Q1 2020 Earnings Call

[music], ladies and gentlemen, thank you for standing by welcome to the end signed energy services Inc. first quarter 2020 results call. At this time all lines are in listen only mode. After the speakers presentation, there will be a question and answer session.

To ask a question during this session you'll need to press star one on your telephone keypad. Please be advised of today's conference is being recorded if your acquire further assistance. Please press star zero.

I'd now like to have the conference over to your speaker today, the Colorado would've been up Investor Relations. Please go ahead Madame.

Thank you.

Good morning, and welcome to enzyme first quarter earnings conference call and webcast on our call today, Bob get Us President and COO and Michael Gray Chief Financial Officer will review enzymes first quarter highlights and financial results.

Oh, our operational update and outlook well then open the call for questions.

Our discussion today may include forward looking statements based upon current expectation that involve a number of business risks and uncertainties.

Factors that could cause results to differ materially include but are not limited to political economic and Marty good condition.

Crude oil and natural gas prices.

Foreign currency fluctuations weather condition, the company's defensive lawsuit the ability of oil and gas.

Companies to paying accounts receivable balances raise capital or other unforeseen condition that could impact the use of the services supplied by the company.

In addition, our discussion today may refer to non-GAAP measures such as the justice itself.

Please see our first quarter earnings release, and SEDAR filings for more information on forward looking statements and the company to use of non-GAAP measures.

With that I'll pass it onto Bob.

Thanks, Nicole and.

If there was never a time for a throwing advisory.

A leader when it was Ah. It's now thank you again for joining the call today for.

Sensors first quarter 20 regional summary, first off we're hoping all of your assays unhealthy what a world. We live in today I also want to quickly take the opportunity to cycled the frontline health care and essential service workers.

Our keeping this world running well, we managed service pandemic with immediate and proactive response from the field.

We had enzyme have been able to continue operations around the world essentially uninterrupted.

I always said the drilling companies are billed for cycle, where they have not my wildest dreams imagine the stacking of macro events would occur all at once.

Nonetheless, it is reality, we adjusted we figure it out.

Mostly the entire office spaces in a race to de lever and continues to reduce cost and rightsizing businesses.

Mrs challenges in the first quarter enzyme was able to generate a healthy cash flow increased liquidity further reduced fixed cost overhead reduced debt by almost $170 million year over year expand our contracted fleet booked by signing up to more rigs onto long term contracts now with over $1 billion and forward contracted revenue.

And our global fleet going I would almost five years, we successfully beta tested our edge autopilot cutting 15% off the average Walton scenario right off the bat and we operated with the best safety record and the company's history.

With that I'll turn it over to Mr. agreed to provide a more in depth summary of the quarter like.

Thanks, Bob.

Results in the first quarter 2020 were negatively impacted by the oil price war and the global called the 19 pandemic.

Global measures implemented to fall back to spread a little bit 19 has led to significant slowdown in global economic activity, which has reduced the amount for crude oil and natural gas products.

This reduction in demand contributed to restart sharp decline in global crude oil and natural gas prices over the quarter. As a result, the company's operating days were lower than the first quarter 2020, when compared to the first quarter 2019.

As customers quickly responded to the speed pricing declined specifically in the United States United States operations recorded 5141 operating days in the first quarter 2020, a decrease of 23% Canadian operations recorded 3102 operating days in the first quarter, 2021% increase in international operations recorded 1000.

And 438 operating days, an increase of 8% compared to the first quarter of 2019.

Property generated revenue of 383.9 million ones first quarter of 2020, a 14% decrease compared to revenue of 445.3 million generated in the first quarter of the prior year.

Adjusted EBITDA for the first quarter 2020 was 90.1 million at 22% decrease from adjusted EBITDA of 115.5 million in the first quarter 2019.

The 2020 decrease in adjusted EBITDA can be attributed to the decrease in activity across the United States operations.

Depreciation expense in the first three months to 2021 89.8 million, 2% higher than 88.2 million said the for three months in 2019.

General and administrative expenses in the first quarter of 2020 with 60% more than the first quarter 2000. My team. The overall decrease in expense was largely due to the company's focus on managing and reducing costs and management continues to look to reduce costs on a go forward basis.

Total debt for the first quarter of 2020, it was down year over year by 167.3 million 1.6 billion as of March 31st 20, 21.8 billion of March as at March 31st 2019.

But an increase in death of 46.4 million due to foreign exchange that purchases of property equipment for the first quarter of 2020 totaled 22.3 million 16.4 million related to maintenance capital and 10 million related to upgrade capital.

Capital expenditures for the calendar year 2020 has been reduced to a total of $50 million on that note I'll turn the call basketball.

Thanks, Mike.

So let's provide a worldwide operating highlight with some a forecast on what we see happening moving forward starting with United States.

You asked which generates roughly 60% of or EBITDA saw the immediate response early in February with rigs falling off almost everyday true into March as everyone cut budget. We went from running 60 to 70 rigs in the U.S. down to where we are today roughly 30 rigs over 122 rigs in the U.S. approximately 30% or engage.

The under long term contract and 50% of those have remaining term a six months or greater with some of these extending out in the 2021 over the last few months. We have worked closely with a strong client base in U.S. to provide immediate rate relief on existing rigs in exchange for flattening of the contract curve into 2021 very important.

We're finding very quickly in the U.S. that there aren't the technology have and the have nots clearly separating in the pack rigs with advanced controls like her edge platform are continuing to work for all of its go down our U.S. well servicing division continues to find ways to perform amongst the strong headwinds with steady but reduced activity in California the raw.

Keith and the Eagle Ford.

While others have shut down their directional drilling business, we continue to operate ours roughly with about half a dozen jobs today running no question margins are tight, but again right sized one can crank out of margin strong field performance strong management team low fixed costs high variable cost moving forward and U.S., we anticipate we'll be running roughly in that 30.

35 rig range 20 to 25, well service rigs and roughly five to 10 directional jobs through the next quarter.

In Canada, Canada had a strong first quarter as Canadian winters are typically we hit a high of 55 rigs in the first quarter with strong utilization and all our rig types accepting the heavy tele doubles, which were disproportionately affected by the lack of investment into places like the Cardium Central Alberta.

We saw our margin improvement, Canada for the first quarter year over year, mostly the result of our high utilization again on the more technically advanced 80, or 1500 type Rick Acadian team was successful in securing a three year term contract with a major for two of already or 15, hundreds with edge controls on them of the 101 marketed rigs in Canada.

Approximately 20% or engaged under contract to various term and approximately 60% of those have a remaining term six months or longer.

We anticipate that will run give or take 15 10 to 15 rigs through this summer and depending on how quickly the market swings back perhaps up to 20 in the fall.

Got it a well servicing is expecting to see our share of the ore from wealth management program. The defense announced a few weeks back this should put about 10 of our well service rigs and their crews to work over the summer and fall.

Our directional drilling business in Canada has worked its way into the top three and expects to participate with again about half a dozen jobs running through the summer.

On the international where we.

Right about 20% of our margin.

Certainly our international rigs are engaged for the most part on gas projects. This was in contrast to our North American market, which is mostly oil driven.

We now generate as much in our international businesses, we do in Canada, not the diminished Canada, but it does talked enzymes global footprint, which helps to de risk geopolitical events and helps the stabilized cash flow.

Australia had a steady eight rigs operating daily down from 11 in the first quarter three rigs that came down we're drilling for oil.

Venezuela's obviously on pause for some time to come we basically shut down or last shrink their money back and have reduced staff to a skeleton crew in Argentina.

The one rig on long term contract with a major and expect to see a secondary and go to work later in the year.

Again these rigs require no.

Growth Capex or general Capex to get them back to work Middle East another very strong area friends right now with equate to rigs running solidly performing after if you break and challenges with the new rigs, we expect solid results out of the 280 or 3400 horsepower rigs as they work into their five year contract.

We also have both have already or 2000 horsepower rigs running in brain.

Both of which are long term contracts.

Oman will probably come under some pressure this summer as we expect a three to four month pause with two of our clients in the region. We've been awarded new contracts with the start dates have been as I mentioned put on pause.

So in general and as Mike alluded to earlier, a 10 million of the Capex in the quarter was tied to one timer going has wins, which provided for long term contracts pushing out to the other 2023.

The fleet of roughly 50 to 60 drilling rigs running and 25 30, well service rigs running daily around the world we.

I expect the maintenance capex to settle into the 10 million run rate per quarter for the foreseeable future $40 million annually.

On the technology front, we believe that you can't take a foot off the gas pedal with technology as it becomes more and more of a differentiator that not only keeps your working it keeps working with higher margins.

Nor this has to run a slippery slope.

As I mentioned earlier, we have our it systems down over 20, or some sort of 75% of active rigs and have an installed on 50 plus rigs worldwide. The team also successfully beta tested our first edge autopilot on a program in the Permian with a major results are very impressive 15% reduction in days right off the bat.

Charge rate for the edge autopilot will be roughly in the 2500 day range.

So with that operator, I'll turn it back for acuity.

At this time, if you'd like to asked a question over the phone lines. Please press Star then one on your telephone keypad, we will pause for a moment cabal lets you when they roster.

Your first question comes from the line of what car side of Altacorp capital. Your line is open.

Thank you for taking my call My question.

<unk> in no International Division, if you look at the first quarter revenue that seems a little bit lighter than what you were expecting.

Days.

Operating days were roughly the same as in the fourth quarter, but revenue was substantially door.

Could you provide some guidance and what happened there.

Yeah, there was.

On one of the projects in Kuwait, there was some delays with the construction on the.

First location and.

Also on one of the other events.

Or one of the other areas. We also had a slight delays so that that caused revenue to come off a little bit so again.

Two of them on three year contracts or the other two on five year contract. So.

Probably a one and a half month delay from where we are expecting things.

Okay, but as we look into the second quarter, we have a pretty good idea on what.

The number of active rigs wouldn't be but in terms of.

Revenue per day, you know how should we think about that is it more like what we saw in the first quarter or more like fourth wasn't number.

You are talking up back to the middle East are generally.

A foot international businesses, though within that yes, I would I would say that the.

The the average rig day international.

Go up because the the larger rigs are continuing to run and the ones have slipped off were on the lower day rate end.

Okay.

That sounds so thank you what do any early termination revenues in the U.S. or guide a in the in this first quarter.

No Mike I'm quite sure there were there was negligible I know there was not.

And do you expect any them in the second quarter.

No no.

So as I was mentioning.

In the.

In the.

Expansion of the the operating forecast, we're finding that lot of the covers we're working for recur or are looking more to.

Lower day rates and extension for some term going out into 2021 in other words are wanting to keep a rigs running and not let them down and pain at early terms. So I think that that talks a lot to the operation and how efficient they're running out there.

So I am not expecting.

During the second quarter that I'm aware of at this point.

So as we yeah in in terms of.

Revenue per day kind of projections for for the U.S. business.

We know what a 10% I'm kind of he has got because of these reductions would that be a reasonable expectation.

On on revenue that you said regard the yeah revenue per day afforded the U.S. rigs.

Yeah, Yeah, I think that that would be I mean, depending where you're starting point is but if you took on.

First quarter average and and we're asking what the second quarter looks like it probably.

Safe with that.

10%.

15% perhaps.

Okay, great. Thank you very much appreciate the kinda.

Thanks, Rick.

Once again, if you'd like to ask question over the phone lines. Please press Star then one on yours telephone keypad.

Your next question comes from the line of.

Bruce Harav agenda. Your line is open.

Oh, Hi, it's Bruce tariff your.

Or a couple of questions one is regarding.

The repurchase of the senior notes.

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And it looks like your purchase.

The there was a purchase subsequent to the end of the corridor.

And my question really is a as it relates to about a it looks like the discount just looking at the gain that you disclose the discount it looks like with somewhere.

It looks like you're buying that talking about.

Okay.

33, or something since the dollar and.

I'm just curious we are well you constrained by volume in terms of the mountain could buy back at that price level or where you constrained by the amount of cash you how to deploy.

Good.

Obviously is the huge when you can you get if you could do as much of that it is possible would be a huge wins I'm trying to figure out the.

Volume was a constraints in other words, there was only so much trading or whether you could have done more but.

The cash available to buy more.

So Oh, Bruce Mike you want to handle that one.

Yeah, no. So the the discount you talked about Bruce who are the appropriate range.

That's where the volume I mean, there's volumes with more of expectations will be what price is going to be none bouncing up between liquidity.

And what do what the actual market it can kind of work about so.

Yeah, it's kind of because it or.

All the last few weeks I mean, if you you do follow the bonds being traded out I would say, they're going to large amounts of volume with.

Definitely like so we pay attention to what it does where it's trading what our expectations should that should be and kind of go from there.

Okay and also I'm, just trying to get a sense for the EBITDA margin furniture National you guys disclose once a year segmented.

EBIT by any division and the also disclose depreciation by division.

So you can calculate EBITDA dot way and my question on the international if I do that it's 43 million for last year.

Is that kind of a smooth number or is there. Some one time reason there then I guess I'm trying to figure out you know international seems to be a real solid.

Steady stream of EBIT down for you guys, but I'm trying to get a sense what what's the margin will be there was there anything unusual last year.

No no Bruce I think the.

You hit it right on the had the international business.

As a very low beta.

Lower volatility.

For us as far as a margin goes a term contract we're generally running.

On average in that three as high as five as low as one year type contracts, so where we generally run in.

In.

Low to mid Twentys margin.

On a continuous basis international.

I don't think that Jake.

Yeah, because if I do like the calculation that I. Just described for 2018, you were 27% EBITDA margin international but for 2019 year only 15. So there must have been some one time words in there maybe moving stuff around or something like that.

But but more important to me that number going forward you are seeing its low to mid twentys kind of business. There on an EBITDA basis, yeah, that's kind of where they settle as I said London metrics.

There.

The project metrics and a 19.

As you know some startup.

Costs and things like that that's probably what to expect.

Expecting you saw in that 19 margin compression there.

Keep in mind.

The middle East of the Virena Mcquade rigs provide us a nice nice forward margin on a continuous basis.

I think thats, what you plan for.

Okay and in the debt repurchase the you did subsequent to the end of the corridor. We that's funded from drawing down the operating line.

My goal is funded by operational cash flow and working capital harvest.

Okay excellent I mean that seems like a highly good use of capital needs.

We agree that's all.

Thanks Bruce.

Your next question comes from the line of NGL enough Stifel. Your line is open.

Good morning, everyone.

Dan.

A follow on Bruce line of questioning I mean, the debt repurchases ravi's, you've done a very attractive prices it and get more diodes surely be positive I'm, just curious whether there's anything within your credit facility agreements or node indentures that could potentially limit the quantum or the amount of debt you could repurchase just we go through the remainder of the year.

Mike you want to have one.

Yeah, there is no restrictions.

And then.

In prior quarters, I mean, there's obviously been some talking of asset sales.

To help de lever, obviously, the world's changed a lot over the last three months or are you able to provide any sort of update.

Around those events in the likelihood of execution on that front in 2020.

Yeah, I would say, there's a very high likelihood of execution on ER.

On the 20 to 25 range.

You know without getting into much detail.

Weve.

Moving along on that on that path.

Okay.

And then I mean with respect to the credit facility you have a bit of time till it matures, but do you expect that something gets executed or an extension gets executed at some point in 2020, and if so able to provide any initial feedback on the conversation with your with your syndicate.

Mike.

There'll be no common really on that as of yet.

Sort of taking a month by month quarter by quarter.

Depending on how things for you folks so from our sampling so well.

And a good position.

Kind of how those conversations I was required when they come up.

Okay.

Maybe last one for me and once again, probably for you Mike but are you able do provide any goal posts around what you think the working capital release could be in Q2, and maybe what you expect to give back through the remainder of the year.

Oh, it's nothing specific but I mean, if you look at the receivable balance in the payables. When there is 50 to 60 million kind of their you do is usually fairly good on the working capital harvesters given.

Just on Q1 that we have in Canada Beatles collection, so it's a come through so.

You could probably target on that I'd say 50 50 million plus.

And you haven't seen any degradation in the DSL at all through Q2 yet.

No we have enough, okay, I'd say the customer base that we houses.

Hi, this is quite good considering what's going on out there. So I mean, it's an area that we continue to monitor a fairly tight credit process on ops. So.

You haven't seen its as of yet and hopefully do not yet.

Yeah.

Very helpful. Thank you very much I'll turn the call back over.

Excellent.

Your next question comes from line of key Smacky of RBC. Your line is open.

Hi, good morning, Thanks for taking my questions and I hope everybody is doing well just a question on the Capex I didn't notice.

The disclosure as mentioned the net Capex number.

There were some dispositions in the quarter. So he is the proper number we should be modeling in for a you know organic spend 50 million or 55 were or or you know any any help you can give on that would be great.

Yeah, I think what a way should be modeling forward is about 10 a quarter Q.

Okay, that's the maintenance capex to ER to keep.

A fleet of 50 to 60 rigs and 25 give or take service rigs running safely and operationally efficiently moving forward.

Forever I mean, that's kind of the run rate for those types of rigs so.

We can we can hang on for quite some time in that 10 a quarter range.

Okay. Thanks for that just on the on the day rates and the term extension so.

It sounds like a preferred approach we've heard a bunch of different different approaches from different you know market participants here I'm just thinking about a re contracting are you would you be looking at considering further reduction in rate or would you like to you know as some operator.

Just have said get off of the day rate model, a little bit more in and maybe move onto a little bit more of a non traditional a performance based contract as a you know as you get more comfortable in your technology or just kind of wondering how we should ultimately be thinking about.

Any sort of further extensions to contracts or as a as things start to get rolled on.

Right right. So the I I mean, we're finding that the re contracting of rich obviously is a.

One bucket, where you're getting pulled into the up into the notional.

While market pricing and then and then you're working from there with your technology suite.

The second the second part is where we have an operator, who has the rigs under contract who are coming back and saying Hey.

Can you give me a 10% a reduction in rate than we're saying well, we can but we need to protect our E. But moving forward with a with a little bit of a time value money. If we're going to stretch out in the 2021, so we've been going through that process again.

Setting the EBITDA stream.

Just moving it out for keeping the rigs running it also allows us the opportunity to upsells.

Some other things.

Big one we're working on is already autopilot, which.

As is quite a game changer I'm ever it seems that a few other companies have.

What they're calling.

On autopilot of some sort.

But.

As you see analogy is like a autopilot is like the conductor of an orchestra.

The music is coming out with different groups differently, we purposely built our our gateway so that we could run it on Trinidad rigs are inside rigs.

Finally be quite a quite an interesting platform.

First well.

We were able to reduce the the time on the well by about 15% now what would what we're doing is we're trying not to give it away by weaving in performance based contracts or the third component of your question there Keith.

That is to suggest that will give you a competitive day rate and so so theres no risk on us either way no risk on the operator either way.

By the way, but what we do is Ah, we said that if we can now we can increase the penetration rate or.

A few metrics in there that we know that we can control and and accurately.

Before.

And then were.

Basically are able to offset by as much as two to $3000 a day.

So in some cases, when we run into the.

To a.

Brick wall with people trying to suggest that something maybe were two or 3000 Boes a day, we attack it from a performance based contract and get it that way in other words, we are in at the old fashioned way by producing performance and and and backing in by saving the operator money and.

Essentially getting paid.

Through a notional.

Rate increase rather than a flat per day for putting it on the rig in other words again performance based contracts.

More and more of those types conversations.

Or starting to happen, but keep in mind over the last month the conversations have been very.

Straightforward, hey, we're putting rigs down right I mean, we're losing on like a data like everyone else for a period of time. So it wasn't the opportune time to bring up Hey can we talk into performance based contract. So things are settling down we're having a few more of those conversations now that we've been tested.

Our auto pilot and so you'll see that rollout as we roll out through the summer the fall, but you know the everyone's a beating other big fires right now.

Yeah got you know that's a that's very good color appreciate that just finally for me here and on the on the 1.7 billion of well decommissioning money. You did mention you expect to have about 10 crews running in Canada.

Can you maybe comment on what you ultimately expect your potential market share of that money could be a you know in and how much you might expect to ER to potentially win and then if youve. The and then just John on how many or if any applications you've you've submitted so far.

Yeah, Yeah. That's that's a very good question. It took some period of time for anyone to understand what it was a boat and how was to be rolled out and.

Anyway to our understanding.

You know I've asked are well service team what does this mean for us.

They are figuring there should be about an incremental 10 rigs of work keeping as busy as through the summer.

And into the fall. So so the guys are on it I mean it is.

It is helpful of course of 1.7 isn't all going to offered well but.

We hope to get our market share of it I don't think anyone's got a technical advantage or anything or client advantage. In this regard I think that.

As a big blanket that gets spread across western Canada in that regard.

Okay. Thank you very much that's a that's it for me.

Okay.

There are no further questions over the phone lines at this time I turn the call back over just the receptors.

Thanks, operator.

A rest assured the team and enzyme is focused on delevering and working to expand our market share in every area around the world with or high performance crews and leading edge.

Pun intended.

Control system, we'll look forward to hopefully a healthier and more economically stable world. When we report Q3 months time until then stay healthy think positive we'll get through this thank you.

This concludes todays conference call you may now disconnect.

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