in the recovery.
I can report that Weve added customers since the crash began and some of the new customers that include both drilling fluids and production chemicals. The we have retained those and actually increased our position, particularly with.
One of them as things have gone down there, we a 49 jobs running in the states today in seven in Canada for drilling.
We can squeak by at that and probably not print red ink.
And importantly, not be swimming in inventory of liquid mud.
Will shrink dry goods and all the consumables as we ought to.
And that's why the working capital harvest happens is everyone understands but yeah. We've done we've been able to grow the business in terms of customer list.
And while a lot of the new work is shot in we've replaced competition.
In the production business in the U.S., because we moved quicker we could give them ideas that were different and because of being a basic manufacturer. We have a little more room on the price side, then all the blenders, which is what all mom and Pops, our private equity guys. So really its baker nellcor enough.
Yes that can get serious what the customer. It allows you to retain the relationship and all the hard work you did in the past and then when they go back to making money the suppliers they'll go back to making money. That's how I would summarize all of this the vendors can't make much and hopefully not.
Lose too much when the all the customers are losing and when the worm turns we need to go with them.
On a I'm sure can specifically I suspect that some of that strong margins on a consolidated basis. This quarter for a function of improvements there. So I guess I'm wondering if you take it balances.
Headwinds coming your way in that business versus all the operational improvements that you've made how should we think about margins for that business in Q1 and then.
Well in Q1, they were no longer a drag on the rest of the business, which is a huge part of why overall margins have been creeping up the other three parts of the business.
Had to carry it and that's no longer the case and what that's led to where it is awesome being able to be a little more competitive on price and the other three parts, which has led to growth in market share at acceptable returns well pure Ken has kind of turned it.
Sulfur route.
And we got a lot of stuff shut in in Canada today for pure Cam, but we've been awarded a lot of new business that as the industry Kinda turn things back on.
It's going to be pretty good.
So we have to retain or we have to retain or people and retain these relationships across that award. This work for everyone to benefit in a recovery.
Do you think that you've given you know the decrease in activity.
Do you think you're the pure and what would be a drag going forward on margins or would it be accretive to merge he's in the near term.
Medium and drilling site decreases.
I think it's too early to be really specific but.
Each of the markets is a little different the Rockies is really shot in.
Some people in the Permian are more shot in and others I think it depends what pipeline. They go to what their own capital structure and balance sheet look like and it's the same in Canada.
No. We don't expect pure came to be a drag on the business I think is the answer air.
And.
Personally.
For the first time in a long time really happy with a politician and Canada I think the timing of Keystone is a home run or the country and for the Canadian oil field. It is a path to growth for the basin that didn't exist before.
And we think money will come back into the base and because of that despite Ottawa.
And so that gives us that Emboldens me for pure Kim Alok.
We're gonna says, we're going to we're going to run drilling fluids on wells to drill for gas and condensate.
We're going to have growth in the oil sands in the future we're going to benefit when they grow those wells. We're gonna have benefited from the deep work that use uses the condie to get the oil sand so.
And we're going to treat a bunch of that oil sands production. So we like we like what things look like in a couple of years for Canada.
Karen just to provide a little bit more color. One aspect of your question was which was really to the relative.
Margin expectations of that business, perhaps versus the rest of the company. It as Tom mentioned, there's absolutely no longer is a dried up and there are some quarters, where it's it's close to being a leader in terms of margins, but Q2 is gonna be really really tough for the reasons that Tom mentioned our partners have worked.
He quickly she wants to do those things that we highlighted to ride to just cost structure and a Q2 will be felt by everybody. However, the two production chemicals businesses. We believe we'll start to outperform the drilling fluids businesses as we get into Q3.
And Q4 as these abbvie shut in levels should start to subside and a that all shoes that the other rig counts Ah stay at depressed levels because as soon as goes started coming up so too will the the contributions in the margins and the drugs foods businesses, but in the near term.
Based on the limited visibility that.
I think its right to to ascertain that the margins will then I will be more leaders in the on the production chemicals businesses. Both in a candidate in the U.S., especially as we get through Cheechoo into Q3 in Q4.
Understood.
Last question for me on a purely hypothetical or even anecdotally basis is there anything missing in that portfolio that you might have.
M&A perspective.
Obviously catalyst 26.
16 turned out to be a pretty big strategic wafers, yes is there anything.
Strategic like that.
I'm pausing on the answer Aaron.
There's private equity production chemical companies, there's companies that supply into refining and pipelines.
I'm not sure that's going to be a big focus of the business pretty hard to do M&A, where the dollar stock.
And we think we can create massive value for ourselves I think by doing things organically.
And.
Either buying 75 cents bonds or.
Low price shares instead, but we're always looking and open to things we know.
Where we might like to be in that would have a bigger presence in treating pipelines. The frac market is very beat up that's a small focus for us.
And we're finding is paper thin margins diversification out of energy one day, but right now our focus has bottomed down matches survive and when on the other side.
Understood. Thanks, guys I'll turn it over.
Thanks Aaron.
The next question comes from Great Coleman with National Bank Financial. Please go ahead.
Hey, guys arent.
Good Greg good morning.
Just wanted to start by talking about the market share, but I know a analysts touched on a little bit too and your wins. There you know the the growth strategy in Q1 was going very very well I know, it's a fluid market and an ever changing situation, but we should we be thinking I'm, 30% market share in Canada and 20% in the U.S. is the rubber possible.
Already as we start looking out into 2021 or do you think this is sort of a temporary dislocation that has to do with the current situation and what sort of be reverting back to historic norms as the business like a recovers into the following year.
Oh, well I hope the recoveries next year great.
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Oh baby jumped to my summary point in a recovery, we aspire to be the number one drilling fluid company in North America. We already are in Canada were too in the U.S., We think we're going to one.
We think that because of who are working for where we have infrastructure. The technology that we know we have that others aren't replicating or cap and the will continue to bring new solutions to new problems faster than them.
And we aspire to expand our position that the number three production chemical company.
For North American production, which all emphasize we think will predominantly be from horizontal wells or floods and recoveries that our chemical intensive. So we like the look of the recovery do we like the crashed to create thought not at all but yeah I don't think twice.
20% is out of range at all in the U.S., we kind of half the have that to be number one in North America, and we might do better than that we have the physical infrastructure and the horses to do that.
Got it.
And and my second question has to do with it's sort of a double barrel question regarding balance sheets and capital or capital allocation and whatnot. So so the first part of that is and Tom I think you really addresses and the opening comments I just want to hammer home is it fair to assume that we're we're gonna see the sole use of capital right now as.
Reduction in the Bank line and then building your cash balance as opposed to you know paying off the are trying to pay down the bonds, which have a higher interest rate and also you know trading at a discount because to your point cashes came about sort of point number one and then the second part of that is expectations on the senior line do you believe.
At the peak draw on the seen your line is behind US you know probably around that Q1.
Calendar Q1 end period and that the balance is likely to only fall from the current 75 million level based on your understanding on expectations for working capital harvest and your Capex Your Capex Doug.
Greg we're going to let Tony take this he's actually not even allowing you to have access to the bank account these days.
We're being very conservative and he's in charge.
Yeah. Thanks, Tom.
Greg Bang on Tom outlined the a the high level philosophy. So basically you are right in that and what you said and what Tom laid out at the beginning cashes, Ken and we are going to use that.
Working capital harvest to pay down that line and a and we will come up for air as a as we need to to make decisions on capital allocation, what I would emphasize though is a.
Because that is your comment about whether or not the highest drives behind us. So we were at a we're at 93 million at the end of Q4 and we're currently at 75 million, but think of note is a is the fact that.
We went up to 9500 under in 10 during the period between reporting and that 75 million dollar draw that you saw in our press release and documents yesterday, so not a that trial has already started to crashed.
And the team finance team divisional controllers, a divisional presidents and Tom Oh, we are all laser focused on bringing down that they are controlling that inventory and we're already starting to see an acceleration of the working capital harvest. So.
We believe that that draw that significant or more significant got level is absolutely behind us and we're in the middle of Ah harvesting that working capital.
But we're not taking anything for granted we continue to optimize collections look at a at this gradings of existing and potential customers and ER and accelerate the that harvest because we want to be in a position not necessarily in six months, probably in 48 weeks to come up for air.
Take a look at what we have in that Piggy bank or what we believe is coming and then as we think it's prudent.
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Got it it makes sense going and then one more question last one just shifting gears to.
Well I guess are staying on working capital here for a second but not the the harvest the rather the write down there was a little over $11 million written down in the quarter, just because I'm not as intimately familiar with with inventory accounting and write downs, it's not something which is largely contains a quarter or is that something which will be occurring over the duration of.
The I'm just sort of challenged period here.
At that time, so good question and I think you picked up in some of your comments or in your work that to that it was petroleum based commodity price that other commodities that a that drove that not write down. So we sat there at the end of the quarter took a look at what happened to double B T. I looked at the.
Petroleum based inventory that we had which at that time was about $20 million to $25 million worth of our inventory and ended up with that 11.1 million non cash write down to that inventory I think almost all of that type of write down is behind us.
Yes, there could be a little bit more like that but will not be anywhere near that number.
Got it that's it for me Thanks, a lot guys.
Thanks, Greg.
That's that's one of them keep me Hey, RBC capital markets. Please go ahead.
Hi, Good morning, Thanks for taking my question and hope everybody is doing well I just wanted to ask first off just if we think back to in 2016 for a moment and the revenue levels that you achieved during those times.
If that were to re occur over the next year to year and a half would you expect to see similar margins a war or.
Ah different margins and if so what would be the main contributing factors to a two a differential from from those results in 2016.
I think I'll start off with this one time right I think Keith it's really difficult to compare that to and that simply because the the business has changed in involved a number one we picked up catalyst I think it was in August August September of 2016. So.
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We didn't realize the full potential or the full contribution of that business I eat production chemicals related.
And tell a until into the following year and as I mentioned earlier its [noise].
It's a it's something that we've avoided doing in terms of using that exact play book from that previous downturns, because it's it's very different or if you look at at the or the the twin blocks ones that happened. This time with the oil price war or that I believe has subsided, although that's now.
Being appreciated yet and the bigger thing, which is the convict related collapsing demand, which is the bigger issue I think the big difference is the fact that we expect.
Drilling fluid margins to stay low for longer until we see that rig activity come back up the big Delta right. Now is the Soc that we never saw the level of shut ins that we're experiencing right now and believe we're going to experience for the better part of the next four to eight weeks and.
And and the CRE already with that is and again to address your specific margin question. We expect the the production chemicals businesses to pull us out of the low margins there, we're going to see and in Q2 and often start getting ourselves more quickly in Q3 Q4.
Now what we would have realized across the board in 2016 17 2016 in particular.
Got it thanks for that color Tony I'm not Tom in your prepared remarks, you did mention you added a bit of storage or <unk> in Texas for liquid mud and then you also mentioned that you can avoid I printing ready and get the current 49 levels.
Of drilling fluid jobs can you maybe just comment on you know you're you're you're playbook or your strategy for what to do if things go below those levels and then how that might affect the effective business a into margins a in that scenario.
You bet and all maybe elaborate a little on your last question he I.
I think listeners should expect.
Every single service company to struggle to turn a profit when their customers.
Our printing headline eye popping losses, and not just from write downs.
So I think when oil creeps back to better numbers.
The price concessions will be up for discussion again, and you'll get some of it back Keith So it's going to track the price a crude and they'll be a little bit of a lag because some guys they'll be turkeys and not on or what they said, but most well and we'll get some of it OCC.
Then you know my sort of message to everyone is we believe we can get through this shut ins period as Tony said, we think the next 40 weeks are pretty tough for everyone, but we can get through that financially because of this big quarter and our pocket because for.
Denying jobs in the states does turn a little profit and if we don't run too many mud plants in the states if we.
Take the pain of this 11 million dollar write down now on the value of oil based mud mainly.
We can get that stuff back in the ground in the field and not be printing terrible numbers with it or have to get prices that are on attainable. So then you lose the work.
We can go a little lower than this and make a little or breakeven.
Probably anything under 30 jobs gets pretty tough, but we're not going to blow up our people and our culture in our company for the sake of a month or two so we can stay kind of 10 jobs in Canada, and 35 jobs in the states and they're in concentrated areas.
Which is different than 15 16, we were losing money at 40 jobs in the states in 15, 16, and breaking even at 50, but they were more spread out now everything to the northeast U.S. or the Delaware and if it stays like that the breakeven would be in the thirtys.
And we're going to carry some important people because we need them later and we don't want to compete with them.
And as shut ins come back on whatever losses, we might print for a month or two we think we get back to breaking even or making a little and.
Do better as people get busier and particularly as oil goes up and then you can get some pricing back that's huge.
Got it okay. Thanks for that and just finally, a maybe a clarification on your U.S. market share the current jobs are running.
Is it mainly or [noise], mainly because your current customers have been running more or as you say have you actually won one enough new customers to to grab additional organic here.
Well our second.
Our trailing 12 month basis, our second biggest drilling fluid customer has your old rigs money today.
And our market shares up so it isn't just that we got lucky and our people didn't laid the rig to style. We've won new work and then we've got more as a percentage of the rigs that people are running than we had before the crash.
Got it okay. Thank you very much appreciate you appreciate the color and I'll turn it back now.
Thanks Ricky.
The last question that was I'm going to tell with Altacorp Capital Inc. Please go ahead.
Hey, Mark Oh, that's one question for me Tom You mentioned, you're in your prepared remarks or that you think you can substantially increase your market position coming into this downturn. Just curious if you give an overview as a competitive dynamics and if you've seen any change in attitude or change in.
Strategy going through this downturn from your major competitors.
Yeah. That's a great question. So we're seeing some mom and Pops fall away never thought or what happened.
We've seen.
Baker and slumber, they almost entirely exit pursuing drilling fluids land in North America. They just can't move fast enough and be lean enough to make any money and get the right people, what's really leaves.
A handful of independence in the U.S. One is public one is private equity and then Halliburton and then in Canada. It leaves secure and some independence.
I think there'll be less people.
Buying for the work that's up for grabs after we're going to make it we're seeing.
Questionable pricing coming from one of our competitors, we think the people on the ground or giving prices to customers. So they can keep their jobs because they keep the work.
But the work wouldn't make any money. So we think there was a disconnection from maybe head office to who's controlling pricing at the customer level there.
We don't see halliburton using their balance sheet.
In drilling fluids like they did in 15 16, so if they just stay still with share and we take it from the independence. The private equities that are hitting find actual exhaustion and the mom and pops that are going away.
And then add that to our expansion into the Super majors over the last year.
Kind of willing to stick or an echo and say, we're going to number one.
Gotcha.
Yeah, and it Tim I should qualify that how we measure number one isn't just in market share, it's actually in what value, where we're creating for this business.
Are we the top technical company or we the top financial company or we the top company for culture, we the place that young Petroleum Engineers Warner work, if they don't go work at oil company.
That's how we define number one it's not just do we have 300 jobs and Halliburton as 299, we want to get more for what we do.
Dutch it's important a distinction in terms of nalco have you seen any change in a the way that they come to market now that you know the combination with average Gi and do you expect it that's can have an impact on pricing a they can come with sort of a more bundled solution for production.
Well I'll start by saying, we don't believe the customers want the bundled solution slumber. They had data available for a long time and they're not a relevant player. So we're not convinced that that combination has sales synergy.
Same logic as why we stayed out of equipment for Mod my experience being on my tanks and on location and selling is if you provide the equipment form odd and chemicals and the equipment fails. They don't want to pay for the chemicals. So I think there's more risk than upside.
What we are seen its different Tim as that Baker is being very aggressive on price.
We aren't seeing that from Melco at this point.
I think they want to preserve their margins they've probably lost whatever contribution they were getting from their frac sales because there are not to get up because they've done anything wrong.
But now I listen to Baker do a call a month or two ago and they were pretty clear that they went through the last crash kind of on autopilot and that was not going to happen. This time and they're acting on that they're being aggressive on price.
So I appreciate I'll turn it back.
So that's less than cousin, Yeah give us with Stifel. Please go ahead.
Morning, everyone.
There's been some questions around acquisitions throughout the call maybe approaching this one bit of a different angle.
Are you see any opportunity maybe adds you keep people that may deal with customers that you haven't dealt with historically to help extend some of those verticals are and is that something you might be interesting.
Given I mean, the strength of capital position et cetera. It seems like you should have a fair bit flexibility to go about to try and execute some of those endeavors.
That Mr. Gil eases, the great way to frame. The question, Yeah, we don't want them.
Get private equity off the dying or send anyone to the lake to retire when they sell words can they get the people that can get the work and so we have to preserve our culture our platform our brand a good standing with our customers.
Ideally I don't want to issue any equity to anyone ever again.
So.
What's your investment banker colleagues won't like the here, but.
M&A is low price or are you low likelihood, but we can't say never we have a duty to look at things that could create value when we always will.
Okay. That's.
It's useful and I guess, the other part I guess I'm curious on as we never really talk about international expansion in regards to your business.
Yeah, there's a <unk> you built out North America by and large at this point at what point do you think about start starting to look outside of the current jurisdictions. Your end is another avenue for growth or is it it just something you're not interesting at this point.
We were looking before the crash.
I was personally involved.
Tony was involved.
Ken and Baxter in burn were involved so it has got to our level I, even got Baxter to South America on a trip. So we're all their kicking tires, he doesn't travel well he'll be listening to this and laughing.
It's on the radar for us, but for the next year or two unless we literally got a sponsor that says we really want you to come do this and will help it not lose money in the beginning.
It's kind of on the shelf for awhile, but.
We know that that's the next leg.
We know the next like isn't equipment.
It's to do more of what we already do somewhere else.
Got it.
That's helpful as well I'll turn the call back over thank you very much.
Thanks again.
The next question government doses afterwards check the energy research. Please go ahead.
Good morning, guys and thanks for taking the calls.
I've got a couple of for Tom and then one for Anthony Tom You mentioned it earlier in the and the commentary about the benefits or potentially revenue wise from the Canadian abandonment like you know abandonment of program, where the feds are putting our money and although you know the main provinces in the west or what.
Kind of a business can you see there.
And maybe if there's any magnitude of two to that revenue stream that you're seeing what specifically would you be bringing to the table for that.
Thanks for the question Joseph I'm not amounts of money that will move the needle the Alberta government.
Interestingly and I think it's well intended but it's caused some consternation by the customers. They want the service companies as sort of the general contractor on their billion of abandonments.
Which means.
You know my.
Customer friend that the oil company isn't in charge were in charge, which is not social convention in the oil field at all.
There might be several million dollars of work to win there it might get to and if we hit a home run.
It's really a way for us to expand and clears reputation.
We can do 20 30000 dollar revenue jobs for our environmental services, very little kill fluid needed or chemicals too.
Abandoned most of these wells so it's something to be a lot of revenue for mud.
But if it keeps some people it clear employed it allows them to print a little bit of a positive.
If it helps industry the wins any social license in the country I'd say they it adds up to a positive it's better than not thing what we need is for society to be allowed to go back to functioning so people use oil.
And I'm not I'd be eating that I'm, an expert on when that should happen, but that's what we need.
No the Canadian government would be financing package, especially for the larger companies is pushing this environmental Oh, you know improvement.
Okay, and feel too and stuff like that with your strong science group. So that you have 'em. The chemical side is there any way of leveraging that that's skillset for you to come up with a items that could be potentially decent size revenues, but also helped for companies meet these is struggles that will allow them to tap the.
Financing that the federal government is looking at potentially doing.
Well sure thinking about those things Joseph I'll start by saying, we won't need the government's mean, we're taking employee assistance money like every.
Responsible business should and trying to access to but we're not going to need the government's money for liquidity.
However, if we could get loans that.
End up not needing to be repaid that's probably a nice things. So we're going to keep our eye on what they want to spend money on we're working on the backside with all of our customers constantly on how to recycle water how to use frac flowback water for the next job instead of fresh water.
How to reduce corrosion and pipeline so they spring a leak less often.
How to run drilling fluids in a way that never touches the ground.
That is something amazingly that relatively new say in the last decade in the U.S. and it's been in place in Canada for 25 years. When I started in the field. We still at pits are something that we put water and to flock you laid solids out in dots long since gone.
We handle cleaning up frac ponds for some of the Super majors already so the environmental lens.
There's opportunity, but honestly I think it's more of a penalty to the industry and Canada than a benefit we can't make enough to set off what damage. They keep doing to the industry in my opinion I wish I could say the could.
But I mean, we've been working on technology for clean up of.
Cuttings and tailings and the oil sands for three or four years trying to launch a new mouse trap in this market is pretty tough.
Yeah, but they took for those companies that are hurting.
Probably going to be kind of ever gonna have to push if they're going to be able to access from the producers side that got capital for over 100 million dollar loans. So it's.
The pressures on from the Feds and entered those left of the approach you know with where you want to NDP Greens on side, rather than the conservative. So you know there's gonna have to be some breakthroughs technologically I'm just trying to see if your skill sets a would be able to help there. My last question for Tony I'm, you took the big write down on.
Good well why wouldn't you have just knocked off all of the goodwill and just have a much cleaner balance sheet from just people perspective, looking out and seeing that on the balance sheet.
Yeah, No fair question. It was a it was an objective formulaic approach and when we looked at a at our forecast over that period for the goodwill impairment.
And Ah Onez, we looked at the assumptions that went into driving a boes relative cash flows about valuation.
Became very apparent that are about 100% of the a that Canadian or C.G. use a goodwill would be impaired and based on that objective approach, we got to almost all of not quite but 75% of a of the a U.S.
Our cash generating unit and we don't expect opt to revisit that.
Oh, you don't expect there, there's no pricing point or valuepoint that might make you address it in future quarters.
Yeah look if we're talking in another quarter about a about w. CCI going back down to minus 39, or minus 35, we could be having a different conversation, but right now.
Okay Super Thanks, very much for taking my questions on the stay safe and I Hope all your employees are as well.
[laughter] Q2.
The next question comes from my two weeks with industrial aligned Securities. Please go ahead.
Oh, good morning, I I think most of my questions have been asked that at this point I actually tried to exit the question Q, but was not successful, but but I I will just after a clarification question really quick [laughter] I'm not sure. If you had mentioned earlier in the call I know you mentioned it for the U.S. drilling fluids business.
But how many drilling fluids jobs were being run in Canada through the quarter [laughter].
We ran 884 jobs.
Ah on Albert's through Q1.
And we're down to seven today.
Okay.
That's all for me. Thank you I'll turn it back.
Thanks for your patience.
That's going to lose a question answer session I would like to turn the conference back over to Tom side, as President and CEO for any closing remarks.
Well I'll wrap up by reiterating or that we believe we can get through this shutting period financially that we've got the balance sheet to bleed a little bit so that we don't blow up our company's capabilities on the other side of this.
As those shut ins come back on for our customers.
If we get into the Red that'll move us back into the block.
As covert passes in the world consumes the overhang of oil.
We look to resume generating substantial free cash flow for our shareholders. We aspire to be the number one drilling fluid company in North America on land.
And we aspire to substantially expand our position as the number three production chemical provider to North American land producers.
We commit to our employees to retain are unique culture of working managers, having a sense of urgency solving problems to win work and then building relationships of trust with that customer.
To our customers, we commit to work with you so that both of our business to survive and our relationship survive.
And to our shareholders, we're committed to being prudent to surviving through building in hoarding cash.
And being very strong financially and operationally.
As normal see returns to the world.
With that will wrap up the call and say thank you for your time.
This concludes todays conference call you may disconnect. Your lines. Thank you for participating and have a present day.