Q1 2020 Earnings Call

Good morning, and welcome to the next year oilfield Polish first quarter 2020 conference call.

Thereby during today's call is being recorded.

At this time all participants are in listen only about.

Great question answer session will follow the formal presentation.

For opening remarks that I'm introduction.

I'd like to turn the call over to Kevin Mcdonald, Chief administrative officer and General Counsel for next year. Please go ahead Sir.

Thank you operator, good morning, everyone and welcome to the next tier oilfield solutions, earning conference call to discuss our first quarter 2020 results.

Our call. This morning include statements that speak to the company's expectations outlook or predictions of future, which are considered forward looking statements.

These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control that could cause our actual results to differ materially those expressed or implied by these statements.

We undertake no obligation to revise or update publicly any forward looking statements for any reason.

We refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report.

On form 10-K recent current reports on form 8-K, and other Securities Exchange Commission filings.

Additionally, our comments today also include non-GAAP financial measures.

Additional details in a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our website.

With that I'll turn the call over to Robert Drummond, Chief Executive Officer of next year.

Thank you, Kevin and thanks, everyone for joining the call. This morning.

I'd like to start by addressing the ongoing cobot 19 pandemic that continues to impact so many across the country in around the world.

Partners and the communities in which we operate.

During the first quarter, we quickly implemented a response plan focused on risk mitigation from the office to the well site.

We continue to support our people and hope that by acting quickly and decisively.

We continue to stay ahead of the curve and continue to strengthen our relationships with our customers and partners.

I commend my colleagues across the industry, who have prioritized ever spots and encourage everyone to remain vigilant in protecting themselves and those around them.

Turning to the first quarter.

Despite challenges throughout the quarter, we delivered strong results.

Revenue was $628 million.

3% lower sequentially. Despite only two months of contribution or more will support services business. Following our recent divestiture.

Adjusted EBITDA totaled $72 million.

Paired to $78 million last quarter.

Delivering flat sequential adjusted EBITDA margins.

We had an average of 27 fully utilize completion fleets on this base, we generated annualized adjusted gross profit per fleet of $13.4 million.

Which once again positions us near the top of the competitive stack.

We generated adjusted free cash flow $24 million in the first quarter, excluding onetime inflows.

And I'm proud to report we are nearing completion of our integration related to the keen and seeing Jay merger and have recently captured our targeted run rate cost synergies of $125 million.

From an operating perspective.

Company started out as expected.

Including increased activity as customers got back to work to start the year and budget exhaustion and seasonal headwinds abated.

We averaged 25 pro forma fully utilized frac fleets in the fourth quarter and achieved a steady increase in deployments throughout the first quarter.

<unk> 31 deployed in working fleet in early March.

We were very pleased with our strong start to the year.

Interested though was then faced with sudden unforeseen and unprecedented circumstances.

Including major shocks to both supply and demand beginning in early March.

Cobot 19 has resulted in significant demand destruction for oil products.

Isn't by significant slowdown in worldwide economic activity.

This is also resulted in an increasingly utilize global storage network.

Extreme commodity price volatility.

The onset of unprecedented global oil production shut ins.

While the recent agreement about Opex plus nations, it's part of a path towards improvement.

Commodity prices remain under pressure and supply demand imbalances are forecasted to persist.

As expected.

Producers have responded urgently.

And in a range of ways.

Including drastic reductions in budgets and outright completion stoppages.

Given the Unprecedent pace of deterioration several producers have updated their budgets multiple times over a short period.

As a result.

During the final with the quarter, we experienced a significant decline in our deployed fleet as compared to our first quarter average.

Well the sit situation is fluid as commodity prices remain volatile.

Here's what we believe.

First.

Near term activity will continue to deteriorate and visibility will remain low as producers slash activity in light of a fundamentally full or all storage environment.

We see this manifest with completion activity declines outpacing the rig count reduction.

Second activity declines will take on a variety of arrangement.

Including temporary completion stoppages.

Activity reductions.

Situation remains dynamic almost day to day, making the achievement of schedule efficiency, even more challenging in the near term.

Third.

Not only in P. operators will will be impacted similarly, given varying hedge positions.

Geographic footprint.

Access to storage and financial strength.

For example, we expect activity and gas basins, where we have a sizable footprint to be more stable.

And fourth.

The exact duration and magnitude the downturn is unclear.

Good them by uncertainty related to the virus resolution, it's widespread economic impacts and the need to work through a significant global crude inventory build.

While the downturn in industry activity associated with the Cobot 19 outbreak came on quickly and without warning.

Next year is well positioned to deal with the situation and we are custom to change due to our history.

Strong management processes.

Our culture is focused on constantly challenging the status quo and our customers appreciate our nimbleness and track record of continuous improvement in risk management.

Pollution efficiency and innovation.

We've been quick to deploy new technology and techniques that drive tangible improvements in these areas and we will continue to do so.

We believe and forging lasting partnerships with customers and vendors.

These relationships.

Combined with our People's dedication mobility teamwork collaboration a swift action.

Have continuously led to a differentiated result for us and our partners.

Our company our objective remains the same.

We're determined to be the most cost efficient completion company in the U.S.

By utilizing data and rapidly deploying technology in a process that drives ever improving cost efficiency and safe operations.

The U.S. land in oil and gas business is currently under pressure, but.

But is not permanently shrinking.

Well, we believe it will grow again, when the economy gets restarted.

The call on U.S. production again increases.

As such we've organized ourselves in a manner that will allow for rapid response to future opportunities.

We are preparing for a worst case short term scenario, while preserving our ability to react quickly to opportunities created by our enhanced sales organization.

Our deliberate actions cover two primary pillars.

Directing our balance sheet.

And aligning our cost structure to demand.

Starting with the balance sheet protection.

Where our decisions are centered on preserving cash.

This remains a top priority for next year that will help us navigate these challenging market conditions.

Taking several steps to further fortify our balance sheet position and I'll highlight a few.

First.

We acted decisively to shift our capex playbook.

And reduce future spending.

As previously announced.

We lowered our Twentytwenty total capital expenditures by more than 50% from a previous guidance and reflects a decrease of over 60% as compared to pro forma spending in 2019.

This reduction included idling significant portion of our previously active completion fleets in line with market demand, while narrowing our innovation and technology investments two initiatives with near term returns.

We continue to evaluate all ways to reduce capex, particularly in the event of a prolonged market downturn.

While maintaining our diligent approach to maintenance.

Second.

We recently executed on the divestiture of our well support services business.

Streamline our operations.

Unlocking further cost reductions.

And accelerating approximately five years, a free cash flow onto our balance sheet.

Our sale generated approximately $94 million of total proceeds.

Including $59 million in cash at closing.

$34 million in bonds guaranteed to par by make whole provisions.

March 2021.

With the actions taken.

We actually did the first quarter with total liquidity a $591 million.

[noise] comprised of $489 million in cash.

Including $175 million and revolver draw and $101 million revolver availability.

We expect our actions to further benefit our balance sheet as we continue to navigate the road ahead.

Our customers have expressed confidence in our financial Hill has several have communicated than in the current environment financial strength and sustainability or critical factors and who they choose to partner with.

Our second set.

Aggressive and proactive action involve sizing of operations and cost structure to market demand.

While preserving our ability to react quickly and expand when activity rebounds.

We are nearing completion of the integration of keen and seeing Jay.

In recently achieved our targeted $125 million a run rate cost synergies.

As a result the environment.

We have transitioned our efforts and are now intensely focused on the larger scope of business transformation.

Since early March we removed a significant base of cost from our system across variable and fixed component.

Which are incremental to the $125 million a run rate cost synergies mentioned earlier.

This highly proactive transformation involve planning coordination and execution from our entire team.

We assess the situation accurately in early March.

Started taking actions immediately to significantly reduce the size of our organization and manage cost accordingly.

These cost savings are derived from reducing our headcount.

Operational footprint.

And overhead cost for lower activity levels across multiple geographies.

Our swift and proactive measures respond to near term activity declines as well as longer term structural challenges that streamline.

Simplify and flattened several functions within the organization.

That's taken to streamline the organization are consistent with our strategy and unrelenting focus on optimizing our cost structure.

The advantages of which we will continue to benefit from as the market recovers.

Let's walk through some of the key drivers.

Starting at the top of the company.

We reduced our executive leadership cash costs by approximately 60%.

Including significant reductions in cash compensation from temporary salary and bonus reductions.

We restructured and reduced the size of our senior leadership organization by 40%.

In a way that maximizes our managerial talent with a streamlined team taking on expanded roles.

Our board of directors has taken similar response of measures, including a reduction and the number of directors bought three.

And a 20% reduction in cash compensation inline with the executive team.

We adjusted the size of our overall workforce to a level aligned with expected market demand.

As of today.

We've reduced our workforce by nearly two thirds.

In addition to these workforce actions.

We've implemented compensation reductions for all of our employees.

These combined actions will drive a 75% run rate reduction in October labor cost.

Lowering annual cash compensation expense or more than $400 million.

We've adapted to the current environment swiftly and aggressively by rationalizing our operating in facilities footprint through strategic reduction and consolidation, while maintaining a competitive footprint.

In every basin in which we operate.

These actions have resulted in the reduction of about one third of our commercial sites.

And when factoring in our recent well support services divestiture, we've now exited more than 60% of our sites.

We've addressed nondiscretionary and other costs, including the elimination of about 4.41 K. match.

He suspension of non essential travel.

And long term alignment of arrangement with key suppliers.

Not only will these actions have produced a cost of running our business.

It should also lead to better informed decisions.

Faster response times to customer needs and changes in the ever evolving business environment.

Well necessary.

These actions have been very difficult.

Especially because of the quality of the people involved.

We are humbled by every wants professionalism and understanding during these challenging actions.

The next two people or second to none.

I cannot possibly thank all of them enough what they do for customers.

And our company.

Both historically and in the future.

As I noted.

We sharpened our focus on select.

Hi impact innovation opportunities.

Centered around our surface and digital and they will projects.

During the first half of 2020, we are completing our strategic spend.

On a few key initiatives, we've already committed to.

For 2020. This includes two primary initiatives.

First the upgrade of a portion of our Frac fleet with dual fuel BGB engine technology capable of burning compressed natural gas or field natural gas.

While lowering opex.

Second.

Digital initiatives, including Frac control optimization and equipment health monitoring.

Which we believe will provide a significant opportunity to drive them maintenance spending ended liver capital efficiency over the long term.

We've already seen return on these investments.

As our enhanced service offering was more capable of addressing and maintaining a declining base of customer work.

While our digital initiatives have made our headcount even more efficient.

Dan supports the level of workforce adjustments we've made.

In addition to these great strides we are making across innovation.

Next to further differentiate it through our natural gas oriented position in the Marcellus Utica dating back to the beginning of our company. We maintained a strong customer base that is sustained bar streamlined and well positioned footprint in the region.

Separately.

Last year, we deployed a completion fleet from the U.S. to Saudi Arabia, the a U.S. based contract with our partner Nesser.

Our partnership.

Off to a very good start.

I'm proud of our team's ability to deliver leading service quality and efficiency.

This arrangement benefits all the parties involved.

Furthers nesters business development.

He brings world class efficiencies to the end customer.

We continue to believe this reflects a unique growth opportunity for next year in the future.

Before I pass things over to Kenny I'd like to make a few comments on our industry.

We know this is a cyclical industry, but it's difficult to see thousands of our industry colleagues being released from their jobs.

Employment loss in the sector will be tough when all of us.

At the same time went pathetic do those.

They continue to be impacted by the cobot 19 outbreak.

No two cycles are the same.

But our industry has been through challenging times before our industry and the people in it are strong and resilient.

They stay focused when times get tough.

Innovate when changes needed and are optimistic when our uncertainty is prevalent.

With this as our collective track record.

I'm confident that will persevere once again.

Well come out on the other side with stronger, but perhaps fewer companies.

Dan ready to take advantage of be more constructive market.

And we'll continue to proudly deliver critical energy services for the benefit of Americans and so many around the world.

With that I'll now turn things over to Kenny.

Thank you Robert total first quarter revenue totaled $628 million compared to pro forma revenue of $648 million in the fourth quarter.

The sequential decrease was driven by the divestiture of our well support services business in early March coupled with the pricing impact from Q4 contract Reopeners, which was partially offset by the increase in utilization and strong operational performance.

Total first quarter adjusted EBITDA was $72 million.

Compared to $78 million pro forma adjusted EBITDA in the fourth quarter.

The sequential decrease was due to the divestiture or the wall support services business.

Excluding the Divesture of the segment, our first quarter performance was relatively flat as compared to the fourth quarter.

Price reductions in all basins were partially offset by higher utilization and aggressive cost reductions from both our synergy program and our quick and decisive actions to adjust the challenging market conditions in March.

In our completion services segment first quarter revenue totaled $513 million compared to pro forma revenue of $510 million in the fourth quarter remaining relatively flat.

Well placed in service segment, adjusted gross profit totaled $98 million compared to pro forma adjusted gross profit of $106 million in the fourth quarter.

During the first quarter, we deployed an average of 29 completions fleets.

And when factoring in activity gaps we operated the equivalent of 27 fully utilize fleets.

On a fully utilize basis.

Annualized adjusted gross profit per fleet, which includes fracking bundled wireline.

Totaled $13.4 million compared to pro forma annualized adjusted gross profit of $15.6 million per fleet in the fourth quarter.

Which continues to position next year as a leader and relative peer performance.

In a well construction intervention services segment revenue totaled $57 million compared to pro forma revenue of $58 million in the fourth quarter.

Adjusted gross profit totaled $9 million unchanged as compared to the fourth quarter.

And our will support services segment revenue totaled $58 million compared to pro forma revenue of $81 million in the fourth quarter.

The decrease was driven by the divestiture of the wall support services segment in early March.

As Robert noted our sale generated $94 million, a total proceeds including $59 million in cash at closing before transaction costs escrowed amounts and subject to customary working capital adjustments.

And $34 million and bonds guaranteed to par by a make whole provisions.

Segment, adjusted gross profit totaled $12 million compared to pro forma segment adjusted gross profit of $50 million in the fourth quarter.

Adjusted EBITDA for the first quarter includes management adjustments of approximately $52 million.

The thing primarily of $34 million for impairment of assets, including goodwill.

$30 million, a merger and integration costs.

I mean dollars a market adjustments and $6 million, a noncash stock compensation expense all partially offset.

By the 8 million dollar gain on the sell well support services business.

On the $52 million imagine adjustments during the first quarter approximately $40 million, we're not cash.

First quarter, selling general and administrative expense totaled $57 million compared to pro forma SGN, a if $70 million in the fourth quarter.

Excluding management adjustments adjusted SGN expense totaled $48 million compared to pro forma adjusted SGN, a $54 million in the fourth quarter.

Turning to the balance sheet.

We exited the first quarter with 314 million of cash and 175 man drawn on our revolver for a total of $489 million.

Compared to $255 million, a pro forma cash at the end of the fourth quarter.

Total debt at the end of the first quarter was $512 million.

Net of discounts and deferred finance cost and excluding finance lease obligations compared to $338 million in the fourth quarter.

We made a strategic and defensive decision to draw on our asset base credit facility in March to maximize our cash position during the unprecedented challenges in the market.

Net data. They ended the first quarter was approximately $23 million, resulting in a leverage ratio of near zero on a trailing pro forma 12 month basis.

We exited the first quarter with total available liquidity of approximately $591 million comprised of cash a $489 million, including $175 million of asset based credit facility borrowings and availability of approximately $101 million on our asset base credit facility.

Cash flow from operations was $48 million during the first quarter.

Cash flow using investing activities totaled $39 million driven by maintenance Capex and selected investments in technology.

This resulted in free cash flow $9 million during the first quarter.

Excluding $15 million, a merger and integration cash cost adjusted free cash flow totaled $24 million in the first quarter.

Due to ongoing market volatility and uncertainty, we're not going to provide forward looking guidance on activity levels or financials.

Nevertheless, we can provide some color regarding our recent activity evolution.

As we reported we had 31 fleets deployed in working as recently as early March.

That number declined by more than half by the end of April and we would expect further declines in line with overall market activity.

We are however, also prepared to address potential market opportunities that could provide a range of activity profiles.

You can see from a cost control measures, we've already taken that we're being cautious regarding near term activity as our customers deal with the current inventory issues.

With that I'll hand, it back to Robert for closing comments.

Thanks Kenny.

We announced yesterday that after nearly a decade dedicated servicing keen and now next year.

Greg Pablo will be leaving the company later this month.

Greg has been a key element to our success since the very beginning.

And critical roles in every single milestone achievement throughout our company's evolution.

My company with a single fleet in the northeast.

Leading completions provider in the country.

I've been privilege to work closely with Greg. These last several years and consider him to be one of the most talented leaders and executives that I've ever partnered with.

We thank him for executing a world class integration process that will benefit next year on an ongoing basis.

Greg has left an enduring market our organization and its impact will continue to benefit us over the long term I know I speak on behalf of all of our stakeholders.

He will be missed and we wish him nothing but continued success in the future.

Before we open up the lines for Q and I I'd like to leave everyone with several point.

First.

Energy industry is in the midst of an unexpected and unprecedented downturn.

The impacts are likely to be experienced for an extended period of time and only the strongest will survive.

Second.

Financial strength remains Paramount.

We quit quickly pivoted to balance sheet protection by focusing our capital expenditures.

Aligning with market activity and driving additional cost reductions.

Fortified balance sheet positions us to last and persevere.

Third.

Our platform at strategy continue to differentiate next tier.

This includes our unique international outlet.

Bracted gas, which basin exposure in the northeast.

Platform for innovation.

In a base a fresh equipment.

Finally, we have a strong management system.

And a long track record of meeting our commitments.

Forging lasting partnerships.

Maintaining capital discipline.

And efficiently integrating consolidations.

Well the challenge ahead is real.

We are well positioned for the long haul and I like our relative position in the market now.

In in the future.

So in closing.

And thank our customers for their loyalty and commitment and assure them. They were here for them for the long term as they navigate this period of low commodity prices.

I want to thank the next tier team.

Including management.

In our hard work in field employees for their extra efforts.

We're focused on our customers.

Their loyalty.

And the dedication to safety and efficiency.

I simply could not be surrounded by better people.

We are working together to create opportunities that will allow us to encourage our departed comrades to rejoin the team.

Through our shareholders.

And other stakeholders.

We are managing the company for the long haul and we'll continue to work diligently to protect our strong balance sheet to give us the continued ability to that both offensively and defensively as the market gets sorted out in the coming quarters.

With that we'd now like to open up the lines for Q and I.

Thank you we will now begin the question and answer session.

Yes. Good question you May Press Star then one touched on.

If you're using it speakerphone, please pick up your hand pressing the key.

Well Joe Your question. Please press Star then Tim.

At this time, well, Paul momentarily to assemble Uh huh.

My first question comes from Sean Meakim with JP Morgan. Please go ahead.

Robert Kennedy morning.

Hey, good morning, I don't want to shop.

Thanks for all the.

We're going through all the specific cost actions you've taken both the integration as well as reacting to the current environment.

When you re size the fixed cost structure is there any reason it look materially different than what Standalone key made it looked like.

Back in 2018, just considering how few fleet you will likely be running and later on 2020.

And how long it does it take you to get there.

Thanks for the question Sean.

Definitely we looked at it from from that lands and anticipate being able to a.

To create an S.G. and I structure that is in tune with you know keen prior to the merger we're seeing today, if not somewhat smaller considering the current activity status. When do we expect to make it we made a little bit of progress you can see in Q1, we're making a huge amount of progress or since college.

The second week of March and we intend to get there in Q3, you'll see that Kinney would you give little more color, perhaps yeah on the SGN I. I mean, we're seeing a nearly a 40% reduction in Q2 versus Q1, you know just side that we are seeing the benefit of the well serviced.

In divestiture as we had planned in terms of SGN a reduction so all those combined we're gonna see a significant reduction in Q2 as we as we head towards Q3 and potentially getting below the 80 main annualized.

Got it that's very helpful. Thank you and then I guess.

Recognizing the difficulty in forecasting without any visibility.

Can we just talk about.

What your what you'll manage the business too in the near term. So in other words and maintain that fortified balance sheet you need to avoid burning cash for an extended period of time, how confident are you in your ability to sustain positive cash margins net of maintenance capital.

Company overhead if we assume that activity stays fairly low through 21.

Yes, good question look.

The reason, we might pick in a position I'm not being able to provide a lot of guidance like we've done in the past is simply because scenario for us owner revenue side.

It is extremely still uncertain and there's no question that a the activity we've already we're experiencing significant.

Downward activity.

But but on the cost side you know we tried to give a lot of guidance. There because we are I would say planning for a worst case kinda short term interim immediate term scenario.

And taking out dramatic cost as you saw as much is 75% of our of our total compensation line.

But.

When we look at.

What our activity looks like going forward.

I think you got to be able to first predict and be able to you know estimate what the total market.

Frac capacity is going to look like and then look at it. This is this is me given a little bit a guy that look at it through our historical market market share perspective, and we've got a been in a range.

Of 8% to 12% of the active fleet deployed in the market.

That's been true you know kind of through the process, we're obviously work into to increase that.

But the bottom line is that we're sizing the organization for this.

Kinda Q2, Q3 scenario, where the operators are dealing with a full storage environment and how are having to shut in.

Shut in production.

Can you want to add a little more color.

Yeah on the second part of your question Sean on the cash flow May look we've looked at the scenarios and how they can play out but.

But even if it stays at these levels that we see here through 2020, I'll just tell you what we see.

We do see positive free cash flow generation for 2020.

Well, we'll be able to increase our cash balance at year end of 255. This obviously doesn't include any borrowings.

This will be helped by our significant working capital that we will liquidate.

And in addition, I just want to mention as we're talking about longer term into 2021, we do have that 40 $34 million bond capture.

Look the sets us up for 2021 for whatever brings whether we have to pay off since all we have to play defense.

No I would also add that we're really not going to try to necessarily optimize the cost structure of the company for the absolute bottom what a market.

I would rather focus on maximizing liquidity, so that we got enough room to deal with a defensive not would dip at the deposit dealing with a defensive aspects now, but we also want to have the runway.

Working capital runway to deal with the ultimate rebound in activity.

So we kind of balancing those two.

It's very helpful feedback.

Thanks.

They show.

Our next question comes from Tommy No let Stephen Please go ahead.

Good morning, and thanks for taking my question.

Thanks, Tom.

[noise] Robert for the fleets that are currently active.

What kind of visibility if any you have for the calendar is even in the just becoming days weeks months.

And then as we proceed through the rest of this quarter and a third quarter.

What's the go no go decision based on when you're deciding how many of those to keep acted as it just shows.

Sharing your free cash flow breakeven after maintenance or is there another way to think about it.

So good question Tommy Yeah, I would just want to say that the visibility we have is linked to the visibility that our customers out.

And if you noticed lot of the market MP operators or change in their capex guidance pretty frequently as as the clarity becomes more clear about working they.

But their dedication.

We have loyal very loyal customer base and in other sticking with us or as we go through this but it is very difficult to put you put a put your finger on.

Wow out part of Q2 and a in Q3.

We do have a customers that are making plans to a scenario planning that could have some variation there.

As far as.

You know, how we size ourself.

And how many fleets we keep deployed.

It's very much I guess the same is for us as it is.

In the upper side of the market in the sense that.

We're going to size ARCEP, what we know we got common.

Plus.

A little bit of flexibility to take advantage of opportunities. So the the number of fleets that we have deployed.

We'll move pretty rapidly.

With the market outlook.

And you can see from the guidance that we gave about.

Reducing our headcount by two thirds gives you a little bit a view of how dramatically activity change has occurred and I know you everyone's kind of looking for a little bit Gannett's and I would just say you know we talked about in Q1 that we were at reached a peak at 31 deployed fleets.

We are now and I can tell you what we do know is it we exited April on an average of about 17.

In the fleet count is going down from there you know the market projections by many of all of US have a has placed it.

Ranging from 55 to 100 fleets in the market and we we would be in that band as well as wide as it is.

Did I did I catch all that question Tom.

Yes, Sir that's very helpful. Thank you.

Oh pivoting to a bigger picture question for you Robert.

Consolidation, it's been a big part of the company's history.

And during this downturn I suspect, we're going to see more opportunities to do so.

But on the other hand here the third largest player in the North American completions market now, there's a largest pure play so I wonder as we go into this downturn.

As it makes sense to continue consolidating or do you look at your asset base now thanks.

It it's it full scale and there may not be a need to continue to add.

I think I appreciate the question I would say.

First we fully appreciate from the macro perspective, the benefits of consolidation given the ability to rationalize assets.

Yeah, We've got track record of success doing it and most recently demonstrated the good integration process that we've done with CNG.

But for US you know the strict strategic rationale is gonna be extremely important.

Yeah, we're going to hold of very high bar, you know to screen the opportunities but.

It wouldn't be a case I don't think where we'd see us taking out too much leverage to do it and it would be would be aimed at stock transactions.

That would be accretive to our shareholders from the beginning.

But having said all that I do want to say, we go into it with an open mind.

You know, we've obviously got a view of the competitive landscape in North America enough constantly taking a look at the end and I'm sure so or potential counterparties.

And then if that's kind of the logic.

But.

These conditions it had to be very good.

And I would say as we get further along and get our reaction time or our reaction finished to this current scenario that we may investigate.

You know maybe other ideas around consolidation that are not purely frac.

We keep in mind open to that as well.

So we are just now digesting the CNG ideal and you know will not aggressively in that mode.

<unk>.

Well I would ask you for example.

What.

An area might be outside of Frac, if you're willing to give it but assuming you may not be at this point called.

I'll also be happy to turn it back to appreciate the question. That's yeah look appreciate I appreciate that last part of the question I would just say is that we're in very early days, there and not looking for somewhere that.

Our management team could add value and where the you know the this the.

Industrial logic had some tend to what we do today.

Fair enough questions Robert.

Yes, Sir.

Our next question comes from <unk> be Okay with Cowen. Please go ahead.

Hey, thanks.

Kenny I just wanted to go back to your comment about the the free cash throughout the year I thought I heard you say something about a 200 million number at the ended the year and I, just maybe I misheard because I'm looking at the cash balance right. Now for 90 can you just kind of run through what your commentary was there again.

Yeah sure. So I was just pointing out that you know from what we see today. If Q2 stayed the way. It is through 2020 that we would see a positive free cash flow generation, increasing 2020, ending cash over our ending balance of 2019. The to 55 that was the comp gotcha gotcha. Okay. That's that's great.

And in terms of the the working cap expectation there can you talk a little bit about how much you would expect to release.

In that commentary.

What's really look when we are using.

Sure when we put the two companies together you know as we said we identified a lot opportunities on working capital efficiencies.

On the client side, we still seems a lot of opportunity to incrementally increase that working capital efficiency and even on the supplier side, we've been making really good inroads collaborative the cooperatively with our supply base. So we still see a trend of working capital efficiency that we called out last quarter in terms of incur.

The middle efficiency.

But you know in general when this market environment. This downturn, you're going to see working capital being a significant contributor to our free cash flow from both our incremental efforts and also the shape of the revenue in the activity. So I would just say, it's gonna be significant portion of our free cash flow generation.

In 2000, Tony.

Okay fair enough.

Yeah in terms of the the exposure to gas basins can you can you help maybe say how many fleet you have there and maybe you know if there's any any visibility on what that piece does over the next couple of quarters, given indications from customers and so forth.

So thanks for the question more [noise].

We havent really given any guide on for competitive reasons, how many fleets we have operating in a in the gas basin, but I would point out that you know keen originated in the Marcellus Utica region, and we've had a very consistent customer base that we've actually been able to grow a little bit and the last couple of quarters.

So it will it is a becoming with the oil situation, we have even bigger contributing factor for for our overall activity profile.

As far as a.

The relative prospects and gas versus oil. It is distinguish itself as we look out and the next few quarters. If you can you see that commodity pricing a bit.

So we are really like the position that we have and we had taken some actions a couple of quarters ago to kind of.

You know rationalize our footprint in the northeast that made us even more cost competitive up there. So we've been able to a show that to our customers, while maintaining our consistent service efficiency and safety record up there. So we like it a lot it's important to us and we got some very good customers I believe the best ones operating in.

In the region.

Okay. Thanks for that Robert I'll turn it back.

Thanks Mark.

Our next question comes from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning, gentlemen.

Good morning.

Robert.

Longer term view here, how do you think about how the completion business evolves here in the U.S., how does the industry help the M p's side incremental efficiency gains, but also make a marginal and the process I'm sure. There's a digital angle to this but in addition, I previously mentioned.

Adding non tracked businesses is that simply from a diversification angle is there a bundling angle here in terms of how you go to market are there new contract models, possibly that you're contemplating just overall, how do you think about how you help customers drive additional efficiency gains, but also capture some margin for yourselves and the process.

Yes.

That's good question.

Look there's a lot that we can continue to do them the efficiency perspective.

As we look into the future I do believe first from a macro perspective that the call on U.S. production is going to come back or the bigger much bigger question is kind of maybe when and when it does that the customers. They I mean, the competitors are the opera service companies that can deliver the most cost effective.

Cost efficient service with the ones that went out the most.

As far as what other services, you would want to roll into that I would say.

As a service company can increase the scope of the other services I bought in the completion network the opportunity to leverage fixed cost and the opportunity to improve efficiency on a bigger scale is a is increasing <unk>.

We went through a phase where the operators we're doing some vertical integration and you know it was.

Prevalent even as we come out of Q1.

Because they had challenges at some point to the cycle gaining access.

We believe that.

As things move into the future if the service company like us can put together a bigger scope.

It will have more to work with to take efficiencies.

Further, but Mike Mike efficiencies even more.

Prevalent.

So that's one one avenue.

We've been about a year into the investments into our digital programs that are really focused own primarily just that.

You're talking about some of the bigger service companies speaking a digital they're often talking about revenue opportunities generated by digital but just wants distinguish ourselves at the stage. We're in today, our investments around improving cost efficiency [noise].

We rolled out next hub in last quarter's call <unk>.

This is a center for bringing in logistics and equipment health monitoring and the Ali operations around a wellsite into a hub. So we can leverage talent leverage our engineering across a bigger scope, reducing the total number of people required to do job for example.

Lowering the you know the equipment health monitoring aspect of the digital program as you know, having the data where you need it and when you need to make decisions to prevent early failures of equipment. For example, we think these programs had the capability to take 20% to 30% out of our operating maintenance cost profile over time by eliminating.

Early failures, you didn't using artificial intelligence to how you control the pump systems themselves.

So there is scope increase and through digital applications and you know through blocking and tackling that were very good at when it comes in general efficiencies and working closely with customer partners.

We think there's a lot more to be had there and I think customer's going to be very sensitive and looking at that in the future and that's what we think preferentially our market share is going to increase overtime.

Well I appreciate a lot of science.

No no everyone's reacting to the market right now they both you and your customers.

Talk with you have the senior leaders that are your customers are there side conversations today of ground expanding the envelope of services to the top tier provider like like next year can can bring to the well site or just taking their business can be more of a push from the services industry or is there to give you some pull from customers.

I'm just kind of have a have a shift in the model here you know moving away from that Alkar model, then maybe towards a more and more bundling of services here in the U.S.

Look it's got say, it's early debt early days for sure but.

Just thinking about the operators dealing with the scenarios, it's tough for them to do a low commodity prices and when they start really dig into their organizations like we or they're looking for ways to rationalize cost and productivity every way possible and I think it's going to be a process that we're going to try to.

Create a bit but there's been a little bit of discussions in that area, but it's definitely early innings.

Got it appreciate the color.

Yes. Thank you.

Our next question comes from Stephen Gengaro with.

Okay go ahead.

Thanks, Good morning.

Let's take two things you'd am I just wanted to follow up just I'm on an earlier question I think from Mark.

Your cash balance comment that you made you ended 2019 it to 55 it jumped in the first quarter is your comment around.

Right from your end 19 to 20, where do you can you give any color where do you think you'll be relative to the end of the first core.

[noise] yeah. It is arise from from from.

It's a rise from from year end to the end of the year, we're not going to give any color on on Q2.

But what we are saying is that excluding our ABL draw we will have incremental cash on our balance sheet by the end of the year versus year end 2019.

Okay. Great. Thank you you do you see working capital liquidation from these levels, though is that fair.

Yes.

Okay.

And then thank you and then just one follow up as we think about your maintenance Capex per fleet per year, you know with <unk>.

Leach being.

And I'm sure. Some negotiations how should we think about that number for the balance Oh 2020 is it is it coming down at all versus history, or if it gets pretty stagnant versus where it's Ben.

Now, let's assume 2019, you know we averaged about $4 million a maintenance capex for fleet.

We committed to reducing that's about three and a half to for what we're seeing today to achieve our guidance of 100 220 million in 2020.

We're going to achieve about a 20% to 30% per fleet reduction offer that three and a half the $4 million per fleet.

Hi, I'm going to achieve <unk>. Thank you.

One of the factors in achieving that will be some inventory consumption as well as the fact that we're running smaller a smaller fleet of of asset.

Thank you Andy just one follow up to that as you as you have discussions with customers.

Now I know things are extremely dynamic are you seeing a strong preference or <unk> ability to deploy some of the newer assets are more rapidly or is there a big customer preference or is it or is it true.

Or is it too volatile right now to have a good sense.

I would say most of our customers are are focused on the key performance indicators on how they run a business you know it's a home it's a mix of the equipment in the people in a process and everything but I would say that the investments that we called out that we made.

And the firm front half of this year and let the latter part of last year around dual fuel has been you know a preferential a little bit in a market not everywhere steel and there's a long ways from being everywhere can't supply feel gas everywhere needs needs to be but.

Assets that can burn natural gas CNG, our diesel do have some places in the market where they are preferred.

Hence our investment.

Okay. Thank you for the common Sheldon.

Thank you pretty question.

Our next question comes from Chris Valley with Wells Fargo. Please go ahead.

Thanks, Good morning.

Morning.

So thanks for all the clarity on that on the cash front I'm. Just curious me give a little more color. Obviously to Q is you know very volatile we've had a lot of cost come out as well can you give a little bit of sense around EBITDA, whether you expect that could be.

Whether break even as a decent bogey to think about for the quarter, because I know, there's a pretty wide range on how could shake out and given you know if anybody that have so far just curious if you can give kind of a benchmark on EBITDA.

Okay. That's what we meant when we said we weren't really going to be able to guide because while we've given a lot of pretty clear guidance on the cost side.

You know the fluctuation on a in activity day to day makes it very difficult to predict you know your revenue side of it.

So uh huh.

The range is pretty broad compendium dependent upon how many active fleet you can work in.

In a time like this you know where the the customers or change in their minds a lot. It's not the most efficient operating environment to operate in so white space in the schedule or efficiency can be a bit less you know kind of kinda during those periods.

But you know it's not so much about.

The short term Q2 Q3.

We're focused on we're obviously taking out.

A large amount of cost demonstrating that we got our eyes on a ball there, but I'd say protecting the balance sheet and the liquidity position to give us the ability to capture the value. This can be in them in this marketplace. Once things do get kinda Sorta, then we can get a more clear view of what the activity profile is gonna.

Look like I.

I think there's where the more the most value creation is going to occur in our space is a company is best positioned to do that we're going to both obviously, but we're going to be focused on having that liquidity. The gives us the ability had the working capital platform to capture the growth you know as it gets into next year or the your after that.

Even.

But even in the worst case scenario like Q2.

Boy trying to make is it we're going to have more cash.

Next year at the beginning of the year than we do this year. Thanks to the were working capital in input and we're going to be very well positioned to deal with it.

As a defensive mode at the market's bad or offensively, if the market gives us a lot opportunity.

Okay. That's fair Thanks, and then to follow up obviously activity is the big mover, but there's been a lot of request for pricing so different answers from some of your peers on whether there's movement there, but given how hard it. It's a call back have you seen much of a change in pricing and if so can you quantify.

Yes. So you know, we we said last quarter that as we rolled into the beginning this year as much like the year before that we did have to yield pricing in a week, we would typically call I know those.

Pricing concessions back doing proved deficiency in better cost management, we're rone that tracking Q1, if you notice that our margins EBITDA margins flat versus Q4 that was with price concession similar to the year before.

After the virus scenario when people were shuffling to get through get Tupperware right. Now there were some further price concessions and we've had further cost reductions as well, but but it's still very fluid and you know we wouldn't go try to quantified but.

Just keeping in mind to the decisions we make around pricing are going to go back to my previous comments that were trying to manage the cash and manage the balance sheet to give us the longest runway and the most opportunity on the upside.

Yeah, Okay. Thank you.

<unk>.

Our next question comes from chain smoking him with Bank of America. Please go ahead.

Hey, Thanks for squeezing me in general.

I'm glad to check yet so.

Thanks, Robert I guess first question I had I just want to make sure that I've heard you right. I think you I think I've heard you say you exited April 17th fleets.

Can you confirm that.

And if so.

That's actually a little bit better than the rig count is down since then and definitely better than what we're hearing from some of your peers. So you know maybe if you can kinda talk about is their customer concentration or something something that that is helping your kind to outperform your peers. When we think about you know how many active fleet you have out there today.

Such as I clarify only by saying that that was an average number and at the Baxalta April was obviously lower than the entry point of April.

I would also say that.

In a more in a mode. We're in right now and overall market. It depends on kind of how are you working for on the timing as it relates to you know kind of whose shutting down operations and where they're at in a pad or whatever but lots of different factors.

So you know I think that.

Comment I made about market share is one that I would say that we so I think a little bit blip to the upside on market share in April we did but you know how that shakes out the rest of quarter difficult to predict.

Okay, all right and then so how we should think about it is just 8% to 12% market share as we go forward, we all make old assumptions about you know the fleet count, but then when we think about profitability.

I don't know if you know I know you probably don't want to speak to Twoq, you, specifically, but just how should we through the year in I'm just kind of walk us through you know overall, how you see how we should be thinking about you know gross profit per fleet for the remainder of the year I don't know if you want to give us an exact numbers, but do you think it will remain positive on average for the rest.

Here.

Just look every single part of the piano is influx revenue every single cost line.

And I would just say as can be very difficult to look at the business. The same way. We had you know previously during these during Q2 and perhaps even a reported Q3.

We do have a fixed cost base that we're trying to lower and every manner possible outside of labor, even you know, especially.

And that that that as you get to a smaller fleet count that as plot across that makes it a makes it challenging so is there a range of profitability in tune with the range market share, yes, good that range dip into negative territory in the bottom of cycle you know yes.

And would is that what we foresee a you know we have when we're not going to try to god that because it's too difficult on the top line right now.

Like the way you categorize it get you got that 8% to 12% market share range to look at when you're doing your modeling on that on on the total market and give you a view of it.

And that combined with our guidance on taking $400 million out of our out of a compensation line and give you a good feel I think for where the ranges looked like.

Yeah, I would just because you know our our cost. So has we've always said our costs are highly variable.

And I mean, I believe that we've demonstrated what the cost actions that we've taken properly that that they are variable.

Maybe if I can comment on the Decrementals, if you look at our history.

We have been able to deliver decent decrementals I mean, I'll take Q4 versus Q3 is less than 25%.

I mean, I would I would say I would say that a good result will that would have similar decrementals and Q2 versus Q1.

Yeah, and I'd also add that you know when you think about the cuts we've already made I think we've been in most proactive in in a market as far as deciding to do it quaking in implementing it.

Was that.

If you were trying to size the organization for the worst part of this production shut down in the U.S. you'd have to cut a lot more muscle out of the organization than we've done and we think it's important to be able to protect that to perhaps furloughs and still layoffs or keep in a oh crew or two available to.

Take care of the opportunities its sales pipeline, bringing forward.

But the main thing I want to point out is we really do think the value creation prospects around having your assets ready to go having a muscled up staff ready to man them up and having the balance sheet and liquidity associated with being able to fund all that and we really set up very well for.

For all three of those and one point I wanted to make is when you got this kinda fluctuation in activity were bottoms falling out of a of completion activity in just one quarter. How you protect those assets are very key in the program that we got put in place I'm extremely pleased.

Using our digital program that this new as well to be able to give us a virtual understanding of where every every component is placed and how it's being maintained while in warm stack. So.

We were looking at all three of those aspects.

Okay. All right that's very helpful I'll turn it back over.

Thank you.

Yeah.

It was it was a little more Q. Our next question comes from of course diagonally Altacorp capital. Please go ahead.

Oh, Thanks for taking my question.

Oh, Yeah, you sent one fleet to Saudi Arabia, do you see prospects for additional in future number one and number two how much horsepower does that involve.

Thank you for the question are we did send a fleet.

A while back it's been working very successfully in the unconventional.

Our field ins and Saudi on unconventional gas.

In conjunction with our partner Nesser.

As the from the from a partner in that in it and that arrangement and managing all the business development.

We stated a couple of times that we see this is a is a growth opportunity for ourselves on a very much linked to nesters ability to.

Continued to create business development opportunities.

So, yes, or how many how many horsepower I would say you know you got about about a 1.25 of the fleet of a conventional horsepower fleet from the U.S. in country. There now and we believe the prospects for adding to that in the near term or are pretty good.

Yeah.

And how do you account for the revenues and costs and margins for that what's the what's what's the right way to think about it.

<unk>.

I would just say that there are incremental to our U.S. dollars and margins.

Okay. So it's just fully consolidated all of the revenues and cost.

That's correct and our completion services segment.

Okay, and then in terms of you guided to SGN aid down I missed that number you said S. You name would be down by almost how much in the second quarter.

Nearly 40% versus Q1.

Okay could you provide any guidance on the DNA side as well.

Yeah. So look on the on the DNA side, we're gonna be less than $300 million for the full year, so significant reduction versus last year with the purchase Oh CNG in the purchase accounting.

Okay, and then in terms of non cash compensation for Q2 and onwards any any guidance there.

I would say it's me in line with Q1, maybe a little bit down.

Yeah.

Great. Thank you very much my question's been answered.

Thank you for the question.

Ladies and gentlemen, we have great stand up the question and answer fashion.

I would like to turn the call back to Mr., Robert Johnson for any closing remarks.

Yes. This could be thank you very much for participating in today's call and your interest in next year Hope you got to stay safe environment and look forward to senior thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.