Q2 2019 Earnings Call

At this time I would like to welcome everyone to the key energy services second quarter 2019 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you Ms. Katherine Hawkins Senior Vice President and General Counsel you May begin your conference.

Thank you Erica and thank you all for joining key energy services for our second quarter 2019 financial results Conference call.

This call includes forward looking statements.

A number of factors could cause actual results to differ materially from the expectations expressed in this call, including risk factors discussed in our 2018 Form 10-K and other airports. Most recently filed with the FCC, which are available on our website at W.W.W.P. energy Dot com.

This call May also include references to non-GAAP financial measures. Please refer to our previously posted earnings release, which can be found on our website for a reconciliation of any non-GAAP financial measures provided in this call to the comparable GAAP financial measures.

For reference our general Investor presentation is available on Key's website at key energy Dot com under the Investor Relations tab.

On the call. This morning is Rob Saltiel, Keyes, President and CEO and Marshall Dodson, Key's CFO I'm now going to turn the call over to Rob.

Thank you Catherine and good morning to everyone joining todays call.

For the second quarter, we generated revenue of $112.9 million, an increase of $3.7 million over the first quarter.

Despite inclement weather at the start of the quarter and some customer slowdowns near the end of the quarter. We saw revenue increases in our rigs fishing and rental in coiled tubing segments.

Our net loss for the second quarter was $18.3 million as compared to a net loss of $23.4 million in the first quarter with our adjusted EBITDA coming in at $1.6 million, an increase of 8.7 million from the zero point $9 million of adjusted EBITDA generated in the first quarter.

Turning now to our reportable segments second quarter 2019 revenues in our rig services segment were $67.9 million as compared to first quarter revenues of $65 million the quarter on quarter revenue improvement was led by improvement in the Bakken, where revenues grew 8% quarter on quarter and by higher activity in revenue in California.

Revenues in the Permian basin were fairly flat quarter on quarter as weather impacts at the started the quarter end customer slowdowns as we approach the end of the quarter weighed on our activity.

We averaged 172 rigs working in the second quarter versus an average of 168 rigs working in the first quarter.

In rig hours increased 2% to approximately 154000 total hours worked during the quarter.

Our 24 hour average rig count was fairly flat at about 13 average rates in the second quarter.

So overall completion hours fell 3%.

Completion hours comprised about 15% of our total rig hours down about 50 basis points from the first quarter.

Revenue per rig hour increased 3% to $441 an hour in the second quarter from $430 an hour in the first quarter, largely due to geographic and job mix.

Overall pricing is stable and we did receive a few low single digit price increases this quarter.

Margins were impacted slightly in the second quarter by low single digit wage increases with adjusted EBITDA in this segment coming in at $11.6 million for 17% of revenues as compared to adjusted EBITDA of $11.6 million or 17.8% of revenues in the first quarter.

Our fluid management services segment generated revenues of $18.5 million in the second quarter down approximately a half a million dollars from the first quarter largely due to slower completions activity primarily in the Permian basin.

Truck hours declined 4% to approximately 139000 hours in the second quarter. In addition to the impact of lower activity. We also incurred cost associated with repairing some salt water disposal wells, which impacted our earnings in the second quarter, we expect any salt water disposal, well repair costs to be significantly lower in the third quarter versus the second quarter.

Adjusted EBITDA for the segment fell to $1.6 million from $2.2 million in the first quarter.

Revenue per truck hour increased slightly to $133 per hour in the second quarter compared to $131 an hour in the first quarter on revenue mix.

Overall pricing in this segment has been fairly stable, but it remains a very competitive business.

Revenues in our fishing and rental segment were $14.8 million in the second quarter up zero point $2 million from our first quarter revenues of $14.6 million.

Revenue increases in the Bakken and Permian basin slightly outpaced a decline in revenue from our central marketplace.

Lower margins associated with the lower activity in our central marketplace were not fully offset by the Permian and Bakken growth, resulting in our adjusted EBITDA declined to $2.1 million in the second quarter from $2.7 million in the first quarter, we expect revenues and margins in this segment to be higher in the third quarter with the business activity in the central picking up over second quarter levels.

Revenues increased 10% in our coiled tubing services segment.

To $11.7 million from $10.7 million in the first quarter.

Our average number of working large units.

Was flat at approximately two and a half large diameter units per day with the revenue increased due to geographic and job mix.

We experienced low to single mid digit mid low to mid single digit price erosion. In this segment due to competitive factors in the second quarter of 2019, which impacted our margins.

Our adjusted EBITDA improved to a negative zero point $3 million in the second quarter from a negative zero point $8 million in the first quarter.

Since the fourth of July holiday period, we have seen better utilization of our large units, averaging three and a half units in July a 10 month high for us and we expect this to continue through the third quarter with this improved utilization, we expect to see margins rise as well in addition to the higher activity for the large units Weve also been seeing an increase in demand for our engine the quarter units for production were largely for for clean outs of Wellbores to increase production.

Not surprisingly the third car quarter began slowly as the fourth of July holiday had many of our customers not resuming activity until after the holiday week was over however, we exited July at higher levels of activity than we had at the end of June and while difficult to predict at this point, we expect our third quarter revenues for the company to exceed those of the second quarter.

Marshall will now provide a few more details on the financials before I return for some closing comments partial thanks, Rob for second quarter 2019, consolidated revenues improved 3.7 million $212.9 million from $109.3 million in the first quarter of 2019, our consolidated operating loss improved from a loss of $15.3 million in the first quarter of 2019 to a loss of $14.4 million in the second quarter of 2019.

And we'll go back and we're already covered.

On a consolidated basis DNA for the second quarter of 2019 was 22.5 million as compared to $22.1 million in the first quarter of 2019.

June eight for the second quarter included a $2.2 million fee associated with the one time project to receive a tax refund, which we have received.

Excluding the C.J. was down in the second quarter on lower incentive compensation and the passing of the Q1 unemployment tax impact.

Also included in June for the second quarter was $1.3 million equity based compensation expense as compared to zero point $7 million of equity based compensation expense in the first quarter of 2019 currently our June a run rate is around 22 to 23 million a quarter inclusive of about a million dollars in equity based compensation expense.

Depreciation expense was $14.3 million in the second quarter of 2019 flat to the $14.3 million in the first quarter of 2019.

We expect depreciation expense of between $14 million to $15 million per quarter in 2019.

Interest expense in the second quarter of 2019 was 8.5 million as compared to the $9.2 million in the first quarter between.

Well, we continue to fluids revision any income tax benefit and do not envision being a cash taxpayer for some time with our new wells. We have received tax refunds for prior periods and recorded a benefit in the second quarter of 2019 to reflect this.

We do not expect to recorded an income tax benefit in coming quarters.

Cash flow used in operations was close to nil 21000 in the second quarter 2019.

And $11.4 million in the six months ended 20 June 2019.

Capital expenditures were $7.3 million for the second quarter of 2019 and $12.4 million for the six months ended in June 2019.

We also had 2.4 million in proceeds from asset sales in the second quarter.

And 4.8 million of proceeds over the first half of 2019.

Our capital expenditures net of asset sales were $7.6 million for the first half of 2019.

On a gross basis, we still expect around $20 million of capital expenditures in 2019, and about $13 million from asset sales for a net use of cash of around 7 million.

We're continuing continually assessing our capital soon relative to both our non operating cash inflows and the time frame of the benefits from the Capex food.

At the end of June our total liquidity was $50.4 million as compared to $57.3 million at the end of the first quarter of 2019.

Cash at the end of the second quarter was $29.3 million and we had 21.1 million available under our ABL credit.

The asset coverage ratio under our term loan stood at 1.79 times at the end of the second quarter of 2019 as compared to the minimum required of 1.35 times I'll now turn it back over to Rob.

Yes, Thanks, Marshall, we recognize the keys financial performance has been disappointing improving and improving this is the primary focus for this management team and for our board we operate in a very competitive space in every geography and it all four lines of our business.

Demand for our services remains uneven and hard to predict with many of our MP clients managing their spending on a monthly and quarterly basis to deliver on free cash flow objectives.

We expect this to be the norm rather than the exception over the next 18 to 24 months, given ex investor expectations for our customers to exercise increased financial discipline, coupled with concerns around macroeconomic headwinds and uncertainties regarding future commodity prices.

With this backdrop in mind, we've been reviewing and assessing all aspects of how we conduct our business to determine how to best operate in today's market. We have a number of initiatives underway. Some aimed at increasing revenues, while others are cost focus.

To improve the cash we generate from our operations.

We expect to see the impact from these initiatives on our financial performance starting in the fourth quarter.

We've been very public acknowledgment of the need for consolidation in our industry. It is simply the most efficient way to increase scale and reduce costs, both operating expenses and cap capital expenses, both corporate and in the field and to create value for investors.

Every business line, we compete in is very price sensitive so only the lowest cost players can thrive through the cycle.

And increasing scale through consolidation is an excellent way to reduce service cost to our clients, but it takes two willing boards and shareholder bases to make consolidation happened and so far we've seen our industry stand on the sidelines and hope of a better tomorrow looking at the share prices. It is not really worked out very well for any of us. While we continue to pursue attractive consolidation opportunities. We will also be improving our organization's focus and effectiveness to yield better financial performance and position key to take advantage of the eventual recovery in our industry.

Erika This concludes our prepared comments so we'll now open the call for questions.

At this time I would like to remind everyone. I wanted to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to the barbecue and day roster.

Your first question comes from Mike Harrison with Seaport Global.

Thanks, Good morning.

Good morning.

Rob.

At this point in the cycle you guys ought to be.

Pretty pretty lean.

I'd be interested in where you think you can pull some additional costs and then I think you also said some of the initiatives that you have underway. We're also targeted at generating additional revenues. Just wondering if you could give us a little bit of color on what what exactly were trying to do that to drive these improved results.

I guess you have to start seeing.

Sure well Great question, let me start with the cost side and I think we just have to acknowledge that.

As 2019, certainly hasn't turned out the beer the year that we hope for a year ago and as the outlook for for 2020 is certainly cloudy.

We have to take a look at all of our costs again, and again and whereas we would certainly maintain that we are running a much leaner organization than we did before I think we have to be honest about it and say that our tolerance for any unnecessary costs or costs that may be.

In reserve for potential growth that may not come those have to be.

Sacrifice and eliminated from our structure. So again I think this is something we've undertaken consistently.

You know quarter to quarter, but but again, where we are today with the outlook that we have got we feel that it's prudent to take a harder look at these costs.

And some of those obviously will be corporate costs several be fuel costs.

But we're going to take a very.

Very clean sheet of paper approach to to our entire structure on the revenue side.

I think we have to acknowledge as a company that key energy services is really built to serve.

Larger clients clients, who are more.

Process driven focused on safety.

Focused on service quality and as a company we've.

We havent always specialized our service as much as we can towards those clients and we are taking a real real good look about how we manage everything from our service delivery to our salesforce to ensure that we've got what we need to serve those clients that ultimately are going to give us higher utilization.

And a lot of cases higher margins than.

We would get from from some of our smaller clients. So those are some of the things that we're working on.

And as we said it said in the in the prepared comments. Some of these initiatives are still in early stages, but.

We're accelerating them to the point will reflect in our financials.

Starting in the fourth quarter.

That's helpful and.

Recognizing there I'm sure there's very limited visibility at this point in into Q4, so some of those benefits show up.

From an activity standpoint.

It seems like in the second quarter.

Production services related businesses.

Trying to get a little better completions businesses.

Maybe decline a little bit which makes sense.

You see the rest of the year, playing out will again, given the preponderance of your businesses in production services, those or would those be more.

Reflective of normal seasonality as you go through the rest of the year and then the leasing business a little bit bigger.

Hit on budget exhaustion, and then to what extent do you think you can offset that with some of these initiatives that are underway.

Well, we said in our prepared comments, we do we do see the third quarter.

Likely coming in ahead of the of the second quarter. So we are in an upward trend.

Seasonally the fourth quarter tends to be slower than the third quarter.

But look a lot of this has to do with.

Oil prices and outlook and I think if we've learned anything in this business over the last six to nine months. There is just very low degree of predictability of where oil prices are going to go and the fact is that our clients now manage their budgets on on a quarterly if not monthly basis, whereas before it was more of an annual basis. So we would talk about budget exhaustion coming toward the end of year.

Now, we see some evidence of that coming within at the end of quarters in some cases into months, so very difficult to predict where thats going to head going forward, but we do see an upward swing in activity. Obviously the question about a completions where that will go from here.

He is also.

Hi did to outlook and.

And of course, our fortunes in our completions related work will be linked to.

To that outlook on pricing and and the activity that takes place.

All right. Thanks.

I'll turn it back.

And there are no further questions at this time I will turn the call back over commitments now.

Thank you Erica and this concludes our call a replay of this call can be accessed on our website at key energy dotcom under the Investor Relations tab.

Also under the Investor Relations tab, we have posted a schedule of our quarterly rig and truck hours. Thank you for joining us today.

Thank you. This does conclude today's conference call you may now disconnect.