Earnings Call Transcript - RNGR Q2 2022

Operator, Operator

Welcome to the Ranger Energy Services Second Quarter 2022 Investor Conference Call. All participants will be in listen-only mode until the question-and-answer portion of this call. Please note this event is being recorded. I would now like to turn the conference over to Stuart Bodden, President and CEO; and Melissa Cougle, CFO. Please, go ahead.

Melissa Cougle, CFO

Good morning, everyone. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements, reflecting views from the company about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the beliefs of the company based on current conditions that are subject to certain risks and uncertainties and that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA and adjusted net debt are not a substitute for GAAP measures, and they may not be comparable to similar measures of other companies. A reconciliation of these items is presented in our earnings release, which is available on our website. I will now turn the call over to Stuart.

Stuart Bodden, CEO

Thank you, Melissa, and good morning to everyone joining us today. Although you just heard from her, I'm pleased to introduce Ranger's new CFO, Melissa Cougle, and welcome her to the Ranger team. Melissa brings a wealth of experience and strategic insight into the CFO role, and she is already bringing fresh new perspectives to our leadership team. It's great to have her on board. Since I joined Ranger in the fall of last year, we have been communicating our belief in the importance of consolidation. Our strong sense of market fundamentals were quickly improving for oilfield services, and that Ranger specifically was much stronger and had far more earnings potential as a result of our acquisitions. All of these beliefs have been and continue to show in our financial results. Our performance in Q2 shows that our 2021 acquisitions have created shareholder value and provided needed scale and operating leverage, which will allow Ranger to capitalize on what is expected to be a multi-year upcycle. The future of Ranger is exciting, and this quarter demonstrates why. Quarter-over-quarter, we grew revenue by 24%, achieving nearly double the revenues seen pre-COVID. Our adjusted EBITDA increased nearly 90%, approaching a doubling from the prior quarter, with EBITDA margins improving by more than 400 basis points from increasing prices, activity and strong operating leverage. While some peers have been building working capital on the back of increasing revenues, beginning in Q1, we placed significant focus on managing working capital, which facilitated the generation of $20 million of operating cash flow in this quarter, combined with the ongoing sales of surplus assets. These efforts allowed us to deleverage by more than $21 million, reducing our total net debt balance by almost 25% in a single quarter. Ranger now stands with a debt load that is less than 1 time its current EBITDA run rate. When thinking about market conditions and how our services could fare even through a potential recession, we believe the US WAN domestic production market has shown significant resilience over the past several years and that our services will remain in demand in almost any commodity price environment. Given our leverage to workover and production barrels, which are typically the cheapest incremental barrels for any producer and the quickest to bring online, Ranger feels our business segments are particularly well suited to be resilient and generate sustainable cash flows in the future, despite any macroeconomic uncertainty today. Over the last several quarters, we have been working diligently to integrate our most recent acquisitions, and we have made significant strides in ensuring operations to maintain our strong service delivery reputation and are running consistently to Ranger standards. I'd now like to spend a few minutes to talk about each of our segments. In our high-specification rig business, we deployed more rigs this quarter and worked on high grading work towards more 24-hour work, and we've seen progress on both rig count and rig hours worked per day. Rig rates are presently higher than pre-COVID levels and north of $630 per hour on a blended basis, a Ranger record. We've had to absorb a fair amount of inflationary cost pressure, particularly on the labor side, but we feel we're doing a good job of managing these costs and we believe normalized margins in this segment are currently around 20%. In the coming quarters, we're going to continue to focus on strong execution and operating efficiency that we feel will drive more market penetration and continue expanding margins. Our confidence comes from the high operating standards of our crews, which we know will pay off over the long run. As an example, we were recently acknowledged by a key client in Oklahoma, who remarked that Ranger crews were a pivotal piece of their success in running a series of completion jobs that allow them to achieve significant operational efficiency and time savings on their program. This customer made a specific request to retain Ranger crews and ensure the schedule has managed to allow them to keep that specific rig and that specific crew working for them. Moving to our Wireline segment, we were disappointed in our first quarter and made a series of changes to this business, including changes in leadership, a focus on improving service quality, redeployment of assets, and ensuring our rates are appropriately profitable. Although recently enacted, we're already seeing the changes paying off with revenue up nearly 30% from the prior quarter and now commensurate with the back half of 2021, and EBITDA margins in Q2 approached 10%. We've seen a sharp reduction in non-billable labor and improved pricing by 10% quarter-over-quarter in completion-related services. In short, we have regained lost traction in the business and drilled their significant room to run, and we'll be pushing for additional growth and utilization of our Wireline assets. Finally, in our Ancillary Services segment, things are really picking up. Several of these services were acquired during the Basic asset acquisition. And this year, we have started to more actively manage these product lines. We are happy with the results and their future earnings potential. Our Coil business has shown the most growth at 157% year-to-date and is producing 25% segment-level EBITDA margins. We decided to complete an additional coiled tubing spread that had been acquired from Basic and that unit will be deployed in the coming weeks. Our Rentals business has grown 65% since year-end and is realizing margins of 24%, showing promise as well. Finally, both our P&A and snubbing businesses have shown notable growth this year. All told, we feel this quarter really came together with good traction in all segments. We're incredibly proud of our achievements and the financial results of the month. We'll talk about our financial outlook here shortly. But operationally, our focus in the coming quarters is to continue the momentum gained to date. Finally, and most importantly, I would be remiss if I did not thank everyone at Ranger for their hard work and dedication to achieving such an outcome. It has truly been a team effort, and I'm proud of what they've accomplished. Now, I'll turn the call over to Melissa to walk through some of the details of our financial results.

Melissa Cougle, CFO

Thank you, Stuart, and I appreciate the kind words. It's been exciting for me to join a team full of energy and a desire to grow and build a business that's better every day. As Stuart mentioned, our second quarter results were very strong. Activity increased in all service lines and the pricing environment remained constructive while we manage inflationary pressures that are being experienced across the sector. In reviewing the details of our second quarter results, our consolidated second quarter revenue grew 24%, increasing from $123.6 million in the first quarter to $153.6 million in Q2. The company posted a net loss for the quarter of $400,000, an improvement of $5.3 million over the first quarter's net loss. Going forward, we do anticipate generating positive net income in future periods. Adjusted EBITDA improved from $9.6 million in the first quarter to $18 million in Q2, an 88% increase with margins expanding 400 basis points over the same period from 8% in Q1 to 12% in the second quarter. At the segment level, revenue for High Specification Rigs increased from $64.9 million in the first quarter to $76 million in the second quarter with contribution from both an increase in activity levels and pricing. Rig hours increased by 7% over this period and rig rates increased by 10%, driving the 17% quarter-over-quarter improvement in the top line. Segment EBITDA for High Specification Rigs was $14.2 million in the second quarter as compared to $14.1 million in the first quarter. Operating income and adjusted EBITDA for this segment were both detrimentally affected by certain insurance-related costs that were previously unidentified and related to increased exposures from the Basic asset acquisition. When normalizing for these items, adjusted EBITDA margins for the first six months of the year were approximately 20% in this segment. In the Wireline segment, revenues increased from $38.6 million to $49.5 million or 28% over the period. An increase in revenue was largely attributable to an increase in activity levels with completed stage counts increasing from 7,400 in the first quarter to 8,000 during Q2. We were also successful in beginning to increase first-stage pricing and adding either minimum day rates or standby rates with most of our customers, which will show a full quarter effect in the third quarter. Our Processing and Ancillary Services revenues increased from $20.1 million in the first quarter to $28.1 million in the second quarter, a 40% growth rate. Stuart mentioned some specifics from the product lines in this segment with the strongest growth coming from the coiled tubing and rental businesses. Adjusted EBITDA for this segment increased by 55% during the second quarter from $3.3 million in Q1 to $5.1 million in Q2. This segment now contributes over 30% through our consolidated results. On the G&A cost front, expenses increased by $3 million over the period from $9.2 million in the first quarter to $12.2 million during the second quarter. A significant portion of these incremental costs were adjustments related to integration costs, legal settlements and severance, and we expect these costs to decrease during the third quarter. Turning to the balance sheet. The company reduced its debt load by $21.8 million or 24% over the quarter and is reporting adjusted net debt at the end of the second quarter of $58.3 million. The company was able to pay down this debt with strong operating cash flow of $20 million for the quarter, as well as asset sale proceeds totaling $13.9 million. The cash flow from operations improved dramatically over the quarter with significant effort from the company to better manage accounts receivable. Our results resulted in a reduction of 16 days in the company's days sales outstanding. Hats off to this team. I am honored to be among them. With that, I'll turn it back over to Stuart, who will make some comments about what we're expecting in the back half of the year.

Stuart Bodden, CEO

Thanks, Melissa. Moving into the second half of the year, we continue to see robust demand and a constructive pricing environment across all of our service lines. As noted earlier, given our significant leverage across the company to production and workover barrels, we continue to believe that demand for our services will remain strong even if the commodity price environment deteriorates somewhat due to recessionary conditions. For full year 2022, we're increasing our guidance for revenue on the back of strong market fundamentals and our healthy quarterly results. We now believe that revenue will be between $580 million and $600 million for the year. We continue to believe full year EBITDA margins will be between 11% and 13%. Based on current performance and ongoing discussions with our customers, we expect continued revenue growth into Q3. Quarter-over-quarter, we're expecting mid- to high single-digit growth in Q3 as compared to the 24% growth seen during Q2, which pulled forward much of our planned growth for the year and allowed us to increase our full year guidance. Our growth will likely be constrained somewhat by labor shortages which are expected to continue and will affect how quickly we can deploy additional crews and equipment. We are also feeling pressure from supply chains, which are widely prevalent and causing delays to certain maintenance projects. As the bulk of our integration efforts are not complete, we'll be turning our attention to making incremental improvements in the operating efficiency of our cost structure and we'll be striving to continue to improve EBITDA margins each quarter. We also believe that some of the incremental pricing gains achieved in the second quarter will demonstrate their full effect during the third quarter. Our High Spec Rigs and Ancillary Service segments have seen tremendous growth throughout the year, and we've seen significant improvement in our Wireline business as well. We believe that the Wireline and Ancillary Services segments, in particular, have additional capacity for growth and will be focused in the upcoming quarters on improving market penetration in these segments. Asset sales have totaled over $20 million since the Basic acquisition, including both Basic and Ranger legacy assets. And we believe that achieving another $4 million to $5 million in asset sales is realistic this year. We also believe that our full CapEx spend for the year will not exceed $15 million. We demonstrated our strong desire to be acquisitive in 2021 and feel that Ranger remains a strong consolidation partner for US land servicing companies. We remain interested in pursuing growth opportunities that demonstrate our ability to generate through-cycle returns to our shareholders. As our balance sheet strength improves and we generate consistent cash flow, we'll be evaluating how to best create and return value to our shareholders, whether that be through dividends, a buyback program, additional acquisitions or most likely a combination of these approaches. This concludes our prepared remarks. We've appreciated your time today, and we'll now open it up for questions.

Operator, Operator

We will now begin the question-and-answer session. Today, the first question comes from Derek Podhaizer of Barclays. Please go ahead.

Derek Podhaizer, Analyst

Hi, good morning.

Stuart Bodden, CEO

Good morning.

Derek Podhaizer, Analyst

I wanted to explore the issue of high cyclings. Is there a similar tightness in this market as we see from the pusher pumping? Given the Basic acquisition, it seems there is a significant amount of inventory and idle rigs in this area. Could you discuss what the total cost would be to redeploy those rigs and how that would manifest? I believe more insights on the supply side would be beneficial to understand this market better.

Stuart Bodden, CEO

Yes. You're breaking in a little bit, Derek, but I think the question was whether or not the high-specification rig business has the same equipment constraints that we're seeing on pressure pumping. As you highlighted, there are still a number of excess rigs when you kind of look at the top line or if you look something from research reports. The reality is, a lot of those rigs at this point are on the fence and would actually take investment to get off the fence. So whether they need category four inspections, new engines, new transmissions, we kind of feel like we could put, call it, 10 to 20 additional rigs out if we had crews, which is tough to get ahead of that of labor hiring. But we think we have 10 to 20 that we could put out for $3 million to $4 million of maintenance CapEx, inspections, et cetera.

Derek Podhaizer, Analyst

Got it. Okay. That's helpful. And sorry if the connection hasn't been great. Next question, I wanted to just dig into more about the coiled tubing business.

Stuart Bodden, CEO

Sure.

Derek Podhaizer, Analyst

So if we think back to the IPO, the Ranger story of High Spec Rigs was to more or less displace coiled tubing, particularly when you do the extended reach wells. Maybe talk about that, just the competing services in a sense and how they fight for capital and how you take a balanced approach between the two given that we're seeing coiled tubing become a successful part of the Basic acquisition. I just think it's interesting, given how it's a competing service for the High Spec Rigs.

Stuart Bodden, CEO

Yes. Thanks for the question, Derek. The first thing I'd highlight is that in the coil business, it's really a DJ Basin focused business. So I think the core investment thesis around high-specification rigs kind of outperforming in longer-reach laterals still holds. The way I would think about it is, this equipment is really ideally suited for working in the DJ. And at the moment, we do not have plans to expand coil outside of that basin.

Derek Podhaizer, Analyst

Got it. Okay. That’s helpful. I appreciate that. I’ll turn it back.

Stuart Bodden, CEO

Yes. Thanks Derek.

Operator, Operator

Our next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

John Daniel, Analyst

Hey, guys. Good quarter. Stuart, what's impressive to me is when I look at the pricing; the average of $630 per hour is now much higher than pre-COVID levels. I'm curious how much of that reflects benefits of consolidation or versus rig mix? Just if you could elaborate on that delta?

Stuart Bodden, CEO

Yes, thank you for the question, John. I believe a significant portion of it is related to the backend of consolidation. As we've discussed previously, there were certain players focused on gaining market share, which we haven't done while operating those assets. Therefore, I think that plays a major role in it.

John Daniel, Analyst

Okay, I understand. Regarding Ranger as a strong partner for further industry consolidation, I'm curious about the appetite and potential for tuck-in transactions in the next two to three quarters. Is it high or low?

Stuart Bodden, CEO

For us, I would say it's high. I think as we just continue to get confidence in the market and how it's developing and the market and our services. So, I'd say our interest is high.

John Daniel, Analyst

Okay, great. I was referring more to the likelihood that something might happen.

Stuart Bodden, CEO

Yes, it's a little tough to handicap it, John. So, I'd say we have a lot of interest. What I would tell you is it will be interesting as the quarter plays out and how other people perform and what the bid-ask ultimately looks like. So, I think that's the question.

John Daniel, Analyst

Okay, that's just good enough. That's sufficient. I got two quick housekeeping ones. And one, the assets held for sale, if you could elaborate on what that $5 million is? And then second, I don't know if Derek asked this, I got distracted during his questions, but on the coiled tubing, just how many of your coiled tubing units are running today?

Stuart Bodden, CEO

Yes. Regarding the $4 million to $5 million of remaining asset sales, those are mainly physical properties. We hadn't conducted many sales in the first half of the year. As for the coil side, there are some smaller units that operate within the P&A business, but I won't be including those in the figures. For our 2.375-inch units, we currently have three operating full-time. We made an investment to complete a partial spread that we purchased from Basic, so we anticipate having four units running by the end of the month.

John Daniel, Analyst

Cool. Awesome. Thank you so much.

Operator, Operator

Our next question comes from Don Crist of Johnson Rice. Please go ahead.

Don Crist, Analyst

Morning Stuart and Melissa. How are you all this morning?

Stuart Bodden, CEO

Good, how are you Don?

Don Crist, Analyst

Doing well. Doing well. I wanted to start with Wireline, I know you highlighted in your script some changes that you implemented there, and it's turned around quite nicely from the first quarter. Can you just elaborate on where you think that can go for the third quarter? And do you think the margins can increase substantially from where they are today?

Stuart Bodden, CEO

Yes, we do. Throughout the quarter, Wireline's performance improved each month. Currently, we are targeting adjusted EBITDA margins for Q3 to be just below 9%. We hope those margins will range between 15% and 20% as we progress into Q3. Therefore, we are expecting margin expansion, and our confidence in this is based on what we observed in the latter half of the quarter.

Melissa Cougle, CFO

We're currently seeing performance in the hundreds throughout the quarter. We are expanding by more than 200 basis points each month. As we make progress on the ground, if our performance holds steady toward the end of the quarter, that would be quite positive. Additionally, we believe there is potential for even greater growth.

Don Crist, Analyst

It sounds exciting to me. And in the past, Stuart, you had given us how many High-Spec Rigs you had running. I don't know if you're going to give those going forward. But in your script, you had talked about adding rigs going into the third quarter. Would it be possible to get how many rigs you had running in the second quarter, and how many you expect in possibly the third quarter?

Stuart Bodden, CEO

Yeah. If it's okay, we might just send that to you, because I want to make sure that we're comparing apples and apples and we’ll send you the number. We would expect rig count to continue to increase modestly. I would say, to put a number on it, probably I can point to five or so additional rigs that we would expect to put to work. And I think I'm now looking less handing over, I think looking at what you'd be used to. In Q1, we were running 154 rigs and we were at 161 in Q2. So I think kind of the five or so additional rigs would be reasonable for Q3.

Melissa Cougle, CFO

And that flexes a little bit at the end of each period depending upon what rigs we’re working and what rigs are waiting to go to work?

Don Crist, Analyst

Right, right. Obviously, it's an average, and it kind of flexes up and down through the quarter. Yeah, I get it totally. And just one more for me, and obviously, this will be a harder one to answer. But, obviously, the debt reduction is progressing nicely, the plan that you put out in the first quarter. How does the Board balance debt reduction going into year-end, where you might be completely debt-free versus share buybacks and/or dividends going forward? Can you just give us a little bit more color on where that stands and how the Board kind of thinks about it?

Stuart Bodden, CEO

It's definitely a topic that is generating significant discussion among the Board and investors. To be honest, there isn't a clear consensus at this point, but there is an understanding that as our balance sheet continues to strengthen, we need to find ways to return capital to our shareholders. That would be the first point I want to emphasize. The second point is that as we gain more confidence in the business's future, I don't believe the management team feels the need to eliminate all debt before considering a capital return program for our shareholders.

Don Crist, Analyst

I appreciate as much color you gave on that, because I know you're living it, but…

Stuart Bodden, CEO

Exactly, my CFO is squirming right now, so.

Don Crist, Analyst

I get it. I’ll turn it back. I appreciate the color.

Stuart Bodden, CEO

Thanks Don.

Melissa Cougle, CFO

Thank you.

Operator, Operator

Our next question comes from John Fichthorn of Dialectic Capital. Please go ahead.

John Fichthorn, Analyst

Thank you for taking my question, and great job on the quarter pulling everything together. Many of my questions have already been addressed, but I'd like to expand on a couple. How much additional cash can you extract from working capital in this growth environment? What do you think that might reach? It was impressive to see the decrease in DSOs. However, I'm unsure if this is the normalized figure for contract assets or other items on the balance sheet, so I'm curious about your thoughts on that.

Melissa Cougle, CFO

Yeah. John, it's a good question. We're not budgeting any more releases for the year. The DSO was down very close to 60 days, barring blowing up and completely reengineering how we bill our customers. I don't think we're going to get it much healthier than that. So the question is, can we do any work on the margins there? We'll certainly be going after it, but I don't think we could plan on improving it by releasing anymore. We're at a really healthy level now when we look at DSOs, DPOs. So you always want to do better, but that was probably more going to be on the trenches.

John Fichthorn, Analyst

Super. And you've talked a little bit about kind of where you think rigs could get to. But could you talk a little bit at least on Wireline or in Ancillary Services, what you think the real potential is with the existing asset base that you have without kind of a material change to CapEx? I know labor is probably going to be the biggest swing factor that you can't know the answer to – to answer this question. But just kind of wondering what the capacity of the business is in your minds at this point in this environment.

Stuart Bodden, CEO

Yes, I agree with your point, John. Thank you for your question. Much of the situation revolves around labor and our capacity to deploy it. Regarding Wireline, we are generally not limited by equipment, especially in our Permian Basin operations. There is certainly potential for growth there, particularly in completions and plug and perf services. The real challenge lies in availability of personnel rather than equipment. We need to ensure that our plug and perf operations are closely aligned with the frac crews that are consistently active. We mentioned the impact of non-billable labor, and we've noticed that pursuing sporadic work can increase our non-billable labor costs, especially when faced with supply chain disruptions related to frac or sand. Therefore, we have been focused on staying with consistently operating frac crews. In terms of the Fishing business, we are not limited by equipment, but we do face a shortage of skilled workers, which can be somewhat difficult to navigate. We are actively seeking the right talent. As for Coil, we anticipate an increase in activity, followed by a consolidation as we reach our limits. However, we expect to see further growth, particularly in fishing and in our P&A business, which should gain momentum in the latter half of the year.

John Fichthorn, Analyst

Great. I want to rephrase Don's question regarding the return of capital. You are competing for investors to buy your stock against others in your industry who are aggressively returning capital. You have been discussing this for over a year, and I urge the Board to stop the discussions and begin making clear announcements about your intentions. Even if it's just the initial steps of a capital return program and a potential start date, you could make that announcement now. I encourage the Board to provide more clarity to you regarding their plans because shareholders are eager for information.

Stuart Bodden, CEO

Yes. Understood, John. Thanks for the comment.

Operator, Operator

Seeing no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Stuart Bodden for any closing remarks.

Stuart Bodden, CEO

Great. Thanks. Again, thanks, everyone, for joining. Obviously, we're very excited about the state of the business, and we look forward to talking to you in a few months. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.