Q2 2019 Earnings Call
Greetings welcome to select energy services second quarter earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Krista Archer Vice President Investor Relations and Treasurer. Thank you Mr. George you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for the select energy Services' conference call and webcast to review, our 2019 second quarter results.
With me today are John Schmidt, our executive Chairman Hollywood, Donnie, our President and Chief Executive Officer, and Nick <unk>, Senior Vice President and Chief Financial Officer.
Before I turn the call over I have a few housekeeping items to cover.
A replay of today's call will be available by webcast accessible from our website at select energy services Dot com.
There will also be a recorded telephonic replay available until August 20, Onest 2019.
The access information for this replay was also included in Yesterdays earnings release.
Please note that the information reported on this call speaks only as of today August seven 2019, and therefore time sensitive information may no longer be accurate as of the time of the replay or transcript reading.
In addition, the comments made by management. During this conference call may contain forward looking statements within the meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of select management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed in the statements made by management.
The listener is encouraged to read our annual report on Form 10-K for the year ended December 31st 2018, our subsequent quarterly reports on Form 10-Q , and our current reports on form 8-K to understand those risks uncertainties and contingencies.
Also please refer to our second quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.
And now I would like to turn the call over to our President and CEO Hollywood on here. Thanks, Chris.
Good morning, everyone and thank you for joining us today.
Second quarter, certainly had its macro challenges with W.P.I. prices when you're in the high sixtys to low fiftys during the quarter as well as uncertainty around geopolitical and economic tensions.
This sort of volatility clearly presents challenges for our customers and ourselves.
And looking at activity level for the quarter continued operational efficiencies are allowing customers to drill and complete more wells with the same or less equipment.
Early third party indications point to modestly flat to increasing completions activity.
Though our own internal Frac fleet tracking data indicates a modest sequential reduction in the number of active fleets alongside the 6% decline in rig count through the quarter.
Our customers remain focused on prioritizing cash flow and are committed to living within their capital budgets.
Well operational efficiencies or <expletive> or decreasing certain cost for our customers. They can pay to focus heavily on return on assets with pricing concessions from service companies being a component of that.
The broader server space began experiencing these pricing pressures in the back half of last year, which continued into the first quarter of this year.
Well, we had an experience much in the way of pricing pressures over that timeframe. We did begin to see our first meaningful impact during the second quarter, primarily in our water services segment.
We believe we continue to receive a premium for our services, but we weren't able to stave off the general negative pricing trends that's been accumulating since the third quarter of last year.
Additionally, there were some unusual competitive dynamics in certain areas that also impacted our revenue during the quarter.
For example, in the mid Con, which makes up approximately 15% of our water services revenue rig count declined 20% in Q2 and completions activity slowed meaningfully.
I know the part of this was driven by activity pauses during the quarter. Following some of the recent major E. M. P consolidation in the region.
Its rapid downward market pressure led to some drastic pricing behavior from a number of financially distressed local competitors and we elected to forego participating in a number of recent bid processes for smaller operators rather than pursue value destructive tenders.
We've seen many of these smaller competitors struggled to provide the quality of service or scale necessary to compete in the current market environment and a number of transfer and flowback providers have recently exited the basin or shut down operations entirely.
In response to some of this market behavior, we actually had a major operator in the basin proactively request a one year agreement with us for water transfer services to ensure that they would have selects team and technology supporting them over the next year, it's quality supply gets tighter.
Given the recent pricing pressures in general and the likely activity declines in the fourth quarter, we've been prioritizing contract duration and have had some success recently negotiating over a dozen longer term service agreements with a term of at least one year.
[noise] avoiding downtime between completions as well as periods of uncertain utilization allows us to make them more competitive offer to a customer that create value for both sides.
Additionally, we're having continued success and are experiencing clear market demand for our differentiated automated technology solutions.
Which provide operational efficiencies to both us and our customer.
Well the recent pricing headwinds resulted in sequential declines in revenue I was pleased with the team's ability to continue to improve our operational efficiencies and aggressively manage our costs.
This allowed us to continue to generate meaningful free cash flow during the second quarter and to improve our adjusted EBITDA margins over the first quarter.
Well continue to stay laser focused on adjusting our cost structure in real time to match more to that market activity levels.
Shifting gears to cash flow, we're confident we'll continue to generate free cash flow over the second half of the year and reiterate our target of unallocated free cash flow for 2019 $65 million to $80 million prior to any divesture proceeds.
After considering the sales proceeds this range is $95 million to $110 million.
Well, we value our strong debt free balance sheet and the flexibility. It provides we continue to actively evaluate incremental investment opportunities.
Executing long life infrastructure investments and highly productive core areas remains a compelling opportunity for us and one where we hope to be active in the coming quarters.
With a potential uncertainty around the back half of the year and some of the pricing challenges. We're seeing we have reevaluated the likely near term returns on certain shorter cycle water services investments, leaving us to lower our annual capex forecast to $120 million to $140 million from our previous $140 million to $160 million range.
And finally, well it's been a tough sellers market for traditional services companies.
I'm also pleased that we were able to wrap up the divesture of our noncore Wellsite services operations during the quarter, we received approximately $14 million of additional proceeds during the second quarter, resulting in total year to date proceeds of just over $30 million, which is subject to customary post closing adjustments.
These sales proceeds contributed to the pay down of the remaining outstanding balance of our ABL facility, which stands undrawn at the end of the quarter.
We don't expect any further material divestitures in the near term and look forward to continuing to create value with our remaining water and chemicals businesses.
Looking ahead, we do see continued headwinds facing the sector in the second half of the year as operators likely look to reduce activity levels to stay in line with our remaining budget.
As such we expect our performance in the third quarter to look much like the second quarter overall.
However, as we get to the fourth quarter were preparing for a more significant impact is we expect operations to slow due to seasonal factors such as budget exhaustion and holidays.
That said, we continue to feel good about our leading position in the marketplace I believe that with our pristine balance sheet, we're well positioned to manage through the current market environment and take advantage of opportunities recent market dislocations will ultimately generate.
With that I'll hand, it over to Nick to walk through our second quarter financial performance in more detail.
Thank you Holly and good morning, everyone.
Our free cash flow generation of $20 million in the second quarter, three divestitures are 34 million, including divestitures enabled us to repay the entirety of our remaining credit facility balance.
And exit the quarter with a solid $24 million net cash position.
Our debt pay downs of totaled 45 million year to date and 80 million over the trailing 12 months.
Our fortified balance sheet provides us with unmatched flexibility and optionality as we evaluate new investment, especially those who are attending infrastructure development as well as potential returns to shareholders.
In addition to retiring our debt and building cash we funded $18 million of net capex during the quarter about 9 million of which was tied to the northern Delaware fixed infrastructure project with no associated revenue during the quarter.
Rex Activations of a $40 million budget for this project with a fourth quarter start date remain unchanged.
Well, we believe current oil prices provider customers with an attractive return on their investment. There's no question that they are exercising capital discipline.
Given this we regularly reevaluate every line item in our Capex plan and adjust accordingly when conditions change.
With price pressures in certain areas of our business will be delaying we're foregoing orders for some equipment for which we had initially budgeted until return profiles are justified.
Lowering our capex target to 120 to 140 million for the year enabled us to still make our large infrastructure investment comprehensively maintain our asset base.
And continue investing in automation and other margin enhancing and targeted growth efforts and our water services business.
All while hitting our existing cash flow targets.
Moving to our quarterly results revenue for the quarter declined by $39 million or 24 million after adjusting for the impact of the sale of non core operations.
However, taking decisive action to protect and grow our margins is fundamental to our business strategy, regardless of what part of the market cycle, where it.
Well this revenue total did not meet our expectations, we quickly and aggressively manage our costs and when combined with the continued benefits of our recent investments in technology.
We were able to improve our adjusted EBITDA margins by 1.2 percentage points quarter over quarter.
In line with this revenue reduction we also reduced our cost of sales by 10% and that's you know about 16%.
Much of which again was favorably impacted by the divestitures. In addition to our cost control efforts.
Total revenue for the quarter of $324 million includes 7.2 million for businesses divested during the quarter, we don't expect that revenue to recur in any material fashion.
The sales processes also led to a number of non cash and nonrecurring charges totaling $8.3 million during the second quarter, which comprise the majority of our EBITDA add backs this quarter.
We do not currently expect those charges to repeat next quarter.
As I move on to discussing our segment results I'd note that we have posted a presentation to the IR section of our website also containing a detailed table of our 2018 quarterly results realigned with our new segments, which you may find helpful. Given our recent re segmentation.
The completions activity appears to have modest modestly increase quarter over quarter.
Frac efficiency and pricing trends prove to be a stronger headwind.
Water services revenues decreased 8% sequentially to $202 million in the second quarter from $221 million in the first quarter.
Segment generated gross profit before depreciation and amortization of 47 million in the second quarter compared to 57 million in the first quarter, reflecting a decline in the segment gross margin from 26% to 23%.
Given the pricing pressures probably discuss the current competitive environment should stay vigorous through the second half of the year margins are unlikely to improve.
The water infrastructure segment posted revenues of $51 million for the second quarter declining from $54 million in the first.
Gross profit before a DNA, however increased from 12 to 13 million quarter on quarter.
Due to the absence of some Q1 seasonal cost along with our focused cost management efforts.
Gross margin of 26% for the quarter, while a meaningful improvement from Q1 remains a little below the high 20 percents we're targeting.
Several planned pipeline volume sales of our high margin Bakken pipelines were deferred into the third quarter.
However, we forecast margins closer to 30% following the start up of the new Mexico pipeline system heading into 2020.
Well revenues for oilfield chemicals segment also modestly declined from $67 million and 63 million.
The segment generated additional gross profit before DNA of 2 million during the first quarter for a total of $9 million.
The three percentage point margin improvement of 14% was driven by a continued optimization of our Midland basin production facility, leading to lower freight costs.
And continued expansion of our proprietary friction reducer product lines.
We believe we can maintain margins in the low to mid teens in the second half.
Corporate and other segment, which we don't anticipate we'll continue to generate significant revenue beyond the second quarter produced revenue of $7 billion down from $22 million in Q1.
I'm contributed slightly negative gross profit before DNA versus 1 million a positive contribution in Q1.
The variance was attributable to the impact of divestments.
As previously noted we pay down the outstanding balance of our baby doll and read a net cash position of $24 million at June Thirtyth with an expectation that will generate additional free cash flow over the second half of the year.
Over the next few quarters as we consider our options with the unallocated cash flow, we will continue to focus on high return.
Long lives investments, we are uniquely prepared to exploit as our highest and best use of capital and will build some level of cash on the balance sheet in the short term to accumulate dry powder for these opportunities.
We're continuing to evaluate a number of investment alternatives and look forward to sharing more details on future calls.
Well also be evaluating additional returns to shareholders given that further debt reductions are no longer a priority and we have effectively prefunded the capital required to complete the previously announced new Mexico infrastructure project.
Our philosophy in that regard remains the same that we will prioritize returns to shareholders out of cash flow versus borrowing.
With that I'll hand, it back to Holly for some concluding remarks, thanks Nick.
To wrap up flex is here today with a stronger balance sheet that's ever had.
With the free cash flow, we expect to generate and our debt free balance sheet, we expect our financial strength and flexibility to only improve in the coming months, which is important and given the volatility that we expect in the market in the coming quarters.
Our balance sheet to real asset and will provide us the flexibility to consider value enhancing investment options by others are on the sidelines.
This company was built over the last 10 plus years with a dedication to disciplined growth and always with our customers in mind, which leads us to innovate and provide solutions for our customers.
Our discipline will ensure we deliver accretive transactions, but only when the timing is right.
Positioning us to deliver consistent long term shareholder value.
So while we can't control market sentiment and behavior well remain focused on the things we can control costs customer service capital discipline, and maintaining a strong balance sheet with that I'll turn it back over to the operator and we'll take your questions.
Operator.
Thank you we will now be conducting a question and answer session.
If he would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
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For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Please ask one question and one follow up question then re queue for additional questions.
One moment, please while we poll for questions.
Yes, our first question is from.
Kurt Hallead with RBC capital markets. Please proceed.
Hi, good morning.
Good morning, Kurt wondering thanks, I appreciate the color commentary any update on your perspectives on the market dynamics at play.
As we as we look forward to you I know you provided the guidance there around the third quarter kind of being flat with second quarter and the expectation that the fourth quarter kind of planning for the prospect that fourth quarter is going to drop relative to the third when we look at the individual pieces of the business.
I guess I was just trying to calibrate in this context it would seem to me that the infrastructure and chemicals business will probably continue to have some perspective kind of growth dynamics on revenue. So youre. Your swing factor as you head into the fourth quarter of the year looks like it's probably going to be on the on the on the water services front can you can you help me calibrate that and calibrate that your thoughts with us that'd be great.
Yes, Kurt I think you actually summarized it well is we step back and you think about our customer base the operators being 55% of the way through their capital budgets for the year, we certainly don't expect them to increase.
The budget and given it will be Q3 is being fairly flat to Q2 activity wise that does leave us.
A softer Q4, and so that at least how we're going to plan for the business, but it does differ by.
By segment, starting with infrastructure to your point.
We had our revenues were down in Q2 because of some of the activity level of utilization of the Bakken.
Pipeline system, which were already seeing the recovery in that here in Q3.
Actually July was.
One of the highest months we've had this year. So we feel good about infrastructure and the momentum there.
And as you saw we increased our margins in that business, so pricing more stable.
Similar story of sorts with chemicals and stable pricing and solid margins with.
With the revenue I think opportunities there being.
Similar to the general market outlook, and then its water services, where we will have our probably our most significant challenges, which is always difficult to manage in the volatile markets but.
One of the things that we are laser focused on is going to be around managing the cost structure staying ahead of.
Of those changes and given that we have such a high.
Portion of our cost structure is variable that positions us pretty well.
To manage that.
And the other thing that we've been working on well it doesn't completely eliminate the exposure by any means but we've had some.
Good.
Success in entering into some longer term arrangements with with our customers to lock in work so.
We're certainly going to be very disciplined and focused on on operations and execution, but we also think that there are a few other things out there that will help us.
And what's going to be a fairly tough back half of the year.
Great I appreciate that and then.
Your prepared commentary you referenced.
Having some discussions for kind of one year type contracts, which customer base.
Ill kind of.
The commentary you had about pricing pressure my was generally under the impression that given your size and scale in.
Oil companies desiring to do work with companies with your service quality and everything else if pricing was.
Yes, less of an issue potentially in that water services business, but can you kind of help us kind of.
Yes kind of connect the dots here. So you had some pricing pressure, but then you talked about signing some longer term contracts and.
Yes, I might not have picked up on some of the nuance. There can you can you help me out on that.
Sure, Yes, and you know one thing I'd note is that the pricing pressure on the space started third quarter of last year and hit people pretty hard in Q4, and Q1, and we were able to avoid that and Kurt I think that is because of the technology, we bring to bear the quality of the service, we provide and the types of customers that we work with but Q2, obviously proves that we are completely immune to it those forces did did eventually catch up with this but as you might imagine at some of these larger customers.
That want to ensure that they have access to the quality of the service that a company like select can provide that are interested in entering into some of these longer term arrangements. What we're starting to see in the competitive landscape is that it's not large numbers by any means but.
It's a handful here and there of water transfer companies have well testing companies that have gotten to a point of distress, if they're pulling out of market and our customers see that may want to ensure that they have the right support going forward and that has enabled us to have some of these conversations and and as I mentioned in the prepared remarks.
When we can plan.
Ahead looking out a year with our customers. It allows us to be a lot more efficient and so even though we're able to maybe provide them a better price our margins can be very similar just because we're managing our cost structure better. So it really can be one of those win win situation.
That's great I appreciate that thanks Holly.
Sure. Thanks.
Our next question is from Tom Curran with B. Riley FBR. Please proceed.
Good morning.
Good morning, Tom warning.
Holly front for water services, how much has pricing decline from 2018 peak.
Whether you want to.
Look at it on out on a weighted average basis for whatever quarter, peaking to Q4 from the monthly high to the current mine. However, you want to define it and then how does that pricing drop for an ongoing pressures in the Permian compared to the rest of the basins you operate it.
Sure. So we don't have.
I'll say something specific in technical that I can get a spreadsheet, but I would tell you on pricing, we're probably high single digits.
Other pricing reduction since the peak and you know one thing that we'll have to keep in mind is that that was cheap that's sort of a Q2 to say a Q3 issues last year price environment Q2, Q3 of last year and one thing is that the pricing degradation for US was building up over the quarter of Q2, So we'll have a bit more flow through when you get a full quarter that in water services in Q3, but that's where we have line of sight to.
Cost initiatives that are going to hopefully help us protect or defend those margins.
So we still think low low twentys for this year is going to be the right margin expectation for water services. We still think long term high twentys is where that business should and will get to.
But.
The other aspect is from a basin perspective.
You know interestingly enough the Permian, while it is absolutely competitive it's not necessarily the most competitive and that was one of the other point I wanted to highlight and mentioned briefly in the prepared remarks, you look at a region like the mid Con where you had some of your large operators in merger negotiation discussion. So that created some pauses in their cadence of completions and then you've had.
Other issues with some of your smaller private or public operators in that region and so you saw completion activity decline.
More quickly there and then other regions and so we actually saw more pricing.
Impact and again chose to not participate in some of those.
Tenders, just because we felt like we would not actually be able to generate returns on on our equipment and putting it to use their so we passed on that which is one of the things that impacted our revenue.
Is that pricing not only come the pricing impact reduce the margin that you are but just outright revenue when you pass on on job like that but.
I would say the mid con was the most competitive and as we look forward.
I think another region that will you know have made.
Behave slightly differently is going to be the northeast that Gassier region. As we go through the back half of the year I suspect it will become more and more competitive as well.
That's helpful and then sticking with water services.
Just a two part question first when it comes to the technology investments and efficiency initiatives, you've been implementing to structurally improve profitability there.
How many remaining basis points of margin expansion.
Might you be able to realize and are you counting on that.
Remaining increase to counteract whatever further pricing degradation you might experience over the second half and then specifically for water transfer.
How high a percentage of your revenue for transfer might we end up seeing these one year contracts ultimately accounted for.
Yeah, we'll have to get back with you on that second one Tom we haven't actually.
Targeted a specific.
Percentage that we'd like to get there, but it's probably that time that we need to start thinking through that as you know they're in the pros and cons because you don't want to have too much.
Locked up under pricing that's been a at a point in the cycle that relatively low. So we are going to want to leave a fair amount of spot out there, but I haven't done the math of where we are but but I would tell you that we would expect to continue to add.
Add to some of those as we think about our ability to protect our margins through our investment.
You know, there's a near term impact on there is a long term impact right and as we think through the longer term to get that high Twentys margin gross margin for this business that will take the investments in the technology. So we think that you know.
Again high Twentys is the right long term expectation I think here in the near term protecting the margins and depending what we have is really what's on our plate.
And and technology will absolutely be a part of that.
Thanks for the color and thoughtfully.
Thanks, Tom.
As a reminder, this star one on your telephone keypad, if you would like to ask a question.
Our next question is from Tommy Mall with Stephens, Inc. Please proceed with your question.
Good morning, and thanks for taking my questions.
Sure Toni good morning.
I wanted to start on infrastructure, where it sounds like the investment pipeline is still fairly robust.
One of the things you called out.
In the release was the potential for acquisitions.
And I wondered if you could comment there should we interpret that more as.
Acquisitions of assets versus.
Say operating companies or cash flows or is this more.
Signaling the potential for consolidation of.
Of various players in the market. Thanks.
Sure.
As we think about the larger consolidation question.
I feel like our.
Scale and scope that we have today the basins that we touch the services that we offer the customers that we serve.
Large scale consolidations.
It may not be the best path forward for us So we're more focused on.
Tuck ins and and acquisitions that will add a technology or advances in some ways. It helps to continue to differentiate our our services and so you know I don't want to over state. We're always in the market. We're always looking for these things I just think that.
In markets like this the dislocation that gets created creates opportunities and so.
Well certainly continue to be active and looking and if we find the right value enhancing proposition and it's an accretive transaction and it's the right time. The good news is we will be in a position to actually actually execute on it.
But that would like to that includes our services business. It also on the infrastructure side. That's really we also feel like.
More of an organic approach today, yeah, we could find that there are some small single operator systems that that could be acquisition targets, where those assets are worth more in our hands and then someone elses.
Makes sense and thank you and as a follow up I wanted to talk about margins for chemicals.
It looks like the the benefits of your.
New facility are hitting the model now and should continue to in the next quarter based on the guidance that you gave us.
If we think about.
Longer term.
Is there.
Do you think there's more room to run.
For chemicals margins or.
Should we think about Twoq to Threeq you as fully realizing the benefit of the investment that you made.
Yeah, if you think about how we improve margins in the chemicals business. It can go into multiple buckets.
One was absolutely around you know shifting and are increasing our manufacturing capacity of our proprietary at bars friction reducers there in Midland.
Getting out.
Transportation costs and efficiencies that the team game. There was was one big area and I would say we're starting to.
Feel like we've captured the majority vast majority of that opportunity, but when you look at some of the other improvements in our margins. It's because of other initiatives. The team has been executing on and finding ways to invest in our complete manufacturing capability, sometimes is larger vessel size, sometimes it's how you manage your inventory. It's a it's a fairly good list of opportunities that they've been ticking away at.
And there are more left to be done on that front and then the sort of the third bucket that I think about and opportunities is just your product mix and that's another area that the team has had some success in moving higher volumes of some of our higher margin.
Product line so.
That does that also continues to be an opportunity going forward, but I think for the near term is what what were going we've had fairly stable pricing and we think that that will continue to be.
The landscape for us over the back half of this year, but the way we look at it as you know low to mid teens margins for that business for the back half of this year is what we're working towards and I think though longer term you look into 2020 and beyond.
There there probably are some opportunities to continue to you know I'll say eat that up you're not going to move it up to 20%, but I think that there's there's a bit more there that we can.
We can continue to deliver on.
Great. Thank you Holly I'll turn it back.
Thanks, Tony.
Our next question is from Sean Meakim with Jpmorgan. Please proceed with your question.
Thank you Hey, good morning.
Good morning, John .
Oh, yeah on the infrastructure segment.
I'm, just curious to learn a little bit more about what drove the shortfall in the Bakken I think.
Some of the perceived value of those assets was the consistency of the contracted volumes, but maybe that was a little bit misplaced.
Are you seeing the M p's manage activity into quarter end.
Does that explain maybe.
The contracts that we saw in the second quarter versus July and does that.
Leave any risks as you think about exiting threeq and into Fourq.
Yeah, and just stepping back when you think about the structure of the contracts up in the Bakken their area of mutual interest.
So the way that works on the water side is that theres defined acreage and if our customer is completing a well on that acreage than the water is going to be supplied by us and the price for that water and the delivered cost in that water is is already established but if the if activity moves outside of that am I.
That is where there is no longer a commitment to buy water from us. It doesn't mean that we wouldn't be able to serve but what what generally happens is when the water is within a or the depletions activities within a certain distance of our pipeline, we're going to be the most economic solution anyway, but what we found is there were a few months there that the activity moved away from our pipeline and that's what caused that reduced utilization there in the second quarter were already seeing the activity is back I think as I mentioned, just a little bit ago July was.
Right at it was almost tied with our highest month of utilization on the line. So its I'll say back to normal operating conditions and based on working with our customers and looking at their development programs over the back half of the year.
We feel very good about Q3 and line of sight ability visibility and then Q4 as well.
'cause should continue to be a normal a normal quarter for us.
Got it that's helpful context, I appreciate that.
Doing an infrastructure then.
So you mentioned capex.
Tied to the Delaware project, and so everything is on schedule, but.
Are there cost.
We're also encouraged through the income statement that you don't have any associated revenue I'm, just curious because that could maybe suggested the gap between where you are today versus the expected 30% target once the Delaware comes online may not be as wide as it looks at first glance.
Yeah, there's not a lot of.
Call right now its being charged to the TNL. The vast majority of what we're spending there in new Mexico is around the actual capital is getting capitalized.
But what certainly what we're going to find is that as we bring that facility up and online in the back half of this year, where we already have some spot sales.
Negotiated it's not going to be at its full efficiency. So we'll have some I'll say start up cost associated with that but I would expect it to be to its full blown operating I'll say efficiency and 2020.
But what we're finding is that when you look at the margin progression over the course of the year. The first quarter. We just had more than anything some seasonal cost as part of our new Mexico assistant not just buried pipeline, but our general.
Infrastructure that we already had in place there that did not occur will occur in Q2, and we don't expect to.
We encourage that that was a big part of the margin uplift from Q1 to Q2, and we think that there are some other efficiencies that that will continue to bring to that particular segment, but even though the new Mexico system won't be I'll say firing on all cylinders from an efficiency perspective in Q4, it will still be at a higher margin than than some of our other other parts of that segment that will help pool. The the total segment results up to the high what we're expecting to be the high twentys.
That's really helpful. Thank you Holly.
Sure. Thanks, Sean.
Our next question is from Ian Macpherson with Simmons <unk> co. Please proceed.
Thanks, Good morning, I'm, sorry, my line from five minutes. So if I missed this I apologize I was just looking thinking about the revenue progression for.
Water services from Q2 into Q3.
We're contemplating a modest decline in completions activity per your your fleet tracker.
Have we seen most of the pricing it already in Q2, or we should expect further averaging down of the price usually that would also.
The result in something I'm, contemplating, perhaps 5% to 10% sequential revenue compression for water services.
Is that a good way to think about it.
No I think really E N. One of the things that we think that activity levels will be relatively flat Q3 relative to Q2, we will have a full quarter of pricing compression on in Q3 relative to Q2, so that that would.
And you know in isolation have an impact on revenue, but we feel like there are some other areas that we're going to be able to take some market share where we are maybe under represented today and that.
The balance of all that is to to ours is certainly our objective is to be able to maintain our.
Our revenue in the water services business as well.
Okay.
That's that's a helpful clarification and thanks.
There have been a couple of questions already regarding the volume of these long term contracts that you referenced.
The scale of them I also wanted to do so just stand.
When we think about near term.
23 ish percent margins longer term aspiring to get back to the high Twentys, where would you say the embedded margins for these are longer term contracts are falling within that spectrum.
Yeah, they're probably going to be you're going to.
They're different from region to region service line to service line, but what I would say is that they're gonna be supportive of moving us towards that ultimate goal versus pinning it down to where where we sit today with current pricing.
Got it understood. Okay. Thanks for all the answers to that.
Sure Ian shortly.
Our next question is from Mike Urban with Seaport Global. Please proceed with your question.
Hi, This is Scott mccurry sitting in for Mike Urban.
Well chemicals revenue has been fairly steady over the last few quarters.
In comparison to some of the other ones as we enter 2020 or are there opportunities to increase the top line in the segment or is that still more of a margin improvement.
I think its both actually again as we just talked there.
Through some of the ways you can increase the margin, but on the top line, we're still from a market share perspective, there's more that we can penetrate and that certainly the team's goal and objective and so not only is the chemicals business going to be correlated to well completion. We can we can actually grow that business through taking more market share.
Okay great.
And then as a follow up just in terms of returning value to shareholders.
The company seems ever pretty stable or is increasingly stable free cash flow.
Profile, we're looking at returning value to shareholders. How do you look at deciding whether to use a buyback versus a dividend.
Yes, Scott So overall no return to shareholders here.
That does become a more elevated priorities now that we do have the net cash position.
We've retired all our debt.
Obviously, we want to err on the side of having more optionality versus a.
Efficient capital structure on any given day.
But as far as the mechanism on on how we return.
That value to shareholders I think we want to say stay pretty agnostic and understand what it is our shareholders prefer and.
What drives the ultimate value of the stock.
I think in the in the near term for 2019, I don't believe a dividend.
Likely will be on the table.
So, we'll probably lean more towards the share buybacks, but as we go into 2020, that's certainly something we'll.
Evaluate and listen to feedback and understand.
Water infrastructure investment priorities are and what's the best program to sit around that for shareholder returns.
Thank you. This concludes the <unk> portion of our call I would like to turn the call back over to Hollywood for closing comments.
Thanks.
Just quickly before we fully would drop off today I want to leave you with the final couple of thoughts of the things that we're going to be focused on before we're back on the call with you guys, but obviously, it's pretty simple we're gonna stay focused on serving our customers, we're going to run a disciplined business, which obviously means managing our costs and where we are laser focused on continuing to deliver that cash flow and we'll be judicious in how we allocate it so thanks for joining us today.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.