Q2 2020 CES Energy Solutions Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the C. S Energy Solutions Corp, second quarter 2020 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad should you need assistance during the conference call you Mystic Mellanox trader by pressing star zero.
I would now like turn the conference over to Tony Allott Chino CFO. Please go ahead.
Okay.
Tony you can begin.
Oh, there Tony your line is open.
One moment.
Okay.
[music].
Good morning, everyone and thank you for attending today's call I'd like to note that in our commentary today, there will be forward looking information.
All information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our second quarter Mdna and press release dated August 13th 2020, and in our annual information form dated March 12 2020.
In addition, certain financial measures that we will refer to today are not recognized under current generally accepted accounting policies and for a description and definition of these please see our second quarter Mdna at this time I'd like to turn it over to Tom Simons, our president and CEO.
Hi, Good morning, Thank you Tony and thank you the listeners for calling it.
Oh, the second quarter see us call.
On today's call a will provide listeners with an update aboard actions we've taken within the business to ensure that the company survives coal, but you heard energy demand.
We'll talk about activity for the company in the different business lines in the quarter.
And probably more importantly talk about how we're going to take the company through the balance of coal but.
Sure the overhang of excess oil supply in the world.
And be position to be able to benefit shareholders employees customers into recovery that'll be the focus of today's call basically the philosophy, we're taking to run the business what that will look like economically for the business through Colin.
And how we're going to maximize upside on the other side of this.
So I'll get into operations for the second quarter and activities to preserve the businesses ability to get through coal it.
The second quarter for see us like all energy services providers like most businesses in the world saw sales volumes collapse.
And unique to the oil field is real time pricing.
So all service providers were required to provide discounts.
On work to customers that ran through the quarter.
How it's going to be for oilfield service providers, I would say until oil breaches $50 or pretty close.
In spite of lower volume and lower pricing.
See us effectively broke even in Q2.
We reported adjusted EBITDAC of about $8 million Canadian six of the that was a p. roll help from the federal government.
So we think we've got the business at a point for cost structure, where it can pay for itself at the very worst point of energy, which was Q2.
We've done what was what's required to ensure the company's survives coal but.
And muted demand.
By general by converting receivables to cash.
That's evidence by us extinguishing or line and building a 40 million dollar Canadian war chest over the summer.
We've reduced operating costs by unfortunately needing to reduce headcount.
We have reduced compensation for every one that continues to work at the company, including Tony It I.
We have reduced inventory and we reduced capex.
What we've done that while retaining what I'm, calling our human capability.
Culture, which is a sense of urgency a sense a problem solving we're maintaining our physical assets.
So that we can ensure we benefit when energy demand grows as the world gets passed cobot.
Our strategy overall as a business.
Just to get through coal, but.
And preserve our ability to maximize the upside and a recovery.
We need to preserve our human capacity and maintain or physical assets, we need to keep working on her relationships of trust with our customers. We're looking to add talent to everyday that could bring on work in a normal energy demand market.
We're still focused on solving their customers problems and we're constantly looking to reduce our own cost structure as we see that's the common thread and Andy any industry in the most successful businesses.
Upon a recovery, we hope to other smaller shirt help.
Smaller bond.
And have the financial flexibility to be able to build working capital as required.
We hope to have better pricing over our sales than we have today.
By making these discounts more transients are tracking artificially low oil prices.
And we hope to have an increase market share and all the different verticals that we sell or chemicals into.
I'll now get into the four main parts of the business talk about how they did through the quarter, where they're going today and how we're going to take them through coal that.
And then what they would do and a recovery.
I'll start with a yes, it's our U.S. drilling fluid business, we averaged in the second quarter 51 jobs.
We started to come down in March like the whole global economy did in April we averaged 67.
May was 48.
Bottomed out in June at 39, and today, we're running 41 jobs.
Got a line of sight.
Two more rigs as oil has sort of stabilized in the low to mid fortys.
What we need for AG us to be able to print block numbers for the company and generate free cash flow.
There's another five to 10 jobs.
And it appears like those jobs will come with our expanding customer list.
Through Q3.
We expect those jobs to come from Super majors, and Big independence that we've had longstanding relationships with.
What we see for U.S. drilling fluid market on the other side of covert.
Less competition, we've got a major P.E. competitor that's in bankruptcy, we've seen one of the big Integrated's, a wind down there my business and we've seen a couple of the big Integrateds not allow their money businesses to be loss leader, So bundled service offerings, they're making those business.
Yes, only take work if they can make cash which leader we think benefit C S and the people on this call.
For U.S. production chemicals.
Business was down a lot in the quarter, we had a lot of shut in production in the Rockies in Oklahoma and in Texas and it continues to be very customer specific.
Most of the production we treated in the Permian is either back on or there's indications that it's coming back on.
A little less so in the Rockies, So volume was down in the quarter and pricing was down.
That business today is got enough production back on.
That it's able to make money for the business.
But what will sort of turbocharged those results.
Our when our operators cold box and drilling new wells.
Completing them the new flush production that that the chemical companies treat our high volumes. It's technical work. So it's lucrative and not part of the sort of product mix of sales the absence of that there's going to mute financial results for all chemical companies in Canada.
For the U.S. until operators have a reason to Britain production not.
We think will be better.
When we were before the crash because weve leaned out the business, we continue to invest in bringing in talented people that can get new business or solve upstanding problems. We've expanded our customer list through the crash and were almost done building our Tech center in Midland.
Which we think we'll give burn in this team another tool to work for bigger companies and solve their problems and expand our business.
Well move on to Canadian operations.
Canadian drilling fluids in Canada in Q2.
Average seven jobs.
I would say, it's a result of six years of auto was standing on or chest.
And then the immediate collapse.
[noise] oil and our customers need to preserve cash and shut down operations today, we're running 17 drilling fluid jobs in Canada, We've got a strong market share position. The work we are doing deep long reach or Sag D work. So it's.
The coal the volumes are higher the margins are higher because of the works complex, but we'd need to discount to where customers. While we go through coal bed and oil a sub 50 with the understanding that you can revert to pre covert pricing as the operators get better price.
Thing for their oil or condensate or gas.
Our marketing, Canada, though through cold it is becoming more competitive we're seeing mom and pops looking to do work just to be able to move inventory and keep their business running so that's going to be a drag on margins were going to need to continue to outperform we're going to continue.
The need to bring new technical solutions that those mom and Pops cat or the big shops. The integrateds that are not focused on Canada as a core markets don't apply their best people to solving problems.
I'll move on to pure can now that's our Canadian production chemical business.
Sure Chem saw a lot of production.
Shut in to shut in in Q2.
Enough that again, the business was basically able across the board to breakeven.
What we've had happened as productions come back on this volumes are increasing in sales to the point, where we expect to be able to make money in pure Kim in Canada.
Even with the very low rig count for the industry. So much like Jay can catalyst in the U.S. kind of being an anchor for the business, even when drilling style completions are down sure Chem offers that to us in Canada.
We've just completed a sag D trial treating the production that went very well, we believe we're going to be awarded business on it but.
It's not material and dollar amounts, but it does give us sort of Oh.
The flag on the board to try to penetrate more and more of that market that market is huge for the chemical companies in Canada as Keystone gets built out is trans mountain gets built out and the oil sands operators have a financial reason to grow their businesses. That's a part of the market that we need to be active.
And we're increasingly winning business there.
Overall, how I would characterize pure Tim is from a year or two ago better management is equaling better financial results, while continuing to do a great job for the customer and treating our employees with respect and fairness.
Before I turn it over to Tony from <unk> for a financial update.
What I would advise people is as we're looking at what to do with this cash war chest of $40 million.
We're mindful that the share price is around a dollar.
The bonds are around 90 cents.
And we're going to need about 30 cents, helping the dollar as we rebuild working capital in a recovery.
So we're going away all of those things together as management that aboard.
And try and maximize the value of that money.
I believe we need 12 to 18 months of sort of operating costs, meaning covering our bond in or pocket before we consider doing anything with money beyond that and that'll sort of be the goal posts that will use as we look at what to do with that money Ah Tony I'll turn it over to you know.
Thanks, a lot Tom.
Q2 results demonstrated the Companys financial resiliency and balance sheet strength in the very challenging economic environment as Tom mentioned the effects of covert 19 at a drastic impact on our industry global commodity prices and greatly reduced demand end to end markets that we service.
In may to address the deteriorating industry conditions, we announced our proactive approach with.
Cash preservation and cost reduction initiatives as it relates to our dividend NC IB activity.
Cash capex spend and cost structure. We also provided the market with an expectation that we would harvest a significant amount of working capital and use the associated cash inflows to reduce leverage as we did during the last downturn in 2015 and 16.
Second quarter results demonstrate our strong execution of these strategies and initiatives and I'm very happy to report as Tom discussed as well that are overall liquidity position and balance sheet strength actually improved significantly in the quarter as we once again displayed our defensible business model and counters.
Cyclical balance sheet during low points of the cycle during the quarter than that drawn or senior facility declined by 92.6 million from a net of 92.9 million at the end of Q1 to end that in that trial of $300000 at the end of June driven primarily by strong free cash.
So generation through working capital harvest, and then continued inventory management and cost containment measures CS exited the quarter with total debt of 328 million, representing a very significant reduction from 427 million at Q1 of which the majority is the company's 200.
90 million dollar.
Principal outstanding on our six Centsthree eight senior notes not due until October 21st 2024 [noise].
Of note subsequent to June Thirtyth, our discipline around working capital has continued to benefit us and resulted in material cash inflows to working capital harvest and as we stand here today, we are sitting on a net cash balance of $40 million and zero on ardent zeroed.
Ron on our senior facility.
I guess on company wide working capital optimization, even before this during 2019 and into 2020 has positioned the company extremely well to maximize working capital cash inflows through the second quarter as activity levels declined.
In the quarter CS working capital reduction and a reduction in working capital surplus of 116 million. We continue to remain diligent and focused on strong VR collections minimal bad debt expense and inventory management. We believed that this established focus on working capital.
Optimization will allow us to further maximize free cash flow generation as industry conditions stabilize and eventually recover.
During the quarter CS generated approximately $159 million in revenue down from 312.9 million in the second quarter of 2019 revenue generated in the U.S. was 121.8 million representing 76% of total revenue for the company.
Well Canadian revenue was 37.7 million.
Both of these revenue results represented significant decreases over prior year comparative periods, which was primarily driven by unprecedented reduced activity across all business lines as low commodity price environment resulted in temporary production shut ins deferred completions and.
Significant declines in drilling activity.
Of note both production and drilling fluids segments appeared to trough in the middle of the quarter. So during April of 2028 during the doldrums of the in industry meltdown.
Thats when we experienced the the worst results in the toughest conditions. However, we did see some stabilization began in June and that seems to have continued into July for example, U.S. drilling fluids market share troughed at below 13% in April but continue to climb with high quality customers and.
We currently are at approximately 17% market share.
In light of the unprecedented industry conditions and associated initiatives, we took to rightsize. The business. We recorded the following nonrecurring items, a 1.2 million dollar write down of certain petroleum based inventory products to net realizable value driven by the significant decline.
And in the price of oil, resulting in an associates increased the cost of sales of 1.5 million dollar increase to bad debt allowance is driven by isolated uncertainty around some collections.
And a 1.3 million dollar severance charge, excluding these items CS generated adjusted EBITDAC of $8.2 million in the quarter down from 41.5 million in the second quarter of 2019 included in these results as a 6.3 million benefit recognized front.
I see us from the federal governments, Canada emergency, we'd subsidy program, which has been instrumental in allowing see us to mitigate further Canadian personnel reductions. During this downturn of note them is the fact that the majority of our cost reduction measures that.
We announced in May really only became effective by the middle of the quarter.
Thereby resulting in a higher cost base in April and May in comparison to the estimated run rate of June and going forward.
In May we announced that in light of deteriorating industry conditions, we were eliminating all non essential capex spend and reducing projected 2020 spend by approximately 40% from 15 million to $30 million in the second quarter Capex spend was only 5.1 million.
In bringing the year to date total to 17.4 million and we believe we will be able to exit the year, having spent less than $30 million.
We continually monitor our capital allocation options in the context of market conditions outlook and the levels of surplus free cash flow generation in Q1, 2020, we made it difficult yet calculated decision to reduce our dividend and as industry conditions continue to worsen we announced.
At our monthly dividend was suspended on April 16th Twentytwenty. This decision will can serve approximately $16 million in cash on an annualized basis. In Q1, 2020, we spent $4.8 million under NC IB program and repurchased 2.3 million shares.
Well and see I'd be activity was suspended during the second quarter.
We remain responsibly cautious on our outlook for 2020 M. beyond in this low oil price environment. However, we came into this downturn from a position of strength with an excellent first quarter and a very strong balance sheet and with a proven counter cyclical leverage model in the second quarter, we will.
Continue to assess bond repurchases and share buybacks in the context of or assessment of market conditions certainty around our surplus free cash flow levels and market prices on her bonds in shares as Tom alluded to however, make no mistake about it our primary financial goals through this downturn can.
Can you to be the preservation of our strong balance sheet and optimization of our industry, leading operations and critical employee base to withstand the downturn and maximize our potential for when conditions improve.
So at this point, operator, I'd like to turn it back over to you to open up the call to questions.
Thank you then we'll now begin the question answer session to join the question Q You May Press Star then one on your telephone keypad, you'll hear a talent acknowledging your request if you're using a speakerphone. Please pick up your handset before crushing the keys to withdraw your question. Please press Star then too.
We will pass for a moment as collars trying to Q.
Currently no questions at this time I will turn call back over to Tom Simon's for any closing comments.
Thank you operator to summarize our call our intention.
On the other side of cold bid.
This to solidly be the number one drilling fluid provider in North America on land.
That mean number one across the U.S. in Canada for market share.
But what we really are targeting is number one provider of technology or the best customer list. So the super majors the big independence.
He is that are drilling to sell.
And we can achieve that by having the lowest cost structure.
Married to a culture that brings a sense of urgency is since I've tried to location.
Faster drilling times.
And better execution on location and well planning that our competitors.
Our intention for North American chemicals is to be a very strong number three.
We've got the ability to do reaction chemistry in Kansas in Vancouver by commodity chemicals Cook.
Formulate those into intermediates and then blend them into finished products to be used to drill the frac to stimulate to treat production and pipelines.
To treat tanks, we think off of the manufacturing base, we've got manufacturing capacity logistics capacity in warehouses to double the business from where it's out on a trailing basis.
So that's what we're looking to do with this business.
That's covert passes and energy demand normalizes.
We think we've got the business today in a position where we can sustain our people sustain their training sustain their health.
Maintain our physical assets and when our customers can get $50 for oil they're gonna go back to building their businesses and they're going to higher services that are best in class.
And we're going to be able to be that by having the people by having maintained our assets, we're not going to get through coal bid by selling things by exiting business lines that we shouldn't have been in the first place we didn't make any of our business lines loss leaders, we get into businesses.
To make 15% EBITDA and turn inventory fast enough to generate free cash flow.
If we need to make further adjustments in the business.
To be able to at least break even in the business.
We'll do that but we think we've got the business in a place now where it can sustain itself not consume that 40 million of cash for operations.
But use it to sustain good value when the bond and maybe create value by buying bonds or shares.
Oh, we're close to our customers. We're gonna have the same senses everyone on the call when things may normalize and that's when we can all move around again.
So from now to then we're going to run this business prudently.
And let everyone benefit through it in a recovery.
With that I want to thank our employees.
For trying times and sticking with us and really want to thank our customers for keeping us on location through this.
I will talk to everyone on the next call. Thank you.
Pardon me there is actually one questionnaire now.
My other question from NASS, you weeks Industrial Alliance Securities. Please go ahead.
Hi, good morning variants bit late join the queue.
Oh, good we're happy to have a question.
No no problem I, just I wanted to ask a first about margin. So you're kinda you'd mentioned that cost cutting started to happen a little bit later in the quarter. So you know going forward and considering you're still expecting to see some pricing pressure and activity levels in Canada States are made pretty depressing.
Point are you expecting the margin say in Q3 in Q4 two.
You an improvement.
From Q2.
When you account for the the catalog wage benefit.
I think math you for us and probably all service providers margins are going to be really tight.
Every time, you talk to the customer they're looking for a price concession.
So.
The point to the questions understood. We we had costs happening in Q2 that we'll have went away.
But I wouldn't expect to see margins getting better if anything they might get a little worse.
What will improve margins is higher oil prices, meaning that the cold the discounts will either goal way or be reduced and that's what it's going to take to actually change things.
Okay, Thanks and being.
You know almost a couple of months through the third quarter right now in terms of the Canada wage benefit it did mention that.
The government's extending into the end of year, that's something that you're quite right. At this point and expect or did you have line of sight. So what that's going to look like going forward. You expect that you will see the similar data sets kind of going through core to the ended the year as you did in Q to Q2.
Tony could you take this one.
Yeah for sure so sort of try being very trend, we try being very transparent.
And you have are a number of Canadian employees as as we had in our a hey, I am. So you can actually sort of do the calculations, which some have done so to answer your question directly the the contribution that we're expecting from that program in Q3.
I will be a little bit lower than the 6.3 that we realized probably somewhere in that.
$5 million ish range, and we're still waiting for some of the rules to be ironed out for Q4, but we'd expect based on what we see right now that contribution to be somewhere between 1.5 and 2 million.
Okay. Thanks, that's helpful.
Switching overdue capital allocation, a little bit and I just want to make sure that I can understand that maybe clarify some of the things that were there were set earlier on the call about about bond not.
Sort of your focused right now as far as the war chest and liquidity you have.
I understand that I got the top priority would be funding carries operations odd number two or would you say is growth.
Initiative and number three kind of buybacks looking at the shares and looking at the buyers. Once you kind of looked at the growth first with the opportunities you've got out there with that kind of the correct order of capital allocation.
I would say.
We don't need to deploy capital to chase growth.
We just need people to bring production back on oil prices to go up and that growth will be organic with people. We already work for we don't need.
More physical assets to grow.
So we don't have to risk capital on that.
It would be our judgment on how much cash do we want and the tail.
Up to soar to be able to pay the bond.
And I know that we got good liquidity in muted demand for our service because the world's using less oil so.
12 to 18 months of kinda money in our pocket.
Seems I think responsible to me.
And what we would have above and beyond that we might put to work.
Either bonds shares.
Or inventory those are the three places that we'll spend the money, we're not going a buyer competition out about markets rock in the health private equity get often investment they need to monetize.
If anything we can just been on ourselves, but what we don't need to do with spend money on capital to declare.
Okay. Thanks, I appreciate the clarity on that.
I think that's it for me I'll turn it back thank you.
Thank you.
Next question is from Aaron Mcneil as TD Securities. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question, Tom you kind of touched on it a bit but I think it was last quarter that you talked about maybe strategic hires.
Instead of deploying capital or rescuing private equity as you say, but I guess I'm wondering if you took a survey of your competitors over the last quarter obviously.
You know, there's people cutting costs and people, but do you see an opportunity.
To start hiring good people from some of your competitors then and have you made any progress on that front, yet I assume not just with covance distancing restrictions, but figured it out.
Oh, Yeah. That's a good question Aaron we we picked up a good frac person for Canada.
There's no frac market to sell to today, but there will be one day.
We're poking around constantly.
I mean, we're all I call us working managers.
Next time, the oilfield can come up with a social events. So service people can hang around with operators will all be their selves and.
We're trying to get the word out that we're looking for good people.
So we'll have picked up a few people through this.
And but nothing that moves the needle today nothing that puts us in a new business line it's not.
The.
It's not dilutive, though it's not like M&A. So.
Yeah words, I'd say steady state for that area.
Okay perfect.
I think you maybe either with maybe the.
The answer that's a value for listeners.
Is that our focus is on running the business.
Not on doing M&A or rolling people up because prices are down.
We're going to put our head down stay close to the customer keep as many people as humanly possible in the company. So that later the customer can put all of us back to work.
Perfect. That's all for me. Thanks, Thanks for asking answering my question.
The next question is from Jon Benet Sneaky as Canaccord. Please go ahead.
Hey, good morning, guys.
Good morning, John.
Apologies I guess, we're all on the phone this morning, but a couple of quick ones for you here I just circling back on U.S. specialty chemical.
Interesting dynamic where the treatment points really were relatively resilient yet revenues, obviously were off a bit more than that just wondering if you could talk a bit about the dynamic between you know pricing chemical intensity, maybe revenue mix. It maybe was behind that.
I can start off with with just level setting on exactly how that metric works and the fact that it's not a perfect metric, especially in volatile periods like we're in right now and and Tom can but definitely speak better to to the pricing and customer dynamics so to be.
Crystal clear treatment points is the measure of the number of wells that are treated in any given month. So for example, if we go out and treat that specific well three times in a month it counts as a single treatment point, we had a very strange.
Dynamic during the colder, particularly in the middle of the corridor.
Where we had a bunch of customers that decided to shut in wells in early to mid may after we treated those wells at least once.
So they shut them and during that month and they would stay shut in through the month.
And in many cases in June they brought them back on so if you were to look at the the number of wells that we treated it would've been the same as it would've been in a previous period, although the number of times that we visited that well would have been lower thereby the amount of volume.
And then we delivered to that well would have been lower than in previous periods. So that should help you understand the the fact that the decline in the treatment point figure specifically for the U.S. was not as pronounced as you would have expected it to see it given the.
The lower overall production levels and thereby delivery of production.
Chemical volumes by our company and Tom could probably speak to the pricing dynamic that was being experienced during that period.
Yeah, there's hardly be Oh.
<unk> drop a product that went out the door John that didn't have a discount applied to it through April may June.
And we're starting to just in little ways unwind some of those discounts as oils went up.
But.
Our customers were on a mathematical path. The bankruptcy. So are we saw was everyone. When those transactions call it were happening so.
We were watching storage because if it filled I think it could've been a blood bath for the industry, we all Dodge that bullet and.
We're.
We're not selling stuff at a loss, but we're also prepared to make a lot less.
To stick with the customer that when oil was 50.
We get to charge more and they go back to building their business.
So margins are going to be week, while oil sold 50.
For us anyways.
Got it that's great color appreciate it and it kind of leads to my next question in Canada, you, obviously have a good vantage point to across the basin.
What's your sense of where shut in peaked in China, where we've moved forward today on a kind of a play by play basis.
I'm pausing drawn because.
I think Canada was off a million barrels.
And the U.S. might have been off three.
And.
You know maybe.
Half of that is back in Canada, and two thirds is back in the U.S.
What happens in these times is everyone tries to use a little less product and obviously when they're shut in their using not so there's a lot of variables.
We think probably by September.
Anything that's going to come back on.
I think is probably back on John.
Got it.
That's great color that's it for me guys really appreciate it.
Thanks, John.
No no more questions at this time I'll turn the call back over to Tom Simons.
Okay, well I'll sort of quickly repeat the summary.
We're running the business for the mid to long term.
That means we hope to keep as many of our talented people as we can.
So we may leave a few pennies on the table for what we could do for EBITDAC through Cove it.
But we think that we benefit many times over on the other side of this because our chemicals don't make themselves. They don't apply themselves in the field, they don't mix themselves or the rig.
We need people to do all of that stuff and make a market for our products.
So we need our people and our recovery when we've got the business at a point.
Sure it won't lose that this head count.
And with even a slight bump in upstream activity, we can make a little bit of money is a business.
Our production businesses as productions getting turned back on our back to being very steady and reliable, albeit at lower pricing.
So listeners can expect us to protect our people.
Run the business for the recovery.
And maintain a strong financial position and with that will conclude the call.
This concludes today's teleconference. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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