Q2 2020 Oil States International Inc Earnings Call
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Welcome to the oil States International QQ <unk> earnings Conference call My name is sure.
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Thank you Sheryl good morning, and welcome to oil States second quarter 2020 earnings Conference call. Our call today will be led by Cindy Taylor oil States, President and Chief Executive Officer, and Lloyd Hajdik oil States Executive Vice President and Chief Financial Officer before we begin we would like to caution listeners regarding.
Forward looking statement to the extent that her remarks today contain information other than <unk> historical information. Please note that we're relying on the safe harbor protections afforded by federal law.
He such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our form 10-K, along with other FCC filings. This call is being webcast and can be accessed it oil states website, a replay of the conference call will be available one and a half hours after the completion of the call.
Oh and will be available for one month I'll now turn the call over to Cindy.
Thank you Alan good morning to each of you and thank you for joining us today to participate in our second quarter 2020 earnings conference call. If we projected on our first quarter earnings call. The market dislocations caused by the global response to the covered 19 pandemic have been.
Unprecedented the impact on the energy industry has been extreme due to the rapid demand destruction for crude oil and the resulting inventory builds across the globe that resulted.
However, the demand destruction for crude oil proved to be less severe than was originally projected U.S. shell production shut ins the card sooner than expected and okay floors compliance with the announced production cuts has been fairly good.
Additionally, the Opex was cuts were extended for an additional money through July 2020, helping me industry managed through the crude oil demand destruction and associated inventory builds with these factors activity appears to be stabilizing and crude oil prices have been.
Sprayed with front month WT are approximately.
$40 per barrel and.
In conjunction with our discussion of the quarter, we plan to update you on initiatives undertaken to shore up liquidity give you our thoughts on near term market conditions and summarize our efforts to mitigate cost both capital and operating as we navigate this difficult market.
First I would like to provide an update regarding cobot 19, and its impact on our global operations.
We implemented stringent protocols early in the pandemic in an effort to protect our employees customers suppliers in the broader communities within which we work measured applaud include working remotely we're able to do so adhering to social distancing guideline.
Limiting visitors to our work starts to a central personnel adjusting shifts and work schedules to minimize close contact implementing mandatory stay at home principles when employees show symptoms of illness, performing enhance cleaning protocols along with the other safety measures.
The confirmed cobot 19 cases that we have been notified a than our global workforce. The majority work asymptomatic or have now recovered and our back to work. However, various states, including Texas has seen significant spikes and new cases that they began to reopen not a central businesses.
Risking I set back in the economic recovery that had begun to take place demand for oil and gas and therefore, our products and services depends on a functional economy and we intend to maintain our diligence continue to worksite employee and apply lessons learned throughout this pandemic.
We reported a 25 million dollar loss during the quarter. However, our second quarter results, excluding severance and downsizing charges were generally in line with our internal forecast despite being weaker at the revenue line during the second quarter, our completion services rather.
These were down 56% sequentially with EBITDA margins going negative similarly, and our downhole technologies segment revenues declined 64% sequentially with EBITDA margins also negative in contrast revenues and our offshore manufactured products segment inquiry.
Sequentially due to stronger project driven sales segment backlog at June Thirtyth 2020 totaled 235 million a decrease of 12% sequentially. Our segment bookings totaled $64 million, yielding a book to bill ratio for the second quarter.
As a 0.7 times, bringing our year to date ratio 2.8 times.
Thanks stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed cost to that end, we generated $39 million that cash flow from operations into second quarter secured an amendment to our credit facility.
Providing for financial Covenant holidays through March 30, 2021, and purchase 12 million face amount of our convertible notes during the quarter at a substantial discount.
We have also taken significant actions on the cost side of our business to adjust to the expectation at these revenue declines, particularly those tied to shell completions in the United States, which were in free fall during the second quarter.
We believe that we have stabilized the company during a very difficult period, and we'll continue to closely manage our debt working capital and cash flow generation in the quarters to calm like will now review, our consolidated results of operations and financial position in more detail before I go.
I went to a discussion of each of our segment.
Thanks, Andy and good morning, everyone.
During the second quarter, we generated revenues of $146 million, while reporting a net loss of $25 million.
41 cents per share.
Our second quarter results were reduced by severance and downsizing charges totaling 5.4 million or seven cents per share.
Second quarter EBITDA totaled $1 million, excluding the noted severance and downsizing charges.
We also recorded a $2.2 million charge for receivables would customers have claimed bankruptcy protection.
We generated significant free cash flow during the quarter was 39 million and cash flow from operations offset by $3 million from capital expenditures.
She noted we purchased 12 million in principle amount of our convertible senior notes at a 51% discount to par value, thereby partially deleveraging our balance sheet.
For the second quarter 2020, our net interest expense totaled 4 million.
Of which 2 million was noncash amortization of debt discount and debt issued costs.
At June 30.
Net debt to book capitalization ratio was 21% and our liquidity totaled 91 million.
Based upon the methodology outlined in our amended credit facility.
And we'll in compliance with our debt covenants at June 30.
Our total net debt declined 39 million during the quarter inclusive of the convertible note purchases.
Our convertible notes, which have a maturity date in February 2023.
61% or total debt at June 30.
It was a negative market outlook and the uncertainty regarding the level of EBITDA to be generated during 2020.
Coupled with maintenance covenants that govern both total net debt and senior secured debt to EBITDA.
We worked with our bank group during the quarter to amend our existing cash flow based revolving credit facility.
The amendment the amendment converted the availability calculation into one that is governed by barn based formula.
Two accounts receivables and inventory.
In exchange for reduction in the sizable facility to 200 million.
And suspension of the financial covenants through March 32021.
Maturity date of the credit facility remains January 32022.
June 30, net working capital excluding cash in the current portion of debt and lease obligations totaled 304 million.
Compared to borrowings outstanding under our revolver totaling 71 million.
In terms of our third quarter 2020 consolidated guidance.
We expect depreciation and amortization expense totaled 25 million.
Net interest expense totaled 4 million of which approximately 2 million this non cash.
In our corporate expenses are projected to totaled 9 million.
In this environment, we expect to invest approximately $15 million in Capex during 2020.
Which is down about 70% them the spending levels in 2019.
At this time I'd like to turn the call back over to Cindy you will take you through the operating results for each of our business segments.
Starting with our offshore manufactured product segment, we generated revenues of 95 million and segment EBITDA 15 million during the second quarter revenues increased 4% sequentially due primarily to higher project driven revenues.
Segment, EBITDA margin was 16% and the second quarter of 2020 compared to 14% in the prior quarter orders booked in the second quarter totaled $64 million, resulting in a quarterly book to Bill ratio up like seven times at June Thirtyth, our backlog totaled 230, Bob Miller.
In a 12% sequential decrease.
Our over 75 years, our offshore manufactured products segment has endeavored to develop leading edge technologies, while cultivating the specific expertise required for working and highly technical deepwater and offshore environment recent product development should help us leverage our.
Capabilities and support a more diverse base of energy customers and 2020, we are bidding on potential award opportunities to support our sub sea floating and fixed production systems drilling military sub sea mining and wind energy clients.
Globally.
However, with reduced market visibility given much lower crude oil prices and reduced customer spending we continue to believe that our 2020 bookings will be lower than the levels achieved in 2019, but do expect our book to bill ratio for the year to the 0.8.
Or higher.
And our Wellsite services segment, we generated $36 million have revenues and a negative 2 million a segment EBITDA, excluding the impact of severance and downsizing charges. The dramatic sequential decline in revenues was mitigated by aggressive cost reduction measures taken.
During the quarter, leading to 28% decremental margins when adjusted for severance and downsizing charges in that segment.
The 58% sequential revenue decline was driven by materially lower U.S. land completion activity and the reduced number of frac spreads in operation, which market analysts indicate hit a low of approximately 45 active fleets and like my.
International and Gulf of Mexico market activity comprised 26% of our second quarter completion services business revenues and helped blind the massive decline in U.S. shell driven completions related activity.
As announced last year all of our remaining drilling.
Rigs Starbucks customers and the Rocky Mountain region. None of these rigs work until very late in June providing minimal revenue contribution to the segment during July two of our rigs we're working.
We're highly focused on streamlining our operations and pursuing profitable activity in support of our global customer base, necessitating head count reductions and facility closures. We will continue to focus on core areas of expertise and are actively developing and conducting field.
Old trials of new proprietary service offerings to differentiate oil states completions business.
And our downhole technologies segment, we generated revenues of $15 million with an EBITDA loss of 4 million in the second quarter, excluding severance and downsizing charges revenues declined 64% sequentially, but decremental margins were held to 36% exclude.
Thing severance and downsizing charges and the segment given the significant cost savings measures that have been implemented we continue to develop field trial and commercialize new products in the downhole technologies segment.
Sales trends for our vapor gun integrated gun system, and addressable switches were gaining customer acceptance following their respected commercializations light in the fourth quarter. In addition, our premium integrated gun system strategy was formally launched in the first quarter.
As noted on recent earnings Conference calls, we also announced the commercialization of ancillary PARP, writing products, including a new wireline release tool and two new families of shape charge technology. Our product development efforts are designed with our wireline and N P codes.
Immersed in mind, where we strive to provide them with flexibility improved functionality and increased performance, while ensuring the highest level of safety and reliability.
Given the market weakness, we recognize that revenue uptake of these new technologies will continue to be slow, but look forward to some market recovery in the third quarter.
And the second quarter 2020.
Second quarter 2020, U.S. rig count average was 392 rigs, which was down 50% sequentially, notably it was down 64% from the end of the first quarter to the end of the second quarter, reaching the lowest point in the Baker Hughes dataset history.
The industry experience, a 72% sequential decline in the average U.S. frac spread count, which negatively impacted all of our segments with short cycle U.S. shell driven exposure based upon market data that we have we believe the completions activity in the.
The U.S. shale regions bottomed light and the second quarter and we saw some modest improvement in the month of June why we believe that we hit a trough and completions activity. Unlike may it's hard to predict what the average activity in the third quarter will be given uncertainty associate.
I did with the coded 19, pandemics trajectory and the associated economic shutdowns that are continuing.
However, based on current customer indications, we believed that both our Wellsite services and downhole technologies segments will be barely flat to up sequentially. Despite April being the strongest month of the second quarter.
And our offshore manufactured products segment, we're more confident in our ability to forecast revenues, given our backlog position and the relatively low level, a short cycle product sales in our current revenue mix, we project our third quarter revenues in this segment to range between 87.
<unk> million and 92 million with segment EBITDA margins expected to averaged 12% to 13% depending on product and service mix along with absorption levels.
Our margins are expected to be compressed in the near term due to reduce cost absorption globally as we deal with continued supply chain issues and other inefficiencies created by the coated 19 pandemic.
Management teams have to make difficult decisions during market downturns, such as debt to protect the health of their companies. We wanted to provide an update of actions taken to mitigate the material decline in revenue that we have experience today in 2020 <unk>.
Capex will be reduced rebel roughly 70% year over year.
In total approximately $15 million direct operating costs will continue to be reduced in line with activity declines.
Headcount has been reduced approximately 40% to 45% and are well site services and downhole technologies segments, respectively. Since the beginning of the year.
SGN I head count has been reduced by approximately 20% since the beginning of the year as well.
Various salary personnel, including executive management had taken salary reductions. In addition, do other reductions and short term and long term compensation discretionary spending has been substantially reduced or eliminated.
As an update to our cost out program. We now estimate that we will reduce our 2020 costs about 265 million, which is up from the previously forecasted total of 225 million.
The updated total roughly 85% its cost of goods sold and the remainder relates to SGN <unk>. We continue to believe that 20% to 25% of the cost reductions are fixed in nature.
I would like to offer some concluding comments, we believed that we made substantial progress in terms of shoring up our liquidity with strong second quarter free cash flow generation, coupled with the amendment to our revolving credit facility, our strong working capital position will help us manage through.
This downturn as I mentioned earlier, we believe that we have stabilized the company during a very difficult period, and we'll continue to manage our debt working capital and cash flow generation in the quarters to come.
Well sites will continue to conduct safe operations, and we'll remain focused on providing value added products and services to meet customer demand globally.
That completes our prepared comments Cheryl would you open up the call for questions and answers at this time please.
Yes.
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Pick up your handset first before pursuing any numbers.
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Our first question comes from Sean Mckee from JP Morgan Your line is now often.
Great. Thank you good morning.
I'm wondering Sean.
So thank you for all.
The feedback in the in the prepared comments it'd be great just to maybe elaborate a bit more on where are you. All see your progress in terms of addressing cost align them with a with current reality and then.
As you evaluate what the market may give you over the next.
Two to six quarters.
How are you.
The process of evaluate further opportunities to basically keep digging as you need to to get margins, where they need to be.
Hi, Sean I'll be happy to do that of course, we kinda quantified.
What we think the increase is obviously from our first quarter call to the current call upping that that 265 million and of course I have to just be totally honest there, there's no choice and completion services and downhole technologies given the immense right.
The climb that everyone on this call is extraordinarily familiar with and so we took aggressive class action and and I will say early enough thankfully that we really kind of muted the decremental margin impact in those two businesses now as I noted on the call you.
Had this progression with April obviously early in the shutdown error holding up a bit better then clearly may was that or with a month and we started to say a little bit improvement later in the quarter, but based on what we see and customer indication and I should also.
Sorry, Q2 is not only activity driven as it relates to businesses like my downhole technologies business as well as short cycle in offshore products. Its exacerbated even more by customer Destocking and so we've got a combination of conversations feedback with customers that suggest that.
At a Q2 will show some improvement from the end of the second quarter, such that we should be.
<unk> up in Q3 based on what we know today, but those cost actions, obviously were taken early and aggressively and we took quite a lot of a hit from facility closures and some severance relative to the size of those businesses, but I do that is behind us.
I'd say, there won't be any more severance our facility closure costs, but it should be dramatically less than what we saw in Q2, So I kind of put bad as being somewhat behind us as long as activity holds up as we expect that it will we're continuing to try to find cost efficiencies.
In our offshore manufactured.
Products segment, but of course, no there that what we're trying to do is being more effective as an example, with working remotely doing things virtually rather than traveling a and also trying to find manufacturing efficiencies, but with a backlog that business has proved to be more resilient, but we just have to.
Watch that bookings trajectory as we progressed through the second half as to whether there's more benefit in action there as I mentioned SGN I head count has come down about 20% and that has had benefit at the overhead line item if you will.
We're trying to maintain a high quality strong management team throughout this downturn, obviously, if push came to shove, we could do more dramatic things, but we generally feel like we made extensive progress on that front. We are going to continue to look for I call or deeper efficiencies. If you will.
All which are more at the manufacturing facility level looking for opportunities to enhance manufacturing individual manufacturing facilities to help us with unabsorbed manufacturing costs, but I'd say that would be our focus and initiative going forward.
Got it. Thank you Sandy I appreciate all that detail that's definitely helpful.
And I guess.
Given the success you've had in opportunistically buying back some of the of the convert.
You know really strong free cash in the quarter. Some somebody usually help there I guess, just maybe talk about your confidence level.
And being able to.
Generates free cash.
Regardless of the the range of outcomes that you get and.
Clearly debt reduction as a part of that and net debt reduction as a part of a key part of the strategy, but just how you see.
Oh, that's uses of that cash so.
Capability and what makes will be an ongoing challenging market and then.
Uses of that kind of going forward.
Yeah, I'll start off and I'll I'm looking at Lloyd and asking him to adding additional commentary if I Miss anything on that front, but just from my comments in the called prepared comments. If you will I think you can tell by arc home that we are much more comfortable today than we were at the early part of the quarter.
Just given the rate of decline, we were seeing particularly in north American shale activity and even uncertainty globally around actions to address the code at 19, a pandemic, but weve completed a quarter, we had very strong working capital releases that benefited our free cash flow during.
In the quarter.
As we progress we continue to have a very bottoms up detailed forecast, we do envision that will get particularly in the third quarters, an added benefit from a two things one is kind of receivables. We had a very strong revenue month in June and our offshore products business that will lend itself.
To sum working capital benefits, along with just some timing of payment benefit from our military contracts and the third quarter and then as we talked about on the first quarter call. A we have done some in a well carry backs and do expect some carers Act benefit in addition, and.
Q3, and so when we tell the total that for the year again across both not what we have already done, but including that the total year looks to be about I'd say 100 million up cash flow from operations I'm looking for Lloyd for added commentary there and in addition, we've cut capex it to a bear.
Our minimum if you will and expect that to approximate 15 million. So with that that allows us to we were trying to de lever in total that's why we bought in the converts at a discount that is true de leveraging in totality, because you're reducing it below face amount obviously.
Ah, but importantly, we've tried to reduce the amounts outstanding under that revolver as well and you will continue to see us a focus intently on delevering.
Yeah, Shaun since absolutely correct.
[laughter] very good will look I think that's it's really going to give a lot more runway that cashel Jerry this year. So thanks for the feedback.
Yeah Shaun.
Thank you. Our next question comes from stuffing Jack Gol from Stifel. Your line is now open.
Good morning, everybody.
Oh, <unk> I hope everybody is doing well.
The I guess two things for me the first is.
Given the cost cuts that have been put in place and you know given your commentary on Threeq you revenue.
Would you see I mean, if you exclude the severance charges in the second quarter.
Could you see margins rise a bit in a flat revenue environment given.
What's gone on the cost side.
Yeah, you know, we don't make this practice a quote unquote, adding back a lot of things and giving you adjusted EBITDA. We tried to give you the information to allow you to adjust it consistently across the board and there were a in addition to severance and downsizing costs, we were hit relatively hard.
About 2.2 million by customers climbing bankruptcy protection, which is also in the press release and of course Ah We do expect to get the pretty full benefit of these cost reduction measures in Q3. So twofold number one we really did mitigate the decrementals I've been very.
Actively in the harsh environment at Q2, but as we progress logic tells you that as long as you get the revenue that you think that you do you'll have pretty good incremental.
As we generate that revenue, whether that's Q3 or Q4.
Who knows right, we've kinda got on our own internal thoughts and forecasts, but again all these efforts should lend itself to pretty strong incrementals when they come out of this.
Great that that's helpful and.
On the downhole side, you mentioned some of the early traction you saw with Stratix, particularly as well as paper are you seeing any inclination of customers to sort of bye.
Sort of traditional components as opposed to systems.
Well it or do you think those systems given the efficiencies they bring I mean, obviously the market demands tough right now, but you think those systems at the efficiencies they.
We will allow you to gain traction there as we sort of come out of this.
Well I think your comments are accurate number one we do sell components and having the past and are migrating more towards integrated systems. So we see both and quite frankly benefits from both and I think your comments are accurate that.
Draconian activity environment like we face our customers that continue to work are looking to do so very cheaply and so I do think there might have been.
For a short term migration back to components. If you will I will say, it's always hard to measure market share when you lose over 70% of completion activity in a quarter. However, we did outperform in Q1 on perforating relative to the industry Metro.
Six that we track and so that tells me those new integrated products for gaining share in Q1, and what I looked at is Q2 is how much did we decline relative to other competitors and generally speaking we were at or better than some of our here.
In terms of writer decline now there's a mix there because we have both U.S. driven activity and a little bit of international activity in there but in totality.
I do believe that while this is an extraordinarily difficult market that ours.
Vapor a gun abstracts are gaining share.
Great. Thanks for the color.
Thanks Steven.
Your next question comes from George.
From Tudor Pickering, Holt and company. Your line is now open.
Good morning City morning Lloyd.
Yeah George.
[laughter] mentioned and.
Pardon me if I get this wrong acquired rolling off at the very beginning of you're talking them actually in the office today, but you guys mentioned that I think you're working on some innovations on the completion side.
Just.
Serious if you could share any color you know what types of problems you're looking to solve would what specifically are focused on the innovation side and the completion services side any color there would be super interesting.
Yeah. Thank you George I appreciate that you asked that and I think well. These are ongoing effort that we have in many times. These are I'll call them step out and enhancements of our existing office offerings, but I'll use our extended reach technology initially as an example.
[laughter] takes nine dark temporary product line, where we clearly have leading market share and they really extended reach laterals. The harsher type jobs, but it is I premium piece of equipment that of course.
Man's I premium price and so what we'd like to do is introduced a really efficient technology.
Around the mid range lateral so that we can also have leading market share in the mid range laterals and we had some newly patented technology. It's a complicated name it's the temporary Fluidic Asa later.
But that's what it is but that's an example, again its technology, we know very well, but we're trying to adapt it to mid range type usage by our customer base and as you know we are very experienced and valve technology and we're looking to find.
More efficient ways to mitigate or eliminate San migration, which obviously helps the operators and it also helps us and times reduce maintenance and other key.
On our own or equipment. Those are a couple of examples and along those same lines, we have penetration and international regions, but we're trying to leverage a broader range of our existing offerings into international regions as well, but those are examples George.
Very helpful Cindy.
You think about the structural cost since you've taken out of your business and even some of the variable cost me, maybe don't have to come back if and when things cycle back up.
Across the.
Three segments, where the majority of those structural costs.
Actually come out any color there.
Ah you know I I'll be honest I I've looked at it more in totality my divisions kinda build that up and I would just generally describe it as broad day, but right now of course as I've said, it's been a bit weighted towards Wellsite services and downhole technologies.
Because that is where the rapid rate of decline has a card and so.
Those are and also say, it's tough to say, okay. What is variable what is fixed but where I have eliminated a facility as an example, and I have no intentions relate to reinvest or reopened that facility, obviously that its parma <unk>, we have taken out a mid level management met.
Management layers just like so many other companies in here that we don't we're going to challenge, Nick <unk>, new people and younger people to step up so we're viewing those as more a permanent.
Obviously cost out of the system and so we've been very diligent about trying to identify those and some of that they initiatives, we put in place for or honestly pre coated but they really helped us I telematics and vehicles in terms of sleep maintenance preventative maintenance areas we have.
I Scout program that its intent was to help us with quality health safety environment management programs, but what you find out push come to show. They also can be leveraged into as an example, coded case identification and management the system that you already have implies.
Without layering on a lot of incremental cost it helps us with Onboarding new employees. It helps us with training at new and existing employees. So it's a leveraging a lot of software systems. If you will as opposed to hiring headcount that need to travel to reagents and do those trying.
<unk> programs and Onboarding programs and again those are things that we think we implemented prieto bid, but my they are certainly benefiting us and as a more virtual operating environment.
And I I did say on the call and I should add where you were not sitting on our laurels because our offshore manufactured products is more resilient with the backlog, we're looking for efficiencies across the globe to better serve our customers and use existing resources global.
<unk>.
Which means you can flex your manufacturing capacity and given areas and we're looking <unk> when the early stages of more cross segment manufacturing efficiencies between downhole technologies and offshore products that I'll, just say more to come on that in future quarters.
Thank you very much.
Thanks George.
Thank you Sir our next question comes from Kurt Hallead from RBC capital markets. Your line is now open.
Hey, good morning, since they always.
Hi card Kurt.
Hey, I appreciate all the info and color commentary perspective, I just wanted to follow up Cindy you know the context of what you provided the viewpoints on the progression.
This.
Technologies, a revenue going albums quarter I was just one of them. If you can actually give us a little bit more though directional color on what the impact on margins maybe birds from cost out.
And then in terms of the stabilization or.
Revenue was you kind of kind of progress I know you may be hesitant to kind of gauge it kind of EBITDA margin ranges and I do appreciate that but also given your cost out dynamics want to make sure. We kinda give you a credit card it's too.
Well I hate card I'm, sorry, you cut out just a tiny bit, but I think what I've heard you ask is progression of kind of revenue EBITDA and well side and downhole and importantly, what that means in terms of future incremental margins that with <unk>.
Did I hear that correctly.
Yes, I mean, you got to just correctly and it was really in the context of wanting to make sure are getting credit where credit to do with respect to the cost out.
Okay on the cost out probably I gotcha.
No again, a lot of it has almost been parallel in terms of magnitude I commented I believe a lot of the reductions were about 40% and our completion services product line and again remember they have both Gulf of Mexico and international exposure. So you probably.
We expect that to be just a battle little bit lower than downhole technologies, where their head count reductions have been in the range of 45%. So I'm, obviously, not a fun quarter for any body I'm just in terms of that but again the goal we had its a watch all of that diligently so that.
You don't let that cost creep back into the system, but once you do that again, if we can just get a revenue lift the incrementals are a strong obviously as you come out of this but as it relates to Q3 our guidance. The as you know right now.
Forecasters suggests that the rig count will be down as much as maybe 25%, but completions should be flat to up and so our guidance right. Now again remember April was still a strong month in the quarter, so well be up from exit right, but we'll probably be flattish.
Relative to Q2, obviously, we won't have the severance and downsizing charges at least not anywhere near the magnitude that we had in the second quarter. So just talking that through that line due to a more breakeven result.
For those two segments in the third quarter.
I hope that address your question breakeven results at the EBITDA.
Right.
For you there.
Your turn it does that answer your question.
It looks like.
His line disconnected.
Next question.
That sounds great Sheryl thank you.
Our next question comes from Connor.
From.
Morgan Stanley Your line is now open.
Yeah. Thanks, good morning.
Good morning Connor.
I was wondering.
If we if we rewind the clock today to the 2016 downturn.
We did see some negative God the completion services business, but I think the b.
General color from you guys was that it was more volume issue that are better pricing issue that the fuel margins.
Well I was wondering if you could.
Yes, basically characterize whether or not that's the case again completion of downhole, just any drug pricing trends, we should be aware of.
That's sort of drought.
The negative margins there.
Yeah, you know it very interesting question you know we talked in activity in February of 2016, we had a very severe rate of decline like no one we'd ever seen before only to be followed by worst one.
In this quarter and to your point in both cases. These word dramatic activity declines and you know I got to be honest with you I challenge most businesses across the world the United to adapt to an environment, where you can lose 50% to 75% of your revenue in a quarter.
The activity driven without question and I'd say this decline is different in some respects just because of the duration, we've already had to be fairly efficient because relative to where we've been why we had ABS and flows is not been a dramatic pickup in activity for years and failure.
Cost basis already at a lean level I will call. It we do and you know you can't lose this kind of activity and not have pricing pressure as well, which we have but the cost reductions that's really what we've had to do to stabilize margins and of course, we do have overhead which.
We tried to reduce its hard to reduce it you can't reduce that 75%.
So I would say in totality the margins are probably fairly similar but a lower price environment lower cost environment.
A necessity that that's kinda, but a broad base kind of general answer, but I think you're actually seeing yet if you read all the N.P. notes that are coming out many are doing better than they thought they were going to do in second quarter and importantly, a lot of their drilling and completion costs are down and their l. away costs are down.
Down relative to expectations and so you've had a pretty significant industry compression of cost as we moved three that it's fairly draconian environment.
Got it that's helpful. I guess in both cases, you've got.
It's really not single product line businesses.
As we think about.
Central recovery.
Improvement in the markets is there any major mix shift that's occurred over the past couple of quarters. If things are trended lower here that we should be aware of.
Obviously, we all think in terms of incremental decrementals, but that could be pretty severely altered by <unk> is there any is there any major mix shift.
Point us to in either of those segments.
The margins one way or another.
Normal incremental type model.
Well I think just stepping back broadly first of all of them. The more resilient business has been our offshore manufactured product business, largely because of diversification global reach and backlog and so bad alone. If you just look at the segmental revenue mix is going to favor.
That segment, just because they're not as immediately impacted obviously by land U.S. activity like well site and downhole is I had comments, particularly on the completion services side that Gulf of Mexico in International is now 26% of the Cubs total.
<unk> completion services revenue that is up proportionately over the last year or so as you would expect because again the rate of decline oftentimes hits faster and harder on land U.S., just because of the nature of the operations and it's generally call out work for most people in.
The business and it responds very quickly to changes and the very same thing is true for downhole technologies, although I, sometimes they can olimus be exacerbated to the downtime downside because you also have inventory inventory de stocking to the extent that customers.
Had held inventory, which they do particularly on the plugs side of the business and.
Probably some of the other product lines as well so I hope that answers. Your question, but of course, then I'd say, let's not get lost in just one quarters of activity you know they want to the most important things as management teams that we have to do is that strategy and allocate capital southern.
Real question is not they where we in the quarter, what's going to happen long term and I think what we're all trying to wrestle with is whether U.S. shale.
Seeds share to other global markets longer term and that is the challenge that we're going to be addressing over the next quarters to come.
Got it that's that's helpful color. Thank you.
Thank you.
Thank you.
A question. Please press Star then one on your Touchtone phone. Our next question comes from John Daniel from Energy eight your line is now often.
Listen to what how are you guys.
Hi, John.
I just got a good.
Question no modeling questions here, but.
Yes, it was on pricing.
You have many great long term relationship.
<unk> company Executive and I'm, just curious what you were telling them as it relates to the Unsustainability of current August pricing and how they're responding.
Oh, you know you're right I have a lot of dialogue and I honestly I think that input costs are is do recognize the and sustainability of where we are that outside the however is if you're facing $25 crude oil as we saw.
And you know I I'm not going to focus on the contract that slipped negative forget that bad or they got their own issues their own problems their own challenges.
Probably the more sympathetic customers, we have all the more well capitalized.
Customers that are out there, but if you're an E and pay with high leverage and you're trying to figure out how to make your interest payment honestly relationships and friendships to some degree go by the wayside and lowest price works I I had said, it's crazy industry is so highly fragmented in the U.S. more differentiated.
Good offshore and and our national but highly fragmented and of course, we're tracking all of them. Many bankruptcies both on the S&P side and the service side. So the real question is do we end up with a more consolidated fundamentally stronger supply chain after week.
Come out of this which I think we will without wall Street support as well as as much P E money flowing into the space and so hold onto what we can we do try to be higher technology, you know focused on quality Q Hs and they everything we can possibly due to be good.
Partners to our customers that conversations are tough for every body when you're struggling through a downturn like this.
Fair enough just seems to have any sympathy yet for you.
You did touch on market fragmentation, which is a big deal Im just curious with you know, presumably all the business Rightsizing hopefully behind you.
How much time, if any is being spent on assessing M&A opportunities, whether big or small.
And when do you think the right time will be to aggressively pursue some of those opportunities.
Well I'll just do it in fact, we just went through a pretty big exercise here to try to assess the landscape as we traditionally.
Do and obviously, they're just if you take a wise the from that exercise that just about anything that will get done is stock for stock and likely low to no premium so to do it you'd have to have really.
Strong convention around the strategic nature of the combination number one and number two kind of that you can de risk the integration there and so I think that automatically limits a lot of potential transactions in the near term that couple that with.
Vastly different leverage profiles and the space than we did an exercise of you know everybody gets an enterprise value hit.
In a downturn because of activity, but it is much more severe on the equity side to the extent that you've had leverage first is someone who doesn't have leverage or isn't a net cash position. So then again with the background that these are gonna be stock for stock transactions It really hurts the.
We exchange ratio. So it is my conclusion rightly or wrongly that.
I think you'll see more deals in the N.P. space easier to value on a reserve basis. If you will add that it is some of the service companies and you know.
I personally believe that individual opinion, you're not going to see very much a in the next 12 months until several of these companies either de lever or restructure but that and you know we track a whole lit ne service companies and people are struggling to size should we value those companies on.
2021, or 2022, and most are leaning towards 2022, and we saw a range of multiples at three to 30 times and so those deals are hard to get done.
So we watch it will monitoring but to me it's somewhat of a stimulating intellectual exercise now I just don't see much happening.
They're going to restructuring.
Oh, Okay. That's all I had and thank you for <unk>.
Thank you John.
Once again, if you ever question. Please press Star then one on your Touchtone phone.
All right Charlotte sounds like where.
Concluded that right.
I guess I show no further questions in queue.
Right. Thank you for house in our call Sheryl and thanks to all along for dialing in as I saw the reports come in last night and today I knew it would be extraordinarily busy day and so good luck with all of that and we'll be in touch in the quarters to calm. Thank you so much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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