NEX (NEX) 2018-08-02 Earnings Call Transcript

Good day, and welcome to the C&J Energy Services Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Daniel Jenkins, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the C&J Energy Services Earnings Conference call to discuss our results for the second quarter of 2018. With me today are Don Gawick, President and Chief Executive Officer; Mike Galvan, Interim Chief Financial Officer and Chief Accounting Officer; and Pat Bixenman, Chief Administrative Officer and President of Research and Technology, we appreciate your participation. Before we get started, I’d like to direct your attention to the forward-looking statements disclaimer contained in the news release that we issued this morning and is currently posted in the Investor Relations section of the company's website. In summary, the cautionary note states that information provided in the news release and on this conference call that speaks to the company's expectations or predictions of the future are considered forward-looking statements intended to be covered by the Safe Harbor provisions under the Federal Securities Laws. Such forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by the statements. We refer you to C&J's disclosures regarding risk factors and forward-looking statements in our filings with the SEC for a discussion of the known material factors that could cause our actual results to differ materially from those indicated or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, and these statements speak only as of the day that they were made. Our comments today include non-GAAP financial measures, additional details and a reconciliation to the most directly comparable GAAP financial measure are included in our second quarter earnings press release. As a reminder, today's call is being webcast live and a replay will be available in the Investor Relations section of our website. Please note that information relayed on this call speaks only as of today, August 2, 2018. So any time sensitive information may no longer be accurate at the time of the replay. With that said I'd like to turn the call over to Don Gawick, President and Chief Executive Officer of C&J Energy Services.

Thanks, Daniel. Good morning, everyone. Thank you for joining us today to discuss our results for the second quarter of 2018. During the second quarter, we continued to execute our returns-focused strategy achieving our sixth consecutive quarter of double digit revenue and profitability growth. Second quarter revenue grew 10.4% and adjusted EBITDA grew 19.1% sequentially. Delivering six consecutive quarters of double digit revenue and adjusted EBITDA growth is a testament to our ability to execute our operational and financial plans under the strength of our diversified service lines. While we and many in the industry experienced some challenges in the frac business late in the second quarter our financial performance was supported by our efficiency and execution and diversity in service lines geographies and customers. Notably revenue from our non-frac businesses grew almost 14% sequentially and we increased the profitability of those businesses as well. We also benefited from our geographic footprint that positions us in many markets that remained healthy and provides the ability to move assets and crews to the basins that we believe will generate the best returns as market conditions change. Results from our Completion Services segment reflect higher revenue and profitability in our wireline and pumping businesses offset by a sequential decrease in profitability in our frac business. Our frac profitability was impacted by a lack of contracted regional sand in West Texas. This is a transitory issue as availability of regional sand for our company will be increasing at attractive rates in the second half of 2018. Our frac performance includes the full quarter impact of our 15 horizontal frac fleet deployed in late March as well as two additional horizontal frac fleets deployed in the middle to latter half of the second quarter. We maintain strong utilization through the first part of the quarter but experienced activity gaps in June and moving into the third quarter primarily in West Texas. With the goal of improving our contractual arrangements and building key relationships we're in discussions to play several previously dedicated fleets, which are currently working in the spot market with both existing and new customers. We continue to benefit from basin diversity within our fracturing business and our sales team has continued to do an excellent job of building strong customer relationships in basins outside of West Texas. Currently we are doing dedicated work for a large E&P customer in the Mid-Continent and have established a good pipeline of customers to keep a spot fleet utilized. We anticipate moving another fleet into the Mid-Continent later this year for a dedicated customer. Over 70% of the revenue from our wireline and pumping businesses was generated outside of West Texas, so there was little impact to utilization compared to what we experienced in our fracturing business late in the quarter. We grew market share in the Mid-Continent Bakken and Rockies regions which helps support our financial performance. We also introduced new technology in our wireline business that helped increase our average revenue per truck beyond previous peak levels dating back to 2014. Our well Construction and Intervention segment continued its profitable growth trajectory with improving revenue and adjusted EBITDA in both our cementing and coiled tubing businesses. Cementing revenues increased 12.6% sequentially as we continue to steady pace the cement unit deployments. We added four new units during the second quarter to grow market share in West Texas. In our coiled tubing business we deployed two large diameter high capacity units with 2 and 5, 8 inch tubing at leading edge pricing. Strong demand for these new units drove sequential revenue growth in West Texas by over 25%. In addition we generated over 25% of quarter-over-quarter revenue growth in our coiled tubing business in the Mid-Continent. I am proud to report that our Well Support Services segment generated double digit EBITDA margins during the second quarter. This is the first time we have achieved this since 2015 and we expect further margin improvement in the third quarter due to a recent contract win for incremental work in California as well as from pricing increases enacted late in the second quarter. Reflecting our returns-focused strategy we also divestiture artificial lift business in early July, which had been a margin drag for this segment. We achieved this record performance for the second quarter by focusing on efficient customers that value our service quality and safety records and will pay acceptable rates for our services. We generated double digit revenue growth sequentially in our largest operating basins of California and West Texas. And we achieve this improve performance while continuing to rationalize our asset base. We've continued to strengthen our company's foundation for long-term profitable growth and I want to thank the entire team for their continued focus on optimized performance. Looking forward, we're focusing on our most profitable businesses for future capital deployment as well as to further reduce operating costs and lower overall SG&A as a percentage of revenue. We plan to generate cash flow from operations to finance our capital expenditures for the remainder of the year and our capital deployment strategy continues to balance the requirements of investing in the business, maintaining a strong balance sheet and returning cash to shareholders. Just this week C&J's Board of Directors has authorized us to repurchase up to 150 million of the company's common stock over the next 12 months. The timing and amount of any shares we've purchased will be determined based on our evaluation of market conditions among other factors. This repurchase program demonstrates our commitment to continue growing our company while delivering value to our shareholders. With that, I will turn the call over to Pat to discuss asset reactivation and progress on certain R&T initiatives.

Thanks, Don. In line with our plan we redeployed two horizontal frac fleets during the second quarter and an additional fleet in July. This brought our active horsepower to approximately 775,000 consisting of 18 horizontal and two large vertical frac fleets. The majority of our refurbishment CapEx in the second quarter was spent in our fracturing business. This expenditure will drop off in the second half of the year with a suspension of further frac fleet refurbishments. Our growth projects and our wireline, pumping and cementing businesses all of which have strong returns and short payback periods are progressing as planned. During the quarter, we deployed five additional pumping units and we upgraded our wireline service capabilities with advanced pressure control equipment and graceless cable systems. And our well Construction and Intervention Services segment, we deployed four additional cementing units and two large diameter coil tubing units. We continue to advance our R&T capability to reduce our operating cost in our fracturing and wireline businesses. The warm start system, we announced last quarter is currently in field test with excellent results. This technology reduces operating costs and emissions from our fracturing equipment. Our R&T team is also working to improve our blender design to standardize and upgrade our blender configuration across the fleet with components to demonstrate significantly better life and reduce maintenance activities. This program has identified many opportunities to reduce both NPT and operating costs. And wireline, we have introduced our proprietary ball drop system that works alongside our advance pressure control equipment. This system reflects our commitment to safety and efficiency as it eliminates the use of personnel on man less to fasten the lubricator to the wellhead and to launch balls to shift sleeves. We continue to track the benefit of our R&T efforts. During the second quarter, the combination of savings to operations and gross margin generated from third-party sales created a benefit of approximately $7.5 million, compared to the $8 million for the entire year of 2017. Our R&T efforts are gaining steam and providing meaningful benefits to our company. And we expect these benefits to continue to increase as we introduce new products into our operations and increase third-party sales of our R&T products. With that, I will turn the call over to Mike to review our second quarter financials.

Thanks, Pat. Starting with our consolidated results. We grew revenue 10.4% sequentially, to $610.5 million and generated net income of $28.5 million in the quarter, or $0.42 per diluted share. On an adjusted basis, net income totaled $34.1 million, or $0.51 per diluted share, after taking into account certain non-routine items detailed in our earnings release. In the prior quarter, adjusted net income totaled $27.5 million or $0.41 per diluted share. For the second quarter, adjusted EBITDA totaled $87.8 million, increasing 19.1% sequentially, which generated 14.4% adjusted EBITDA margin and 24.5% incremental margin in the quarter. Turning to the business segments. We grew Completion Services segment revenue 10.4% to $412.9 million. Revenue from non-frac business in this segment grew approximately 19% sequentially, highlighting the strength of our diversified business strategy. Second quarter adjusted EBITDA increased to $83.3 million, compared to $80.9 million in the prior period, which generated 20% adjusted EBITDA margin for the segment. During the second quarter, well construction and intervention services segment revenue grew 13.3% to $99.1 million. Second quarter adjusted EBITDA increased 23% to $19.6 million, compared to $16 million in the prior period, generating 20% adjusted EBITDA margin and 31% incremental margin for the segment. As Don mentioned earlier, we delivered the best profitability in our well support services segment since 2015. Revenue increased to 7.8% to $98.5 million and second quarter adjusted EBITDA more than doubled to $10.9 million, compared to $5.1 million in the prior period. We generated an 11.1% adjusted EBITDA margin and 82% incremental margin for the segment, despite earnings drag from our recently divested artificial lift business. Moving to expenses. SG&A expense in the second quarter was $59.9 million, down from $65.9 million in the prior quarter. The sequential decrease was primarily driven by severance and accelerated stock compensation expense associated with the departure of an executive officer in the first quarter, and reduced compensation expense and lower corporate headcount in the second quarter. Excluding non-routine costs, Adjusted SG&A as a percentage of revenue decreased from 10.8% to 9.4%, or 140 basis points, as we continue to achieve meaningful operating leverage. Looking ahead to the third quarter, we expect SG&A expense to range between $59 million and $63 million. Depreciation and amortization expense totaled $54.4 million in the second quarter, compared to $46.3 million in the prior quarter. The sequential increase was driven by capital expenditures associated with equipment placed into service in both the first and second quarters of 2018. Looking ahead to the third quarter, we expect depreciation and amortization expense to range between $59 million and $64 million. From a tax perspective, as we have previously stated due to our significant NOL position, we expect that we will not be a cash tax payer in 2018 and for the next few years, outside of nominal state and local taxes. We also expect our effective tax rate to be close to zero. Now looking at cash flow. We generated $99.1 million of cash from operations, and $22.1 million of free cash flow during the second quarter, driven by our strong financial performance and improved networking capital position. Capital expenditures totaled $92.8 million for the second quarter, compared to $63 million in the prior period, which was due to the refurbishment and redeployment of two horizontal frac fleets in the second quarter and additional horizontal fleet early in the third quarter, and additional units added in our other service lines from the growth projects, Pat mentioned in his earlier comments. Based on current market conditions, which led to our recent announcement to delay the refurbishment of our remaining stacked frac horsepower, as well as CapEx reductions in other businesses, we now expect our 2018 capital expenditure budget to range between $340 million to $355 million. From the midpoint, this is over a 20% reduction to our previous 2018 capital spending budget. Going forward we expect to generate cash flow from operations to adequately fund the remainder of our capital spending program for 2018. As Don stated, our capital deployment strategy continues to balance investing in the business, maintaining the strong balance sheet and returning cash to shareholders through stock repurchases. We will stay true to being good stewards of our investors’ capital and will maintain a disciplined capital deployment approach with a focus on targeted returns. Moving to liquidity in the balance sheet. Our cash balance increased to $110 million, as of the end of the second quarter. Additionally, we had no borrowings outstanding under our credit facility, which had $356.4 million of borrowing capacity available at quarter end. Our recently expanded credit facility and our growing cash balance resulted in us exiting the quarter with total liquidity of $466.4 million. With that, I'll turn the call back over to Don for a few closing comments.

Thanks, Mike. I am proud of how our team executed during the second quarter. We effectively met our customers’ needs and continued to grow relationships in basins outside of West Texas. Our product line in basin diversity provides the opportunity to better manage the instances of market weakness in our fracturing business. And we should benefit from the full-quarter impact of units deployed late in the second quarter within all of our service lines. Finally, I want to thank our employees for their continued hard work and dedication. I know that all of their commitment and focus on service quality and safety will help us experience continued success in 2018 and to be well positioned for 2019. Thanks, again, for joining us on our call today and we appreciate your interest in C&J. Operator, we're now ready to open the call to questions.

Good morning, Jim.

You noticed that [indiscernible] that your ancillary businesses, cementing, coil tubing, pump down et cetera are not seeing the same oversupply pressures or whatever pressures that frac is seeing. Are we to the point that it's economic to add new capacity or are we going to start seeing increased CapEx by you guys and other players in those fields as you add capacity. Or are we reactivating, tell me, if it's doing better where does it go over the next 18 months.

Yes. It is doing better. In all honesty, I can tell you that there is some impact to our - couple of our other completions businesses. We do a lot of work with both our wireline units and our pump down units for other frac companies. And so we have very good exposure to what's happening in the frac market in general. And again, those units are seeing specifically mostly in West Texas they are sitting a little bit more than they were in the past as the frac crews or just the utilization levels have come down. But because so much of our activity for those two product lines and quite frankly the same is true for our well servicing group is not - in the Permian Basin, we've got very large presence in a number of other basins. The impact overall to them is considerably less. And we are continuing to see opportunities there to continue to - we did deploy more units, we have been refurbishing more units, we're going to continue to do that. It was built into our budget, it's in the CapEx guidance that we're giving and we do see continued opportunities. And quite frankly, Jim, we'd be ahead of where we are right now. We're actually behind of our budgeted expansion in those product lines but we just can't get enough people hired and trained. And again, the labor shortage is certainly impacting how quickly we can ramp up.

Thank you, Jim. And at this time I'm not showing any further questions. So this will conclude our question-and-answer session. I’d like to turn the conference back over to Mr. Don Gawick for any closing remarks.

Thank you, operator. Thanks to everyone for joining us today. We look forward to speaking to you after the third quarter and look forward to improving conditions in the market. Thank you.

The conference has now concluded. Thank you for joining us today and thank you for attending today's presentation. You may now disconnect your lines.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Tommy Moll with Stephens. Please go ahead.

Good morning and thanks for taking my questions.

Good morning, Tommy.

So I wanted to start on fundamentals for the frac business. You mentioned, you saw weaker demand toward the end of the second quarter. What were some of the drivers and your customers decisions to slowdown completions activity? And then also shift into the supply side, you've got some of the larger players in the business, we have been talking about rather emphasizing market share over margins. Is that what you've seen? And how much impact has there been on your customer base specifically?

Yes. So it's a mixture of several different things. In terms of the slowdown, we saw, it was a combination of both - couple of our clients actually, literally taking a pause in their activity. And so that space coming free, in a couple of cases as well, it was time to renew the commitments we had on committed fleets. And they went to basically market check and we saw specifically, some large players come in with lower pricing. And as a result, those committed fleets went to other players. So we have seen more choppiness as well, I'd say, in the spot market, just in terms of people not being quite as urgent as they were earlier on in the cycle, where we used to have quite a bit more of a urgency to get started and get moved over to the next well. It seems that's really eased fairly considerably, I think people are taking a bit of a pause, taking a look at their budgets, where they are with respect to the year and then planning for ramp-up. And what we're seeing specifically, as a number of our customers talking about getting a little bit busier through the end of the year and certainly busier in 2019.

Okay. Thank you. That's helpful. And then moving to your other business lines, where it sounds like, pricing utilization and margins are all up into the right. On the pricing side, and I realize this is general, and maybe you want to give some specifics on the specific businesses. But how much net price do you feel like you're taking versus how much cost inflation are you seeing particularly on the labor side?

Yes, and it's certainly true that there is some cost inflation on the labor side. That's continued, it hasn't been excessive, in all honesty, there's a general shortage of personnel. And I can say that's across all product lines, in fact, a few of our product lines would be considerably busier if we could get more people hired and trained. So and in general, we’re going to does vary by product line, but we're seeing on a quarter-by-quarter basis, I'd say, somewhere in the middle single digits for price increases on average. The best price increases by the way are coming in the well servicing group. And we're seeing up to low double-digit increases quarter-on-quarter for pricing there. And again, we're getting at least half of that, in terms of net price increase in some cases a little more than half.

Great. Thank you. That's all for me.

Thank you.

Our next question will come from Brad Handler of Jefferies. Please go ahead.

Thanks, good morning, guys. Hi, I guess, I want to ask you that to speak more to the frac market as well, are you not too surprising that I'll ask a bunch of questions about that today. Can you recognize also your practice of not sort of giving formal guidance? But can you speak frankly to the third quarter and you've got the additional fleets in place, I guess, it's - there's been a little bit of repositioning not sure frac units per se, but a little bit of repositioning? It sounds like, could we expect to see frac revenues up in the third quarter versus the second?

Given the extremely strong start, we had to Q2, specifically, April and May we're both very, very strong. In fact, if we had repeated that performance in June. I think it would be safe to say, we would have had a blowout quarter, quite frankly. So we did see things turn down in June and be impacted as we entered Q3. So I think in all likelihood, although, we are seeing a build through the rest of this quarter. And I think we're coming off the lows. This particular many cycle, if you want to call it that. I think we'd be lucky to get back to the kind of revenues we had in frac for Q2. We could get very close. But I'd suggest that is certainly not going to be up as the current outlook. That's not the case for our other product lines, they continue to be very strong but frac is really the one that's been impacted by far the most.

Right. Thank you for sharing that. And I guess to be clear. It's not - what it sounds like you're really talking about mostly urgent - maybe you can dig into the urgency comment. But it really sounds like, it's at the overcapacity if you will or it's some of the larger entrants, trying to push in their own frac fleets. It sounds like, it's a competitive issue more than anything else. Is that fair and if so maybe the second part of the question is, you mentioned specifically that there were some relationships or some specific crews that had renewals, is that something you are also staring at in the second half of the year?

Yes. So there's several components to it. One is certainly the entry of more and more horsepower, people wanting to put it to work and coming in at what I would call below, what the market rates had been. So they've certainly come in with attractive pricing in an effort to get their horsepower utilized. There’s certainly has been a little bit of a lessening of urgency amongst our customers, we're just not seeing the notion of immediately getting on to that next well or immediately moving the fleet and having the activity resume as quickly as possible. And again, I think there's a bit of a pause right now as they take a look at their allocation of capital for the rest of the year and really what the plans are going into the late season for 2019 as well. On top of that we've got an issue that certainly we're very much on top of it and we're paying a lot of attention to. And something we expect to see improving for us and that's the availability of the regional sand. We still are using very little in basin regional sand even though we've got contracts with a number of players. They've been delayed coming to market. And quite frankly, we've delayed making long-term commitments on that sand because we are continuing to see the prices of regional sand come down. And we're taking a long-term view on that as opposed to tying it up in the short-term because we believe - we’re seeing definite evidence of the fact that it is coming down and we're getting regional sand locked in the short-term contracts right now at rates that are getting better and better on an ongoing basis. So that's actually going to be in that positive for us I believe in the quarters that are coming with respect to our cost basis.

I understand. But you're pointing as that transition is happening your - that was I guess, part of the second quarter issues both you mentioned that you wound up not quite having availability of sand. There you got tripped up over sand a little bit in the quarter, right?

Yes. And again, the sand was available because we didn't have the regional sand coming in. We were using Northern White. And so quite frankly that impacted our margins a little bit as we were paying more than people who were getting regional sand and who had locked in to some contracts. But quite frankly the early takers of the regional sand are going to be locked in at prices that are higher than they're going to settle out. Because those prices are coming down as we speak.

Good. Very good color, I that. Okay, I'll turn it back. Thanks.

Great. Thank you.

[Operator Instructions] Our next question will come from Jim Wicklund with Crédit Suisse. Please go ahead.

Good morning, guys.

We had expected to see tightness in field labor, when do you get a new CFO or is that market just as tight?

We should be announcing something quite shortly.

Okay. Okay, gentlemen. Thank you very much. Best of luck.