Q1 2020 Earnings Call
Good day and welcome to the neighbors first quarter 2020 earnings conference call.
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After today's presentation, there will be an opportunity to ask questions.
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I like to turn the call first ever too well you called <unk> Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone.
If you ever joining neighbors first quarter earnings conference call today, we will follow our usual customary format.
Tony Petrello, our chairman, President and Chief Executive Officer, and William Restrepo, Our Chief Financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect neighbors to perform in these markets.
In support of these remarks slide deck is available.
As a downloaded within the webcast and in the Investor Relations section of neighbors Dot com.
Instructions for the replay of this call are posted on the website as well.
With US today in addition to Tony Williams, and myself are still <unk> president of our global drilling organization and other members of the senior management team.
Since much of our commentary today will include our forward expectations. They may constitute forward looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 934.
Such forward looking statements are subject to risks and uncertainties as disclosed my neighbors from time to time in our filings with the Securities and Exchange Commission.
As a result of these factors our actual results may vary materially from those indicated or implied by such forward looking statements.
Also during the call we may discuss certain non-GAAP financial measures such as net debt adjusted operating income adjusted EBITDA and free cash flow.
All references to EBITDA made by either Tony or William during their presentation, whether qualified by the word adjusted or otherwise mean adjusted EBITDA as that term is to find on our website and in our earnings release Likewise, unless the context clearly indicate otherwise references to cash flow mean free cash flow.
As that non-GAAP measure is defined in our earnings release, we oppose it to the Investor Relations section of our website. A reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures now I will turn the call never to Tony to begin.
Good afternoon. Thank you for joining us as we review our results for the first quarter 2020.
Our format. This morning, we'll diverge someone come our usual.
We'll begin with comments on our actions is why does the current environment.
I will follow with a discussion of the market.
A result, and the outlook.
William will follow with the financial highlights.
And I will then wrap up.
Let me begin by commending our keyboards tireless efforts to ensure the health of our global workforce as to maintain the continuity of a worldwide operations.
Our primary focus has been to protect the safety of our employees on our rates and operating locations and then our offices.
The quarter Vivus pandemic has presented an extraordinary challenge to the global population and economy.
Neighbors, we mobilized our worldwide crisis response team early on.
A quick action and detailed preparations of the neighbors crisis management team in close cooperation with customers and local authorities as minimize the impact where people as the business.
Today, we have a curious fewer than 10 cases, among our 14000 employees.
The current business environment with significant demand destruction, resulting from the fast striking pandemic is without precedent.
So now interrupted battle for market share between truly oil exporters exacerbated the drop in oil prices over the past month.
Our customers in the U.S. have reacted swiftly and decisively coding activity deeper and faster than we have ever see previously.
The sharp reductions and the current uncertainty on the duration require equally swift and decisive actions they work field service providers.
Nabors is no exception.
We have seen several deep downturns before we have proven experience managing sharp declines activity by lowering costs and navigating through the additional challenges posed by security capital markets.
In line with the reduction in drilling activity, we have put in place normal reductions in variable costs. In addition, we have a number of specific actions target at materially cutting overhead costs, that's supporting our free cash flow.
These actions include first several actions related to our fixed cost structure.
We have adjusted our corporate structure temporarily reduced conversations water company and right size, our field support organization, we expect to realize savings of $85 million over to be ready three quarters of 2020 from these actions.
Second in late March we announced reduction of 2020 capital spending totaling $75 million below our 2020 plan.
That's what our estimated annual Capex to a range of 275 to 295 million.
We're now targeting additional cuts a 45 million that would take our 2020 Capex to 240 million. This compares to 420 billion in 20 on team.
Lastly, the management team made it a recommendation to the board of directors to suspend the dividend payout common shares.
[laughter] suspension should save over $7 million for the balance of 2020 and double that amount annually.
As mentioned all of these actions are aimed at mitigating the impact of lower industry activity on our financial results well supporting the generation of free cash flow and our target a reduction in that that.
Our strategy focuses on technology automation and integration, we aim to generate additional value for customers, while delivering higher margins are reducing capital intensity.
This combination improves our competitiveness and enables us to generate free cash flow, even a difficult markets. In summary, we are significantly better position today that we were approaching the 2015 downturn.
Among the most significant initiatives, we improved our competitive position lower 48, we invested in innovative and cost efficient rig designs. We now have a fleet of the industry's highest specification rigs.
Just as importantly, we invested in systems and processes, which have generated industry, leading drilling performance.
And we have left the market it is developmental drilling automation software.
These actions have helped us stress and expanding relationships with our customers.
These trends they said to enhance revenue opportunities improved margins and more resilient market share.
We've also expanded the breadth of the Mds and Canrig service and product lines with the acquisition that Scott.
The addition of this higher return lower capital intensity portfolio improves our penetration with customers our track record in these businesses as to our competitive leverage in the current market.
Our son, a joint venture in Saudi Arabia creates unique alignment of interest between neighbors and the world's largest energy company. This alignment should continue to prove beneficial to the JV, especially in the current environment.
Finally, we made significant progress the liability management is the last few months, we effectively pushed out the maturity of approximately $1 billion of our debt by more than four years. We also amended our revolver with more relevant terms that provides more flexibility.
All the above actions create a foundation for moving forward through today's challenges, we intend to aggressively into our playbook to manage the impact of this downturn and to emerge as an even stronger company.
With that let me now spend a few moments on the macro environment at current commodity prices industrial activity distressed severely and lower 48 operators have reduced activity sharply.
The rig count declined only began in earnest and the back half at March. Since then the decline is accelerated as announced capital spending cuts by operators starts to take hold.
From beginning to end during the first quarter, the lower 48 industry land rig count declined by 73 rigs were 9.4%.
The rate of decline has increased substantially since the end of the first quarter, we steep decreases in active rigs he was the last week.
In our international markets activity has held up better despite disruptions from the pandemic. These disruptions are particularly acute in Latin America, where some governments have imposed strict locked down.
Historically volatility internationally has lower and lower 48. However, we expect that this unique combination of both demand and supply challenges well have some impact on international market.
I will conclude my comments on the macro with the following.
This current combination of supply and demand challenges is unprecedented in its magnitude.
In the short term the industry will suffer a painful hangover from the extraordinarily high levels of oil inventory.
With the global economy, beginning to resume activity and operators holding back we're shutting in production. We will begin to work off these excess inventories at the current time. It was just too early to stay with confidence when we will emerge on the other side.
We believe in markets and the problem will be fixed but in the meantime, we will keep magic ourselves to these challenges with the playbook outlined above.
Next I will summarize our results.
First quarter adjusted EBITDA of 188 million held up well despite reductions in U.S. activity, our lower 48 average rig count declined by approximately eight rigs.
Gross margin declined by $327 to just under 9900.
This reduction was due primarily to cost relating to the sackey ever rigs has actually declined sharply towards the ended the quarter our revenue per day before reimbursable expenses held steady as compared to the fourth quarter.
In our international segment, adjusted EBITDA decreased by about $5 million to $92 million roughly inline with expectations rig count was stable as deployments in Mexico in Kuwait offset by lower rig count and other Latin American markets International results were impacted by excess startup costs.
Starting a couple deployments in Russia. In addition, temporary virus really locked out resulting in reductions of approximately $2 million.
In our other segments, Canada improved reflecting its usual seasonal pattern.
Drilling solutions adjusted EBITDA declined by 5 million to $19 million, reflecting the drop in U.S. drilling activity, which affected both volume and pricing, particularly evolving third parties.
Rick technologies declined this equipment in aftermarket sales weekend.
Now, let me discuss our view of the market in more detail.
At the end of last week, the lower 48 land rig count stood at 389.
That is down by 285 rigs since the end of last year, a 50% decline.
In comparison neighbors rig counts declined by 38% or the same time period.
We think our advances in technology and systems have solidified our position as the leading performance driller. So far this relative outperformance in the big market supports the premise.
We have spent significant time trying to understand the plans for our largest slower 40 customers. Currently these five count from where the 75% of neighbors rig count among these clients based on all this information we are targeting our market share to increased from approximately 18% to above 25%. This increase this year.
Should help us cushioned the expected reduction in rig count.
At this point all my working rigs are high spec the increasing concentration of our working fleet at the top end in the market has supported pricing and big margins.
We expect that support to continue even with the recent declines to market utilization and downward pressure on rates.
In our international markets industry rig activity as proved more stable than in the lower 48. However, we expect the continuing disruptions related to the virus as well as low oil prices to affect drilling activity materially over the coming quarter.
In the other segments, we see growing interest in our advanced technologies in drilling solutions.
The declining rig count and pricing reductions are challenging.
Notwithstanding that we expect our penetration to continue to improve as customers embrace the benefits of our innovative products and services.
We achieved some notable highlights during the quarter.
First we started to impactful rigs in our international segment.
The first wasn't offshore platform rig in Mexico, the second with a large gastric in Kuwait.
And in early April the 40, Threerd rig and our sanitary venture with Saudi Aramco commenced operations.
Second thanks to our early planning we took advantage of an opening is that markets. In early January we issued $1 billion notes due in 2026 in 2028 with those proceeds we successfully tendered for more than $950 million of existing notes due in 2021 2023 these to transact.
It is significantly less than the maturity of a meaningful portion of our debt.
Third during the first quarter, we opportunistically bought back approximately $135 million of our outstanding notes in open market purchases.
We believe that this purchase of predominately short maturity bonds was a prudent use of cash, especially considering the notes were purchased at a discount.
Now to the outlook given their propensity of change in the big markets. As you had certain magnitude of the market volatility we will offer abbreviated guidance for the second quarter.
In U.S. drilling for the second quarter, we believe our average lower 48 rig count should declined by approximately one third as compared to the first quarter level.
We expect lower 48 daily margins to be impacted by declining leading edge day rates, an increasing costs to stack rigs.
In the International segment, we anticipate the client activity in the short term.
This drop comes as our customers cope with government imposed restrictions and falling oil prices.
That concludes our remarks in the first quarter results in the current market now I would turn the call over to William for his detailed discussion financial results.
Good afternoon.
The net loss from continuing operations attributable to neighbors of $395 million in the first quarter represented a loss of $56.72 per share.
Results from the quarter included $260 million or $36.86 per share and impairments and other charges primarily related to impairments the fixed assets intangibles and goodwill all of these numbers reflect the reason one for 50 reverse stock split.
Revenue from operations for the first quarter was $718 million essentially in line with the prior quarter.
Increased international revenue and the seasonal recovery in Canada, partially gifts that significant reductions in U.S. rig count, which affects that not only drilling rig revenue, but also drilling solutions activity and canrig aftermarket sales and services.
You asked are running revenue at $275 million decreased by 14.6 million as our average rig count in the lower 48 declined by eight and a half rigs one more rigs than we had anticipated.
Daily rig revenue in the lower 48 at $27199 increased by more than $700, primarily from Reimbursable items with limited margin.
Excluding the increase in these reimbursable items, our revenue per day was essentially stable during the quarter.
International drilling revenue at $337 million increased by 5.4 million, primarily due to rig deployments in Kuwait, Mexico and Russia.
These additions were partly offset by reductions in Venezuela, as our main customer winds down their operations and in other Latin American countries were quoted related lockdown, resulting in significant downtime.
Canada drilling revenue at $25.6 million increased by 6.2 million.
This was driven by the usual seasonal ramp up in activity.
Increasing from an average of 12.3 rigs into fourth quarter.
It was 16.8 in the first quarter of 2020.
Drilling solutions revenue of $55.4 million declined by 5.1 million from the previous quarter.
This was driven by a reduction in activity, reflecting primarily the 15% reduction and lower 48 industry rig count.
We also experienced some reduction in pricing.
Our international footprint helped us mitigate the extent of the reduction in our U.S. markets.
Revenue in a rig technology segment was $10.5 million lower at 42.2 million.
Our sales of spare parts and repairs were impacted by the sharp reduction in U.S. drilling activity.
Adjusted EBITDA for the quarter was $188 million compared to 203 million into fourth quarter.
This decrease was driven mainly by activity reductions in the lower 48, which affected several segments.
By covert related Lockdowns in our international segment.
And by unexpectedly high startup cost for a new project in Russia.
You asked drilling adjusted EBITDA of 100, a $1.8 billion was down by 10% sequentially.
In the lower 48 average rig count of 89 fell by 8.7% well daily margins decreased by just over $300 per day closing at an average of 9891.
Although average day rate for feed were stable as compared to the fourth quarter, our base daily costs increased driven mostly by higher stacking expenses.
We expect average rig count in the second quarter to be down approximately one third from the first quarter average of 89.
Our current rig count totaled 58, and the lower 48.
We anticipate daily rig margins to tail off somewhat to around the 9000 dollar mark in the second quarter, driven by market price erosion as well as by additional cost increases related to stacking idle rigs.
Although we are addressing our fuel support structure, we would nonetheless expect these costs to have a higher impact on our daily operating expenses as a result, other significantly lower rig count.
International adjusted EBITDA decreased by $4.6 million to 91.5 million in the first quarter.
Reflecting mainly the covert disruptions and excess cost for a Russian project started.
Yeah average rig count was stable.
However, international Daily gross margin declined from approximately 14000 113500.
The current environment presents challenges in attempting to provide guidance.
We expect activity to be affected for several months by the current pandemic.
The unprecedented drop in oil prices is starting to have an impact in some markets.
So we anticipate our international activity to be significantly more resilient and our North American business. We would also expect or EBITDA to decrease in the second quarter due to the existing headwind.
We expect to have more visibility on the extent of this reduction over the next few weeks as the virus concerns diminish.
Canada, adjusted EBITDA increased by $2.6 million to 7.9 million.
Rig count at 16.8 was four and a half rigs higher and any margin increased from $5500 per day to 5700 due to seasonality.
Canada is currently experiencing is usual seasonal breakout, but the seasonal reduction in activity, it's much more mark and in the prior year.
We anticipate a difficult second quarter for Canadian business.
Bringing solutions posted adjusted EBITDA of $19.4 million down from 24.8 million in the fourth quarter.
The adjusted EBITDA margin for this segment decreased to 35% from 41%.
The U.S. activity decline, both our neighbors and third party rigs affected volumes started this segment.
In addition pricing pressure has also become an issue for most of this segment's service lines.
For the second quarter, we're expecting additional reductions in adjusted EBITDA at the lower 48 drilling activity continues to fall.
Right technologies reported an adjusted EBITDA loss of $3.2 million in the first quarter somewhat worse than fourth quarter results.
As for other segments the drop in lower 48 rig count has affected our U.S. revenues materially.
It's rig count continues to fall we have adjusted our cost structure in this segment to help us mitigate the impact at the lower expected revenue.
Our neighbors as a whole the second quarter will be difficult with some remaining uncertainty.
I'll now provide a range of guidance and our EBITDA at this point.
Given the uncertainty on further government actions that concerns as to the trajectory of oil prices and the possibility of further cost by our customers forecasting a revenue in the short term. It's a few tall task both in terms of volume and pricing.
In addition, we have implemented a large number of cost initiatives that will reduce both our variable and fixed costs. These measures, which we can control should significantly mitigated the expected erosion in our results.
As activity falls, we will continue to reduce our variable cost our management team has vast experience in these exercises.
We expect it cuts into hundreds of millions of dollars during the remainder of the year for a drilling activity alone.
We will also reduce our overhead expenses by an estimated $85 million over the remainder of 2020.
As part of our continued focus on capital discipline, we are targeting cuts in our capex of $120 million. In addition to the reductions we had already targeted at the beginning of the year.
And we have propose the suspension of our dividends for an additional 7 million dollar impact this year and 14 million in 2021.
These actions on overhead and capital allocation amount to a 212 million dollar impact for this year.
Now, let me review, our liquidity and cash generation.
The first quarter free cash flow defined as net cash from operating activities less net cash used for investing activities.
Total deposit if $8 million.
Our first quarter, it's usually a low point. This reflects the timing of our semiannual interest payments on a bond as well as disbursements for employee bonuses property taxes and other beginning of year outflows in.
In comparison last year or first quarter free cash flow was negative $75 million.
This year on year improvement highlights our sustained focus on generating cash flow.
Capital expenditures for the first quarter reached $61 million approximately flat with the fourth quarter.
We have caught her targeted 2020 capex to $240 million.
This number could be adjusted further if a rig count trends slower than we expect.
In early January we addressed nearly a billion dollars of our near term debt maturities.
Neighbors completed a billion dollar offering of nodes and use the proceeds to address $953 million of senior notes maturing in 2021 and 20 from <unk>.
This transaction came shortly after we amended our credit facility to give us more covenant flexibility.
These actions I provided us with significantly reduced exposure as we navigate the upcoming disruptions or industry.
Our cash balances on revolver availability total approximately $1 billion.
During the first quarter, we repurchased approximately a $135 million over shorter maturity notes in the open market.
Yes, Andy balances on our 2020 and 2021 senior notes now stand at 139, and a $173 million respectively.
Despite the current environment and the expected reduction in our activity.
We believe that the actions we have already implemented in addition to other measures being taken over future quarters will support our target to continue reducing our net debt in 2020 and to further reduce our total debt.
With that I'll turn the call back to Tony for his concluding remarks.
Thank you William I will now conclude my remarks. This one was the following.
I watch, we reiterate and I'm very proud of our team's focus and timely response to this unique challenges to our industry their collective effort sacrifice and performance are paying dividends in our results. This bolsters my confidence going forward.
Our immediate focus remains the health of our employees the continuity of operations and the preservation of capital.
We have taken decisive actions on all three of these aspects.
This cyclical downturn will no doubt prove trying and arduous it brings us to start relief the value of our digital technology portfolio over the past several years, we have commercialized multiple initiatives with our integrated services automated processes and digitalization.
For example, since deployment last year, we have drilled over 1100 wells with our navigator directional guidance platform.
Total 450 were drilled with our fully automated slide drilling directional solution. The rocket pilot directional system, we lead into fully automated drilling space with more than twice the number of jobs of the closest similar offering.
Currently in our casing running service half of our jobs are completed with our integrated offering that's up from less than 10% a year ago.
This environment is one of cost optimization as such M. P operators are likely to.