Q2 2023 Ranger Energy Services Inc Earnings Call
Good day and welcome to the Ranger Energy second quarter, 2023 conference call.
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I would like to turn the conference over to Shelly Weiner V. P of reporting and finance. Please go ahead.
Thank you operator, and welcome to Ranger Energy services second quarter 2023 results conference call.
After the market closed yesterday Ranger issued a press release summarizing operating and financial results for the three and six months ended June 32023. This press release together with accompanying presentation materials are available in the Investor Relations section of our website at www.
You got Ranger energy Dot com.
Today's discussion may contain forward looking statements about future business and financial expectations actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the secured.
And Exchange Commission.
Except as required by law, we undertake no obligation to update our forward looking statements.
Further please note that non-GAAP financial measures may be disclosed during this call a full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation.
With that I would now like to turn the conference call over to Stuart Ford.
Ranger CEO and malicious evil Ranger CFO for their prepared remarks.
Thank you Shelly.
Everyone. Thank you all for joining US today, we have a lot to announce and celebrate this quarter and we are excited to speak with you. This morning.
I'll start by providing a high level summary of our performance in the second quarter, and then discuss reaching our net debt zero target followed by the status of our capital returns program.
We had a strong quarter with revenue of $163 2 million, representing a 6% increase compared to the second quarter of 2022, and a sequential increase from our first quarter. Our net income of $6 $1 million or 24 per share is up from a net loss of $4 million.
In the same quarter last year and represents an annualized yield of nearly 10% based on our recent share price.
Also achieved a 22% increase in adjusted EBITDA to $21 $9 million from $18 million in the second quarter of 2022.
We achieved strong quarterly results, despite dealing with significant market volatility, which made the first half of 2023 softer than we anticipated declining.
Declining drilling and completions activity largely in gas weighted basins caused more white space in our schedules due to asset movements between regions.
However, we still achieved a 16% year to date increase in revenue compared to the same period last year, which is a testament to our service quality and the resiliency of our production focus business model, we continuously monitor our activity levels and pricing within our basins and I am pleased to report that pricing has been resilient we have made.
Stain pricing in our high specification rigs segment and we have also seen recent stabilization in the wireline and ancillary service lines, which suggest the worst is behind us.
Where we have strategically shifted assets from gas to oil basins, we've been able to do so at comparable rates, our flexibility has allowed us to adapt to market conditions and optimize our operations. Accordingly. This would not have been possible without the constant hustle of our operations teams, who have stayed focused on keeping utilization up and holding price.
Looking ahead to the second half of the year, we expect commodity prices will stabilize and drilling and Frac frac activity will begin to rebound however, and the advent of recovery takes longer than we expect Ranger is differentiated business model and significant production focus physicians are successfully to <unk>.
Abigail volatility and provides the stability in our business.
Importantly, we continue to see customers pushed to maintain their current production levels in the oil basins amid their expectations for increased oil demand in the medium term activity in gas basins remains slower, but the pricing outlook for the next 12 months is improving.
Our commitment to staying agile and responsive to market dynamics as proven to be a key strength for us we remain confident in our ability to adapt to changing conditions and deliver value to our stakeholders.
Now, let's take a closer look at our business segment financial results. The revenue growth in our high specification rigs segment was slightly muted during the quarter with a 2% increase year over year. However, we are encouraged by the fact that our hourly rig rates were $687 per hour in the second quarter compared to $632 per hour.
In the same quarter of 2022.
Year to date, we have achieved approximately 10% revenue growth in this segment compared to last year and continue to believe we can further grow this segment and our future.
In our wireline segment, we have recently observed the wireline market is beginning to stabilize we're also beginning to see fundamental improvements in the business with segment revenue up 10% from last year in the second quarter on the back of increased operating activity.
Finally, our processing solutions and ancillary services segment showed robust growth with revenue up 27% year over year as compared to 2022, all lines of business within this segment, including coiled tubing processing solutions rentals in fishing and plugging and abandonment services experienced solid increases.
Before turning the call over to Melissa I would like to provide an update on our net debt zero target and our capital allocation strategy.
I am proud to report that our strategy of capital light operations and maximizing free cash flow conversion has been validated by the speed at which we have paid down our outstanding debt balance.
We have paid down over $56 million of debt over the past 12 months and we ended the quarter with just $300000 in total debt effectively achieving our stated goal of becoming net debt zero, congratulations and thanks to the entire Ranger team for staying laser focused and executing at a high level every day to make this goal a reality.
Hey.
Our strong balance sheet gives us the ability to explore accretive inorganic growth opportunities and expand our capital returns program.
Earlier this year, we committed to instituting a dividend as we eliminated our debt and I'm pleased to report that the board will be will be initiating our first quarterly dividend of <unk> <unk> per share to be paid out beginning this quarter.
In addition to the dividend we initiated our stock repurchase program earlier this year and bought back approximately 5.5 dollars $9 million worth of our common stock during the second quarter, representing 37% of our quarterly free cash flow as a reminder, we committed to returning at least 25% of our annual free cash flow to <unk>.
Investors through dividends and share repurchases, we intend to continue share repurchases and we'll continue to evaluate the best way to do so considering our already significant shareholder concentration.
Returning capital to our shareholders is a key priority for us and we are excited that our robust free cash flow and balance sheet strength gives us the ability to do so with confidence while also remaining active in pursuit of value, creating strategic opportunities case in point I am pleased to report that just last week, we signed a purchase agreement to acquire <unk>.
<unk> pumps and associated equipment for $7 million to $5 million, we have fully inspected the equipment and several are currently operating under current contracts when Ranger close of the transaction you will deploy these assets to our Permian northern regions in our high margin pumped down service line within our wireline segment.
Financially, we expect these assets to be immediately accretive to revenue and margins with an expected payback period of well under two years. These types of tuck in acquisitions provide great pull through revenue opportunities for our existing businesses and allow us to further expand our margins and presence with our customers.
We continue to engage with potential sellers on various strategic opportunities, but we will remain patient we have a strong track record of making accretive deals and we'll wait until we find the right opportunity that will result in attractive returns on investment with that I will now pass the call to Melissa provide a more detailed discussion of our quarterly financial results.
Thank you Sarah and good morning, everyone.
<unk>.
Sorry.
Sure.
As Stuart mentioned, our revenue for the quarter was 100.
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8% or 153.
<unk>.
Thank you.
8% increase year over year.
Yeah.
Can you give us the operating leverage we achieved at <unk>.
Yeah.
I'll go to demonstrate impressive resilience of our business when you compare the market pressures and defining rig rates and drilling activity. This year.
Moving on to cost of services, we recognized expenses totaling $133 million or 84% of revenue as compared to $130 million or 85% of revenue in the prior year period.
Cost of services during 2023.
Generally impacted by employees.
And normally elevated number relative to the prior year. This affected the ranger financing by $3 $3 million on a year to date basis compared to the same period in 2020.
These costs are expected to somewhat normalize in the back half of the year and stop loss coverage against to support these claims despite.
Despite these unanticipated costs, we still achieved a gross margin of 16, 5% representing an improvement of over 100 basis points from the prior year.
General and administrative expenses were approximately $7 $3 million for the second quarter compared to $11 $2 million in the prior year period with the decline attributable to decreased acquisition and integration costs. We run an efficient back office function with excellent G&A run rate as a percentage of revenue and take Fry.
And constantly looking for ways to increase the support we provide to our operations team.
Net income for the second quarter totaled $6 $1 million or 24 cents per fully diluted share compared to a net loss of $400000 or two cents per share in the same period last year.
We are reporting adjusted EBITDA of 21 point from the $9 million up $4 million year over year and a sequential increase.
The year over year increase in adjusted EBITDA as a result of increased operating activity and improvements in pricing and operating efficiency, partially offset by the employee medical cost issue I previously mentioned.
Our strong results and team efforts have resulted in generating positive free cash flow of $28 $1 million year to date.
During the first half of the year, we exceeded our 60% free cash flow conversion target. Despite completing several compliance certifications for Ari that required some capital expenditures.
Turning to our balance sheet as Stuart mentioned, we have made substantial progress in reducing our total debt, which now stands at just $300000 compared to $18 $6 million at the end of 2022.
Our overall financial health has improved dramatically since this time last year, when we reported a debt balance of $56.5 million. The entire here the entire team here at Ranger takes great pride in having achieved this milestone that positions us to be nimble and responsive to future opportunities.
As we announced at the end of May we entered into a new ABL lending facility with Wells Fargo facility includes $75 million of committed liquidity with an accordion feature allowing expansion to a $150 million to give us ample flexibility to grow as we need our borrowing base is determined from our accounts receivable balances and we have a standard fixed.
<unk> coverage ratio covenant that is triggered based on borrowing levels. We believe this facility provides us with a more economic and flexible structure that will allow us to quickly respond to strategic opportunities as they arise.
Now I'll turn the call back over to Stuart can give you some updated thoughts about the back half of the year.
Okay.
Thanks, Melissa and evaluating our results for the first half of the year.
<unk> our expectations for the back half of the year, we forecast that Ranger can still achieve the lower end of our original guidance ranges for profitability.
Shifting of assets and resources did create some white spaces here on the revenue side, and we have narrowed and lowered our guidance ranges. Accordingly, we now expect revenue to be between 660 and $680 million and adjusted EBITDA to be between 92 and $97 million, we continue to expect our.
Free cash flow conversion rates to be approximately 6% and achieved between 55 and $65 million.
Free cash flow for the year capital expenditures and leases are expected to remain at $25 million to $35 million.
Overall, our guidance continues to reflect strong revenue growth and greatly improved profitability is of our efforts to improve utilization and fixed cost absorption. We expect this remains true through the second half of the year with the third quarter, representing a peak in activity and Orient early winter, we had the opportunity to deliver a year over year growth.
In the fourth quarter as well.
While commodity price pressure and rig count declines are affected all North America onshore players. This year Ranger has successfully navigated these challenges because of our outstanding teams and production focus service lines. Additionally, as we have mentioned before we are seeing effort by many large customers to consolidate service providers with an emphasis.
Just on service quality safety and multi basin scale, given Rangers geographic reach and reputation for safe and high quality operations. We are in advanced conversations with several customers on projects, Jim meaningfully boost our utilization second half of the year and over the next 12 to 24 months.
We hope to share more on these projects and the nurse.
In conclusion, we want to extend our appreciation for your continued interest in and supported Ranger Energy services. We firmly believe that we have a business that will create value over the long term and we remain excited about the opportunities that lie ahead now I would like to open the floor for any questions. Operator, please compile the list.
Okay.
Thank you and we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys.
You said anytime your question has been addressed and you would like to withdraw your question. Please.
Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Don Crist from Johnson Rice.
John Please go ahead.
Good morning, guys. How are you all.
Good morning, John how are you.
Good.
I wanted to ask about.
About demand steward.
Obviously, a lot of your operations or our workover related not new drill related and I kind of wanted to dive into the demand picture.
And.
You know how is the demand on the Workover side move since since the second quarter when oil was at.
In the high Sixty's versus the low eighty's now as that market moved a lot over the past couple of months.
Yeah I'll start off.
So.
It's definitely improving as oil prices have firmed up.
I think again I think as we've talked about in the past.
It really depends on where you are so the natural gas basins.
Haven't really started that means they are starting to come back but are still pretty soft, but all your basins are quite strong.
It's puts and takes I would also say when you kind of go look in production related work continues to be strong we've seen a little bit of softness on the completion side, which isn't a surprise.
But overall, we're seeing pretty steady demand and we are starting to get customer inquiries for more work in the back half of the year.
Yes.
Okay and I wanted to ask one question on the guidance.
A sentence in the guidance paragraph that says the third quarter should be pretty good.
I'm, assuming that that means that we should see a pretty good step up in the third quarter versus the second quarter, and then maybe a little bit of moderation in the fourth quarter am I thinking about that correctly.
I think you are doing yes, that's exactly right for us third quarter has historically been our strongest quarter and.
And we expect that to be to be the case again this year.
Okay, and if I.
I can sneak in just one more on the M&A.
Congrats on getting your first M&A transaction done in quite a while.
Is that done with cash or shares or a combination of the two or how should I think about that.
It was done with all cash.
And the reason is we think that's the most accretive thing for our shareholders.
Okay I appreciate it I'll turn it back for now.
Okay.
And our next question comes from John Fitch Dorn from Dialectic capital John You May go ahead.
Thanks, guys.
Nice job on the share repurchase nice to see you're exceeding the 25.
My first question is is how do you how do you think about that and.
So is it now 35 or is it just dependent on price just give us some ideas. How you continue to think about the capital return either through share buybacks or through targeted acquisitions like the one you just did.
Thanks for the question Jon Good morning.
I think we will continue to be opportunistic.
It does depend.
On on where the where the stock is trading.
I would what I would say is that we're obviously very very bullish.
I'm very optimistic about the long term prospects for the company.
And if ranger.
Where is trading at a discount of levels, we will be actively purchasing shares.
Yeah, just speaking from a shareholder at four times free cash flow I would continue to say you're trading at actively discounted level levels. Even here. So you know don't don't let your meatloaf as we like to say.
Yeah.
Second you mentioned maybe some.
Contracts that were in negotiation or those at all in the guidance and can you give us an idea understanding that we don't have no idea, if they're going to close or not and with all the standard caveat, what kind of like size, where we're talking about.
Yes.
So right now they are I would say.
Really in the guidance, but if you think about the deployment schedule for something like this for some of our larger customers.
Good.
Increase in rigs.
Can be deployed over call it six to nine months. Thank.
Thank you and really start to see the real impact of it.
Okay.
Great. That's all for now thanks a lot.
Thanks, John .
We now have a question from Jeff Robertson from water Tower Research Jeff go ahead.
Thank you Stuart follow up on the comments you made about customer consolidation that you just addressed all those types of contracts come basically one year type contracts as operators to come up with their budget cycles or or do they potentially give longer visibility into revenue.
Yes.
Right now the discussions are around probably a one year contract.
They obviously, you havent evergreen kind of nature and feature in them.
What I would say that the nature of the contracts that we've been talking about.
As you know.
It has kind of a floor in it and for minimal amounts of work.
And again I think what we're seeing from the customers Jeff is that.
As they struggled with service quality.
With a lot of smaller players that are trying to go with kind of more established.
Players that are really focused on service quality and try to guarantee then some work or at least commit to some work over the longer term. So that we can invest in the assets and expect a reasonable payback for it.
So it's essentially leveraging your scale and reliability to provide the customer something that they can count on.
Absolutely and we've been taking a lot of inbounds I would say over the last six months.
Our impression is that operators right now are really being very are really doing a hard review of their of their suppliers because I think they've been struggling with is as that service quality safety et cetera, and so I think they are just trying to shrink it down to the most proficient providers of service.
Stuart you touched on the acquisition that you you funded with cash now.
Now that your net debt zero can you talk about your philosophy on using that as an acquisition and how that would play into trying to return.
If you if you took on that how it would play into trying to return to to your leverage goals.
Yes, so I'll start on for Melissa will chime in as well.
So you know, we obviously have been pretty pretty vocal about wanting to keep very modest debt levels.
We have been we've looked at a number of opportunities we're going to be patient. If we know what needs to be accretive that said I do think the ability to kick in some cash.
Been an advantage to us.
Okay.
At opportunities, obviously, if it increases it increases accretion and also.
It has given us we think an advantage and where it could give us an advantage when you bid on things. So I would say I don't think we're afraid to use it for the right deal.
But again I don't think we want to kind of be highly Levered company.
I would agree with that I think the only on this factor probably that way. Our next question is.
I think we do remain.
Equity friendly.
I would like to share price to be at a much higher level, but given our liquidity and our flow.
I think for really small deals casting.
World for other reasons Stuart laid out as we get bigger there is an added advantage our goal would be to try and support the share price by here in terms of its improved valuation.
When we go to do a large scale transaction, we could put in some equity and principal of affinity and things start to really gather traction towards gas alone.
Thank you for taking my questions.
Thanks, Jeff.
At this time I'd, just like to remind you that if you would like to answer the question queue.
Thats Star one.
Our next question is coming from William Kim from Presidio asset management William.
William Please go ahead.
And just doing them a few months.
Hey, Jeremy.
Two zero.
I guess a.
A few questions and I guess right on the recent.
Our recent acquisition.
You mentioned, a I guess, a two year payback is that a free cash flow payback when you did that payback.
EBITDA payback.
We do we give you.
To give you a capex as being pretty miles and I would say.
Not in terms of actually noticeably better.
It's going to be depending if we haven't been of a range depending upon exactly how does utilization defined networks.
Could be as low as zero 20 months.
Kathleen model.
Okay. Okay, and then those are pretty good attractive returns how did that deal come about was that like a distressed situation. How did you end up sourcing that deal.
It was a distressed situation.
And it was a situation where again our ability to move quickly.
And used cash would be a huge advantage.
Got it great and then.
Then I guess overall for the business overall do you feel like your existing asset base.
As you reach peak returns and if not you know what does that look like and I guess related to that.
What would it take to get the wireline business economics back to closer to 2019 levels.
So I'll start with the first question on do we think we've reached the peak.
We got our strongest said, we do not think we've reached a date just because we do have additional assets that we can deploy.
Both on the rig side and on the wireline for high specification rig side in the wireline side.
The one thing I would highlight is.
We were very disciplined I think over the first half of this year should not drive should not drop price to put additional equipment now right. So so we took a philosophy that if we could not put equipment at a comparable rate, we would rather not put that equipment out right. So we do have additional capacity.
At our disposal as the market.
Strengthens that's kind of the first thing the second thing I would say on the wireline side and I think when you kind of go up underneath.
Inside of wireline wireline has three kind of sub segments to it. So there is pumped down services and quite a lot that tends to be high margin. There's a lot of demand we've been turning down work on that.
Production related services intervention work as well as call out work its a little lumpier, but it tends to also be pretty high margin and the plug and perf market as we've talked about particularly in the Permian has still been pretty challenged we think has reached bottom and we're starting to see some.
Some.
Some kind of firmness again in pricing, but I think to get it back to really pre COVID-19 levels, you would need to see the plug and perf market changed dramatically.
For the better.
Obviously, what we're very focused on is is pumped down in production right now.
Again, we don't want to just try to chase low margin work.
On the plug and perf businesses that do you feel like there is a secular change going on there or is this just a different.
Part of the cycle regular cycle.
I think it's a little bit part of the cycle as we talked about last quarter, we have seen in the natural gas basins, playing a part with probably some of the easiest assets to move around.
From basin to basin, and so we did say in the Permian in particular, we saw trucks from South, Texas, Haynesville et cetera move into the Permian and then get pretty aggressive with price.
No.
I think it's just kind of a function of where we are in the cycle.
There has been a little bit of Atlas in the north.
It is.
Understood and then last one from me is related to the balance sheet.
Yes.
You know what what's.
The minimum cash you would like to see on the balance sheet, what's an ideal level of cash.
And I guess are there any further asset sales that we can expect from previous acquisitions.
Yes, I'll take that and I would say, let's say, there's not a magic number that we strive to retain I think what we view is cash can be can be helped.
Helpful to us at this point in the cycle.
In this sector that we're in.
We think about it less in terms of needing to get to a certain minimum cash balance as much as running the right balance of whereas our share price today, we feel like that's a good investment and we're continuing to deploy incremental cash app versus as we continue to see these additional opportunity. So I think of it more as sort of a.
Our balance.
If we have the ability to pay down I think as we add that we wouldn't have had.
I think we also see ourselves as being very undervalued in the market Stuart mentioned earlier. So I think we also think that's a good use of arch.
I don't think that team is.
Sounds like you need to build the stockpile of cash I think we just view it as were cash flowing we need to use that cash very wisely either through returning it.
As shareholders.
If our share price the depressed or looking for additional opportunities.
I'm not sure that that's.
Yeah, it's up if that's helpful, but I think what I see.
The other end of the spectrum may be the only thing I'd add is I think the team starts to feel and we probably were uncomfortable they lever after the basic asset acquisition.
And so if you kind of go to the other end of the spectrum, but we'd be happy to take on some leverage I think yes, I think as the financial health of the company and the cycle starts to continue to on all of that becomes more and more comfortable.
I just think we're probably not going to look to take leverage in line accuracy time brands start to get pretty uncomfortable, but we would absolutely use it as a towards continuing to grow as well.
Great and then.
Any further asset sales that we can expect.
From the existing balance sheet yeah.
I mean, we have a few but it's definitely marshmallows XY and back.
But in some cases, we don't like it.
It's perhaps a whole onto the assets that we have remaining as we may find some that damage potential transactions down the road.
We have a couple of physical properties that are still members from the acquisitions.
But again, it's pretty minimal.
Alright, great. Thank you.
Thank you.
Yeah.
And this concludes our question and answer session I would like to turn the conference back over to Stuart Gordon for any closing remarks.
Again, thank you everybody for joining the call today.
You for your interest in our Ranger and we look forward to speaking with you in the future. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.