Q2 2019 Earnings Call
With respect to product and service lines.
We will further integrate our business units to reduce operating costs and we will continue to leverage our global franchises to provide unique solutions for our customers.
All of these actions are achievable and don't require us to make decisions that limit our ability to compete in the future.
With that Westy will discuss our second quarter financial results. Thank you Dave in discussing our operating segments. All sequential comparisons will be made to our first quarter results.
Also provide commentary regarding third quarter expectations for each segment.
This commentary does not take into account any financial impact due to interruptions caused by hurricane Barry.
Our second quarter results are directly related to the successful execution of our strategic objectives.
This execution resulted in three and a half million dollars of free cash flow for the quarter.
Which was a $17 million swing from the first quarter.
And continue continues us along the path of improving our returns and reducing debt.
Cash balances increased to $234 million, primarily as a result of the divestiture of our drilling rig business.
While we are encouraged by our initiatives work remains to be done we will continue to rationalize costs prudently allocate capital to higher margin high return business lines, and we will continue to pursue divestitures.
All of these actions are expected to result in free cash flow during the second half of the year and excess of $20 million.
Cash capex for the quarter was $38 million, we expect the rate of expenditures to slow further during the second half of the year and now anticipate 2019 capex to total approximately $160 million.
Which as Dave mentioned is down from our initial 2019 target of $170 million.
As for our segment results, our drilling products and services total segment revenue remained at $101 million as lighter accommodations activity was offset by improved premium drill pipe rental revenues.
For the third quarter, we expect revenue and EBITDA to be flat to up approximately 5%.
And our onshore completion and Workover services segment, which is comprised of product lines that exclusively serve us land markets.
Revenue decreased 20% to $164 million.
As Dave mentioned earlier.
We elected to reduce our deployed hydraulic fracturing fleets and averaged six suites operating during the quarter.
This resulted in decreased pressure pumping revenue of roughly $33 million.
Fluid management revenue also declined due to an annual decline in heating revenue.
That was offset primarily partially by an increase in well service revenue.
Additionally, the financial results from the drilling rigs, which were divested during the second quarter were included in this segment.
Looking ahead to the third quarter, we expect revenues to decline approximately 15% with 20% to 25% EBITDA Decrementals.
As a result of continued lower pressure pumping activity slightly lower fluid management activity and the drilling rig divestiture.
Our production services total segment revenue of $103 million was unchanged and our expectations are for relatively flat third quarter as well.
Aside from our commitments related to our Kuwait expansion capital expenditures will be limited in this segment and our expectations are for returns to improve even in a static us land environment.
In the technical solutions segment total revenue increased 20 million, 20% to $69 million.
Improved results were driven by increased levels of completion tools activity in the us offshore market.
Our expectations for third quarter results offer relatively flat revenue and margins as increasing completion to activity is offset by lower anticipated levels of well control and subsea intervention activity.
Before I turn the call back over Dave here, a few modeling related items.
DNA for the quarter was $72 million and we expect third quarter DNA to be in the range of $72 million to $75 million.
DNA is expected to be between 70 and $75 million.
Third quarter interest is expected to be approximately $25 million.
Thank you and I will now turn the call back over to Dave for closing comments, okay. Thanks Weston.
With respect to our market outlook, we are approaching the us land market as if it is fully recovered and have no expectations for increased activity levels in the near future.
Maintaining capacity or cost on behalf of our customers with the hope of increased utilization at some point in the future as no longer acceptable, particularly in the most fragmented competitively disadvantaged service lines.
As such.
We are laser focused on operational efficiency controlling costs and rationalizing assets and locations, which are likely to remain challenged from a profitability perspective.
The us onshore and international markets, both seem poised to continue to experience gradually increasing activity levels.
Again, this isn't aspirationally, but based on interactions we have been and continue to have with a variety of customers.
As activity levels increase our revenue mix and capital allocation will increasingly favor. These two regions both of which result in higher margin higher return results.
Our primary focus is on cash generation and improving our capital structure.
The second quarter was a solid step in that direction.
That concludes our prepared remarks, we'll now turn it over the operator for Q and a.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
Any time your question has been addressed and you go back to withdraw it. Please press Star then too.
Well again, a reminder, management request that you limit your questions to one question and a follow up.
This time, we will pause momentarily.
Well our roster.
I think the.
The one just qualifier that are put on this is that.
I think I think you can I think you can pretty well count on capital spending in 2020 being below.
What our spending level, we for 2019.
Right. Thank you all.
Welcome.
Our next question comes from Blake Gendron with Wolfe Research. Please go ahead.
Hey, good morning, Thanks for taking my question I'm, just just attacking the 2020 cash flow question from a different angle, perhaps I know you can't give us.
Guidance quite yet there is really no visibility at least in the U.S. market, but the last time, we got to onshore completion and Workover contribution on the EBITDA side at this level was back in 15, and it was a 55% free cash flow conversion from EBITDA. So should we be thinking that you know.
We're going to gravitate toward the higher end of that kind of range from where we are now or is there a way. We can think about the capex run rate of the Remainco remainco being everything outside of on onshore completion and workover. Thanks.
Yes, I mean, I think that I think that what you can count on is that is that capital spending on the U.S. Lan service oriented businesses will be will be at very low levels in 2020.
I mean, they're at low levels in 2019, we did have some capex that was embedded in the first half of the year for fracturing for commitments that we've made a year ago.
But as we as we go forward I would expect that U.S. land capital spending is going to be very low.
You know I've commented in the past that our problem in the U.S. land market is one of overcapacity.
I can't.
We cannot address the entire overcapacity issue throughout industry. We can only do those things that are best for superior and for us.
That means call that means, allowing those businesses to get smaller overtime.
And you do that by under spending capital investments. So I mean, I think your your thoughts about free cash flow generation from those businesses are spot on.
Okay, Perfect and then just a quick one on DNA.
Screens, a little high on a percentage of revenue, but I understand that your rental businesses, specifically of more core corporate overhead as opposed to.
Service related Opex any any further levers to get down gionee across the business as it relates to sort of the free cash flow improvement moving forward.
Yeah, I would tell you that that we will continue to look for ways to drive overall, gionee and corporate corporate expenses down we've been pretty successful in doing that since.
Since the business began to downsize in 2015, and I think you can look for us to continue to find ways to operate more efficiently.
That's perfect. Thanks, I'll turn it back.
Our next question comes from Sean Meakim from JP Morgan. Please go ahead.
Thanks, Hey, good morning.
Good morning.
So just to.
Thanks continue on that line of thinking we could for a little bit so for next year as lauralee in terms of putting together a budget but.
Would you be able to give us line of sight to what you think would be a maintenance level of spend assuming a steady stream of activity. Both just international as well as North America, So trying to get sense of how much it becomes flex capital that could be put into your best opportunities versus.
Where you have some flexibility between.
Free cash to the balance sheet versus deploying it next year, yes, yes, sure I mean, I think just to.
Kind of address philosophically here, where we are with capital spending I mean, where are we in 2019 or addressing very good opportunities.
Outline those when we when we kind of gave you our first look at capital spend for 2019.
Youll recall, there is capital going into the premium drill pipe business bottom hole Assembly business.
A bit into completion tools, although it's it's not a capital intensive business, but all of those reps I mean, the reason, we putting capital into those businesses. They all represented growth opportunities that are in our highest margin highest return areas and I think that we will continue to have some of those opportunities in 2020.
But I do believe that as we go forward there are.
There continue to be opportunities to get more efficient from a capital spend standpoint in our us land businesses.
We also have some expansion capital that's going into international production services this year with.
Startup of Kaka.
Contract in Kuwait now.
I don't know if we'll have those same type opportunities in 2020, now and new contracts or not but I wasn't Sean I'd be what I said before on standby and that is look for overall lower capital spending in 2020, as we get closer to the end of the year and maybe next time. We report we put him, but we can frame that a bit better for you but.
Overall spend will be lower than it is this year.
Fair enough now I appreciate that.
And then on the divestiture of the announced as I was wondering maybe give us a sense of what the timing look like in terms of.
Putting that up for sale ready yet.
Putting out for tender being able to secure.
Buyer.
And just kind of your overall view of how you're seeing that market in terms of.
The potential for some of these divestitures kind of what what the appetite looks like out there considering.
Plant starting out there in the market for folks and maybe looking to acquire assets.
Yeah, I mean, so first off I mean, we've been very open that we were open to divestiture of components of our.
What we've described as non core us Lan services business, and we say noncore that means it's not where we're making investment were causing those businesses to shrink so from a philosophical standpoint, we ought to be opened to divestiture. That's not a new thought that developed in the last couple of quarters in the case of drilling rigs I mean, it's a business that we have.
That we that we socialize day divestiture with in 2018 towards the end of the year of course things got pretty quiet on the on the front with potential buyers and that attitude prevailed going into 2019, but I'd I'd say conversations on this began kind of.
Late in the first quarter and we wound up them closing the transaction just right at the end or towards the end towards the end of the second quarter. So just to give you an idea of timing.
That's very helpful. Thank you Dave.
You're welcome.
Our next question comes from Stephen Gengaro from Stifel. Please go ahead.
Hi, Thanks, good morning, everybody.
Good morning.
Just on the on the asset sale side first.
I mean, I know you've been pretty open about.
Working to sell non core assets, where things stand now outside of the rigs, obviously, where do you see the bid ask right now as you as you look at other potential sales going forward.
Yes, I mean, I think that there are a lot of conversations going on I mean, the the is up.
I mentioned in the prior quarter answering the prior question I mean conversations on asset divestitures got pretty quiet.
And this is kind of beginning late November of 2018 and stayed pretty quiet in the first few months of 2019, but.
My observation has been there is there's a lot more conversations going on since.
Middle to second half of the first quarter and then we've seen a few other transactions that have taken place.
That have been more sizable than the one that.
We executed so I think that there is an appetite out there I think there is a general understanding amongst industry players and investors that consolidation is something that needs to happen.
And and we certainly are in that camp and I think that others are seeing same opportunity there. So.
Look I would expect Stephen that as the year continues and more and more people gain this understanding of consolidation being a potential driver for earnings for companies, you're going to see more and more of these transactions they boys.
It seemed like you had to be happy with the sale price.
I think we are we feel like it was a fair price I mean, it was a is a business that.
Quite frankly was hard for us to continue to make capital investments in.
As a lot of the U.S. Lan service businesses are but this is a this is a very high quality business with great employees and a great.
Reputation from an execution standpoint, and I think that the.
That the buyer certainly knows that so they bought a good business.
Thanks, and then just a final question when you think about the international business.
Thank your revenues up first half 19 about 12%.
Year over year.
Do you think that pace continues in the <unk>.
Back half the year end do you think.
The 2020 international growth rate can exceed.
19.
Yeah, I don't know, we experienced pretty good growth in 2018 internationally I think that it was up kind of low double digit from a growth standpoint.
We have said this year, we think it's probably more like high single digit, but it could creep up a bit higher than that and.
At this point I would believe that the pace of growth continues to look pretty good and 2020, we haven't done a 2020 budget yet so I'll give you a little better idea as to what exactly growth rate. We expect in 2020, but we've got some good things going for us in that.
Lot of the international tendering activity that we've talked about for our premium drill pipe business begins to produce for us in 2020.
We've also got startup in the middle East that I've mentioned that gets to a more full run rate in 2020, So we're a little bit a tailwind, but I'm a bit hesitant to give you a specific.
Expectation on growth rate.
Great. Thank you.
Our next question comes from JB Lowe from Citi. Please go ahead.
Hey, good morning, guys.
Good morning.
So you know as you guys have cash coming in the door through divestitures and potentially additional desperate divestitures down the road free cash flow is improving balance sheet starts to look a little bit better what what steps can you guys take on the debt side.
I guess the head of the 2021 maturities to kind of address address your capital structure from that.
Well as you know that maturity the first maturity wall of 800 million in for roughly two and a half years from now and so I think it's a variety of things certainly Dave mentioned some of the operational initiatives that we have some of the divestiture and other strategic initiatives that we have.
But also recognize that.
We are constantly in the market and constantly discussing our alternatives to refinance that maturity or the entire set of maturities and so I don't think there's anything actionable today.
I don't think.
There's anything to really discuss but just know that we are.
On a real time basis.
Investigating and analyzing.
Our ability to create a more optimal capital structure.
And just to add to that.
What benefits us the most.
In dealing with with them with this maturity is generating cash more cash we have on the balance sheet the better our options become so.
That's that listen this is its dynamic as well he said, we don't have to reach any conclusions today.
We will as we get closer to closer to the maturity point, but.
The one thing that does help us cash and gives us way better option. So thats.
That's what we're most focused on on accomplishing now.
All right. So you guys aren't necessarily and very maturity that you can share some patients.
Yeah, I don't want to make it sound like it's not a.
This is not a priority for us. It is I mean, we commented on that in our prepared remarks and it clearly is a priority for us I know, it's a priority for investors as well I guess, we just see the best opportunities for us being as a result of adding cash to the balance sheet. So thats where were going to be most focused right now.
All right. Thanks, and then just as a follow up how many of the 12 rigs you guys sold in the quarter, how many were actually working.
In twoq or I guess to that.
Yes, that's something we're not we can't disclose.
Okay.
Like we said we gave you the financial.
Impact that those rigs have for us in the first the first half of the year.
Thank you. Our next question will come from John Daniel from Simmons Energy. Please go ahead.
Hey, Dave Westie.
Two questions for me to the extent you sold any other business lines are there any restrictions in your bank agreement or the senior notes, which would limit your ability to take equity from another public entity.
Certainly a lot of things have to be cleared with our credit facility.
But beyond that no I think we have.
Pretty wide degree of latitude and how we can think about.
Ensuing transactions.
Okay. So just it just the bank group not the senior notes number or that's just the bank group and you will note that the only.
Obligations, we have with the Bank group now is on letters of credit.
We're on France were.
I don't I don't I don't believe that there would be any real restrictions there John .
Okay, Good and then.
Well I know you mentioned, you're constantly looking at the capital structure, but.
I am not mistaken I think that that's trading at a pretty deep discount the.
Can you speak to your ability or desire to buy backing into that early or would you rather just build cash.
I look I wouldn't rule out anything, but I think right now cash is a premium for us and so I think the advantages of maintaining liquidity and.
Robust cash balance at this point in time outweighs any notion of reining in some of those bonds.
So I don't.
You never say never but right now look for us to continue to build cash.
Okay and then just the last one for me operational question Dave on.
If you'd be willing to share sort of utilization on your work of our fleet outlook for that business and then did Oklahoma tubing.
Yes, sure I mean on on service rigs I think we continue to operate somewhere between 60 and 70.
I don't know that we've seen any real shifts and utilization over the course of the last few quarters those rigs John our.
I would say.
We.
We do a lot of production work and and what we have found in the businesses that where we have opportunities to bundle for production work on things like plug and abandonment.
Yes, clearly the utilization on a rig like that is different than a completions rig which could work 24 seven.
We can generate good margin and good and good return and doing that type of production work. So I don't think weve really seen any real shift in utilization in total on the fleet.
Continue to have a healthy mix of completions versus production work, but as you know I mean, there are big differences in the way you measure utilization in those two types operations our coil tubing.
You know Weve talked about the fact that we have.
We have reduced the number of places that we are offering coil tubing.
We've got probably our strongest presence presence in the mid continent.
And in Pennsylvania and.
Yes utilization has been lumpy in the mid continent since the start of the year.
We've had some new competitors that moved assets into the market that have not been helpful from a price standpoint, but that was more early in the year I don't know that we've seen a real significant change between.
Kind of mid Q1, and what we delivered in Q2 and I'm not expecting a big changes in utilization in coiled tubing.
In the third quarter.
Okay. Thank you very much.
Welcome.
Our next question comes from Kurt Hallead from RBC. Please go ahead.
Hey, good morning.
Good morning.
Hey, Thanks, Thanks, Dave for all for all the color and addressing you're one of the most critical issue, obviously I think most investors.
When you when you when you look at the cash flow generation the expected cash flow generation in second half of the year based on your commentary about what's going on in international markets in the offshore markets and the pipeline of opportunities.
Taking into account some of the uncertainties around you ex land is that free cash flow generation is at a baseline run rate you can think through 2020.
Or do you think there's potential for some improvement even above and beyond the second half my Q1 free cash yeah, I mean, I think that.
I think that it would be a run rate that we would be would be comfortable.
In saying exist I would be biased to tell you, there's probably some upside to it you know so I'm as you as you think about that run rate and second half of the year, where we've kind of guided to $20 million to $30 million.
My belief is that in an environment, where we continue to be.
Disciplined from a capital spend standpoint.
Where we do begin to see some growth in our continued growth in Gulf of Mexico, and some of the international markets and particularly in product lines that tend to drive high margin for us and lots of cash to the bottom line than I'd be inclined to tell you that 2020 free cash flow, even a stagnant U.S. land market or maybe less of a us land market, we can expand that cash flow.
Okay appreciate that color.
The Uh huh.
In the context of Capex and you referenced it got a lower run rate going into next year, not really having from budget at this point, but.
What's the what's the maintenance level capex.
Given the fact that your operating fewer refractories.
You saw the land rig business, how should we be thinking about maintenance capex.
No I don't know maybe.
If you if you if you use 2018 as a proxy I'd tell you that I'd tell you that we probably have on the order of.
40, or $50 million in growth Capex embedded in our spend so I don't know Curt I mean, you probably use a number that's around 100 million and that's not far off but.
Okay great.
Yeah.
Yes.
Yes, I think sorry.
That might even be a little high it might be more like 60, 75, because right now it's running about half our 19 capex.
It's not an overwhelming great margin on it.
Great. Thanks, Thanks for that and then maybe just one follow up Dave So you mentioned that.
We exited the second quarter, which six frac crews running you mentioned that business be probably 5% of EBITDA less on a go forward basis. So it's all great color.
Should we basically assume that those six you get to that six frac crews as something that you feel confident in the current operating environment with absolutely no urban and activity that if even if you don't sell that business, you'll be running kind of six frac crews.
Well into 2020 is that a is that a reasonable assumption.
Yeah absent absent.
Really significant price increase I can tell you won't be more than that.
Excellent all right. Thanks, guys appreciate it.
Our next question comes from Harry Pollens from B L.
Please go ahead.
Hey, Thanks, guys for taking my question.
Can you guys talk about any other potential divestitures and identify the businesses that you would consider selling.
And do you guys have.
Kind of total cash goal.
You're looking at as far as divestitures go.
I think we've been consistent in saying that all of those U.S. land services businesses that were under investing maintenance capital would be candidates.
But I mean, not all we have also said we're open to anything so.
Nothing's off the table.
Got it and do you have a kind of cash number you are looking for to raise.
As far as the best years ago.
We don't have a specific goal no I mean, I think what we're trying to do is the optimize overall scale cash balance.
Okay understood.
And that's all I really had thank you guys.
Our next question comes from call Sullivan from Wells Fargo. Please go ahead.
Hi, good morning.
It looks like a lot of the higher.
Questions have been.
I've been asked.
On cash flows and everything so just on quickly on some modeling.
Points.
It sounds like the technical solutions.
The comments on Threeq, you and going forward. It sounds like completions activity is picking up nicely for you guys.
On the tools side and second half is it is it fair to say second half is shaping up to be better than what we saw last year.
Yeah relative to last year.
I think the answer to that is yes, it's certainly better than what we saw in the first and the first half of the year Q1 was a very low quarter for us from a completion tool standpoint.
And so second half second half overall technical solutions is certainly better what we saw first half.
All right.
And then in Dps good margin improvement in the second quarter.
You mentioned some drill pipe.
Potentially there is that is it drill pipe that were seeing kind of flowing through there or is there maybe some additional.
Uplift from the completion starting to pickup in Twoq.
Yeah, I mean, that's still in it's still within that drill pipe business I think what we've talked about has there been a better mix of overall completions work.
In the in the Gulf of Mexico and and.
Kind of second half of the year versus where we've been in the first half of the year and made in our in our premium drill pipe business, we rent completion strings as well and typically what we've seen is a little bit better revenue.
Opportunity one when the rigs are in a completions boats that's from the same business line.
It's just a different mix of products.
Got it all right I'll turn it back thanks.
Our next question comes from Daniel Burke from Johnson Rice. Please go ahead.
Yes, Hey, good morning, guys not many left but.
Hi, Dave I'll stay with completion tools for one minute, Mike My inference from your comments and then a constructive longer term outlook is that completion tools based on your calendar right now looks better in 2020, the 2019, but I just wanted to ask that more specifically.
Yeah, I mean, I think that I hadn't seen a 2020 budget yet.
Daniel but.
I'd be inclined to tell you with the momentum that we have been gaining in that business, both with Gulf of Mexico.
Share and and also internationally I'd be inclined to tell you that we do see growth and completion tools in 2020 that the international market has been a bit slow.
For us over the past several years and and I expect that we're going to have some some wins in 2020 that kind of elevate the overall revenue in that business.
Got it Okay, and then maybe just last one.
Can you give us a sense right now maybe on a qualitative if not quantitative basis is how disruptive Barry was for you guys.
Yeah, I don't know that we have a specific quantitative measure, but we were we were evacuated for 'em off of.
A significant portion of the rigs in production platforms in the Gulf of Mexico for.
Four or five days kind of disruption in the first storm of the year is always one where we we get people out and our customers drive people off of the job sites.
Fairly early and in it and that tends to take a few days before you get everything back out.
Well what I'd tell you is this when you when you have a storm interruption that happens in a very.
First part or very early in a quarter you often get opportunities on the non rig related work to to make up for that I think the challenge you have to think about is that as you well know Daniel.
There could be a few more storms that are out there in Q3 and those are hard to predict so.
So we'll see happens this year in Q3 are done it is meaningful.
Yes. It does yes. It does alright, guys I appreciate it thanks for thanks for squeezing me in.
Our next question comes from Mike Urban from key ports Global. Please go ahead.
Thanks, Good morning, guys.
Good morning.
What did the dig in on the international side, a little bit more kind of following up on an earlier question.
I think it was Steven noted you guys are up kind of 12 ish percent here year to date.
Even if you're flat the rest of the year I mean, that's still kind of put you within your range, that's about 6% and talked about Kuwait, starting up some of the tenders turning it into work. So I am just trying understand if you're just trying to be conservative here some of that stuff may slip into 2020 or if there's some work. That's that's rolling off as you know like I said, even if you're kind of flat year within that that band that you're talking about.
Okay.
Yeah, I mean that probably if you go back and think about this the biggest changes in Q1 right.
You know from a year over year standpoint.
Yes.
Yes.
And that probably answers your answer to your question for you.
Well I mean as far as far as what we're thinking about and forecasting for the second half of the year I mean, I think what we're trying to.
What we're trying to do is to set an expectation that that we are comfortable with and.
I'm trying to give you guys that guidance that would that would fit within our comfort range. So.
Okay.
ER and then back to everybody's favorite topic on on pumping you know with the fleets that you are running a you said you're only accepting work that's above cash breakeven.
I mean, just rough math.
5% of EBITDA, you're a little over 2 million of annualized EBITDA per per fleet, which is kind of.
Below a you know.
Okay may at or below maintenance capex level, so I'm, assuming you're talking about kind of EBITDA breakeven or cash breakeven at the field.
In terms of keeping those running.
Yeah, I mean, I think what we talked about as a is trying to keep it above or below above cash breakeven as a field.
Okay.
That's all for actually I'm, sorry, if I could sneak one more in your tax rate is rate is obviously going to be volatile with earnings are where they are and a negative but you did have some cash taxes in Q2, we did not we chose it.
Yeah, correct that we did not we did not have any cash taxes.
Okay, Yes, you're right we had GAAP taxes.
Okay, Pinedale had gotten taxes no cash taxes.
Okay. Okay, and then what's your expectation beat your your cash tax payer at all in the second half or any kind of gaps GAAP tax guidance.
No we would not be a cash taxpayer in the second half.
Okay.
That's all from me thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Marianne at Cushing or from Nomura asset management. Please go ahead.
Again, our next question comes from Mariana cushion or from Nomura asset management. Please go ahead.
Hi could you. Please provide the borrowing base the updated borrowing base in the <unk> facility as well as L.C. usage.
Right now.
Real quick here right now, we've got a availability about a $160 million.
And what's what's the borrowing base and the Lcs outstanding.
The net borrowing base about a $160 million with nothing drawn.
Okay, all right. Thanks.
This concludes our question and answer session.
I would like to turn the conference back over to Mr., Dave Dunlap for any closing remarks.
Okay. Thank you. We appreciate all of you joining us today and and let US know if you have any follow ups.
Okay.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect and enjoy the rest of your day.