Earnings Call Transcript - RNGR Q2 2020

Operator, Operator

Good morning and welcome to the Ranger Energy Second Quarter 2020 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Darron Anderson, Chief Executive Officer. Please go ahead.

Darron Anderson, CEO

Thank you, operator. Good morning and welcome to Ranger Energy Services second quarter 2020 earnings conference call. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. When we last spoke, Ranger was in the midst of materially right-sizing our business to match the needs of the market. As we sit here today, I would consider the result of that effort to have been very successful. If you recall at the time of our May 1 earnings call, we had already reduced our headcount by 50%, taken across-the-board pay cuts, shut down two unutilized operating locations, and initiated a number of other cost-saving initiatives. Triggering these difficult decisions early provided a tremendous benefit to us for the remainder of Q2. First of all, it lessened the demand for additional downsizing as the market continues to contract. Our headcount ultimately dropped an additional 10% by mid Q2 while only needing to consolidate one additional operational location. Second, making our internal adjustments quickly allowed us to turn our full attention back to our customers, giving us the best chance to obtain all profitable work with a focus on flawless execution. And finally, despite the velocity and intensity of this downturn, our management team's extraordinary and efficient efforts allowed us to deliver Q2 results that featured both positive EBITDA and positive cash flow alongside near stable sequential segment margins. In benchmarking this performance against an extremely challenged OFS market, I can't be more proud of the job that our team has done and I'm truly appreciative of the customers that continue to choose Ranger as a partner. Both Ranger and our customers have been challenged across the board, as demonstrated by a 62% drop in revenue, but the challenges do vary across basins. We've experienced activity and revenue drops in certain basins greater than 60%, with customer activity dropping to almost non-existent for a period of time or market pricing eroding so badly that Ranger opted to not even participate. Conversely, in other markets, the reduction in activity was still severe but remained closer to a 50% drop with better pricing discipline. Regardless of the various basin dynamics, overall, Ranger is benefiting from our operational and financial positions upstream, resulting in market share gains during a declining market. Our Q2 results are a true reflection of our high-quality operations and disciplined cost management. We maintain positive adjusted EBITDA and cash flow through each month of the quarter. Our two largest business lines, High Spec Rigs and wireline, were able to hold segment-level margins at pre-downturn levels; an exceptional achievement. Brandon will walk you through the details in a moment, but our ability to deliver this type of margin performance, generate cash, and pay down debt by 35% in arguably one of the worst quarters that our industry has ever experienced truly demonstrates the capabilities of the Ranger platform. While it is far too early to call a recovery underway, our business has come off the trough experienced in late May. I will provide some of these details as I now walk you through our segments, specifically starting with High Spec Rigs. For the quarter, rig hours were down 61% and composite rig rates down 17%. While rig hours are self-explanatory, the change in composite rig rate was predominantly driven by a higher rate for rig completion packages coming to a near end in Q2. While I would not discuss absolute figures at the trough of our rig activity during Q2, 24-hour completion work dropped to approximately 3% of our total rig activity. As we sit here today, our overall rig activity is up approximately 40% from our trough, with 24 activity returning closer to historical norms of approximately 10% of our active rigs. While these increases seem fairly large, please remember I'm referencing our absolute low activity mark. The point I'm making is our rigs are measurably going back to work, and barring a macro-driven reversal, the worst is behind us. One other item on the rig side, we continue to pursue our strategy of customer alignment, specifically with IoT; again, our operational and financial strength is paving the way for these conversations and negotiations to take place. We hope to have more to share in coming quarters on the success of this strategy. Moving on to our completion services and other. On our last call, I stated that our Mallard wireline group ended the month of April with five dedicated wireline trucks running. That number further declined and bottomed at four in late May. Dropping from an average of 11 trucks in Q1 to a trough of four, all due to completion stoppages and not pricing, was a material hit. The only positive metric for Ranger in this data is the Permian frac count dropped to a low of approximately 20 spreads, as published by outside sources. This equates to a 20% market share for the Mallard group. I believe this demonstrates the quality of services we historically intend to bring to our customers. Currently, I'm very pleased, our dedicated active truck count is back up to six as our work continues to resume with some of the strongest Permian E&P operators. Rounding out our completion services in other segments, as would be expected, our smaller other services within this segment also experienced activity and revenue declines. The declines experienced here were comparable to our rig and wireline activity changes. Finally, our processing solution segment. Given the activities clients experienced in earlier quarters, the performance of this business had already endured a large portion of its challenges and therefore held up relatively better than our other segments. While our reported revenue was down, this was materially driven by lower mobilization and demobilization charges which produced a smaller margin than our recurring rental revenue, resulting in an increase in gross margin relative to last quarter. Before I turn it over to Brandon, I want to close with this. The results reproduced this quarter were the products of strong operations, a great balance sheet, and a culture of prudent and efficient decision-making. These are things that are not created in a single quarter but over time. So while it was a very tough quarter, Ranger's capabilities were on full display showing that we built an organization that can withstand the most difficult markets. Brandon, I will now turn it over to you for the details on the numbers.

Brandon Blossman, CFO

Thank you, Darron, and good morning to everybody on the phone. Let's go ahead and get started with a walkthrough of all the second quarter details. First, the consolidated numbers, relative to last quarter, Q2's revenues were down 62% or approximately $50 million, moving from $81 million for the quarter for Q1 to $31 million for Q2. Adjusted EBITDA was down 72% or $8.2 million, moving from $11.4 million to $3.2 million in Q2, while adjusted EBITDA margins moved down from 14% to 10.4%. A quick note on the bridge to adjusted EBITDA here; the as-adjusted result does back out $1 million of severance and restructuring charges for the quarter. As Darron noted, we believe that we are done with our resizing efforts and do not expect to incur any further severance costs in the second half of the year. And now moving down to the segment level and starting with revenue. Quarter-over-quarter revenues saw a decrease across all segments; specifically, high-spec rig revenue was down 67% or $23.5 million moving from $34.9 million to $11.4 million in Q2. This is the combined effect of a reduction in period rig hours and a decrease in the composite rig rates. Revenue hours declined 61% or 37,800 hours moving from 62,400 to 24,600 hours, and as Darron mentioned, composite hourly rig rates declined 17% or $95 an hour from $558 an hour to an average of $463 an hour in Q2. In the completion and other services segment, revenue was down 59% or $26 million moving from $43 million to $18 million, with both the wireline and other non-wireline services seeing declines. Here, within this segment, wireline revenues were down 60% sequentially, driven by a 53% decrease in period stage count and a 14% decrease in composite price per stage. While the drop-off in other non-wireline service lines was largely in line with regional market dynamics. And finally, at our Processing Solutions segment, revenues here were down 43% or $1.2 million moving from $2.8 million to $1.6 million, with the majority of that decline driven by the lack of lower-margin mobilization and demobilization revenue. And now moving to the segment-level EBITDA and margin percentages. Overall segment level EBITDA, this is before corporate G&A, saw a decrease of 58% or $10.5 million moving from $18 million to $7.5 million. Again, all segments contributed to this decline. On the margin front, consolidated segment margins were actually up from 22% to 24%. Now, to disaggregate those two numbers down into the segment level; High Spec Rigs adjusted EBITDA was down 66% or $3.3 million moving from $5 million to $1.7 million, with margins here holding flat at about 14.5%. Completion and other services saw adjusted EBITDA down 60% or $7 million moving from $11.6 million to $4.6 million, and here margins were down just slightly from 27% moving down to 26% in Q2. Processing and solutions adjusted EBITDA decreased just 8% from $1.3 million to $1.2 million, while segment margins were materially up from 48% in Q1 to 75% in Q2. As Darron noted, the margins associated with this service revenue, the primary driver of the decline in revenue was much lower than the base business's rental margin and, as such, the revenue decrease here had a materially disproportionately small impact on the absolute segment margin and drove a positive impact on the gross margin as a percentage of revenue. Moving on to G&A expense, as adjusted, G&A expense was down 23% year-over-year and down 34% sequentially, moving from $6.5 million to $4.3 million in Q2, reflecting the impact of our recent right-sizing efforts. And finally, on the net income line for Q2, we reported a net loss of $8.9 million, an $11.7 million decline versus Q1's income of $2.8 million. This decrease in net income that was incremental to the adjusted EBITDA decline was driven by Q2's lack of Q1's $2 million gain on the retirement of debt and Q2's severance and restructuring expenses. Now, moving on to cash flow and the balance sheet. During Q2, $16 million of cash flow from operations was offset by less than $1 million of cash CapEx expense, which drove a net sequential decline in our net debt number of $15 million. At the end of Q2, our net debt, and this is inclusive of all our vehicle leases, stood at $28 million, again down $15 million from Q1's ending $43 million balance. At the end of our quarter, our term debt balance stood at $22 million, down the usual $2.5 million from Q1's balance. Total CapEx recorded for the quarter was less than $700,000, which breaks down into $200,000 of maintenance CapEx that is maintenance CapEx across all of our business lines and $500,000 related to the final payments on two wireline trucks ordered at the very beginning of this year, along with payments on a new prototype gas processing unit. We also added $300,000 in non-cash lease obligations for the renewal of some of our IT infrastructure. On the liquidity front, we ended the quarter with $11 million of liquidity, which consisted of $6 million worth of cash and $5 million worth of capacity on our revolver, that is down $11 million from Q1's $22 million of liquidity which was driven by the reduction in borrowing base as our accounts receivable balances declined through the quarter. At our release date, our revolver was undrawn and our availability stood at $10 million with a cash balance of about a million dollars. That's all for me, and I'll shoot it back over to Darron for his concluding comments.

Darron Anderson, CEO

Thank you, Brandon. I will wrap up with a few brief comments. Ranger, and our entire industry, has a steep climb ahead of us but with our business showing signs of improvement and our costs remaining highly contained, we are cautiously optimistic about the future. The increase in activity that we've experienced thus far combined with the expectation of one to two additional wireline trucks being deployed over the next month and a handful of well service rigs scheduled to return to work in early August all point to modest improvements. We believe our suite of services allows us to participate in the return of delayed well maintenance work as well as the completion of DUC wells in an improving commodity price environment. Additionally, the depth of this downturn has placed an unbearable burden on many of our competitors which has, and should continue to translate into further market share gains for Ranger. As to consolidation, historically we have taken a particularly disciplined approach to merger and acquisition opportunities and do not expect that mindset to change. However, we do know the opportunity set today is a multiple of what it was at the beginning of the year and post-downturn, we feel that the likelihood of executing an attractive transaction has materially increased. While we continue to work through an extraordinarily challenging period in our industry, our team has demonstrated that we are up for the challenge and we are determined to emerge even better and stronger. Operator, this concludes our remarks and will now open up the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will be from Daniel Burke with Johnson Rice. Please go ahead.

Daniel Burke, Analyst

Yes. Good morning, guys.

Darron Anderson, CEO

Good morning, Daniel.

Daniel Burke, Analyst

Let's see. Darron, I mean, you made a point to mention not to get too caught up with the measurement of activity, I think on the well service side up 40% from your absolute low but I'll still ask, was that a single day measure? Are you measuring a single day trough or weekly trough or a monthly trough? Just trying to measure what's going on.

Darron Anderson, CEO

No. That's going to be from a weekly trough. So we have the daily metrics and we actually, I can tell you exactly we reached the trough beginning at the third week of May that lasted through about the first week of June, so it's referencing really that first week of May with our absolute trough in the next comparable to ask we say here today. Our data shows us across the organization we hit a three-week low during that time period.

Daniel Burke, Analyst

Okay. That's a helpful way to put things in perspective and to see the progression. I appreciate that. I noticed that the truck count on the Mallard side has slightly increased, which is encouraging. Can you share any insights on the potential for further increases as we look later into Q3?

Darron Anderson, CEO

Yes. So we have our information from our customers and that is subject to change, but my comment was we expect to see one to two additional load-outs. So if I'm saying one to two, I probably feel fairly confident about that. So we do have some visibility above where we're sitting here today that we expect to occur here over the next 30 days.

Daniel Burke, Analyst

Okay, great. Maybe I missed that little piece and then maybe just the last one Darron for you or for Brandon, can you just talk about you guys are doing a great job in the second quarter of generating free cash flow and with activity nudging back up here, I would assume that that does look like it will continue but talk maybe just a little bit about the comfort you have with your liquidity level at present?

Brandon Blossman, CFO

So we would love to have more liquidity. We are comfortable with it as it currently sits and certainly comfortable with it as it interfaces with our near-term forecast. Having said that, we will continue to pull levers to ensure that we have even a better cushion as we move forward; and I probably don't want to get into too many details but we have at least two easy opportunities to increase that liquidity profile as we move forward, leveraging one some of the assets, some of the properties that we own, some of them turn out to be quite valuable. And then two I think you'll see us continue to whittle down our light-duty vehicle fleet. It's materially bigger than it needs to be as we look through the next 12 months of activity.

Daniel Burke, Analyst

Okay. All right guys. Well, look again nice quarter and I'll leave it there for now.

Darron Anderson, CEO

Thanks for the questions.

Operator, Operator

The next question comes from John Daniel with Simmons Energy. Please go ahead.

John Daniel, Analyst

Guys, a lot of times we talk about consolidation and focus on well servicing because it's so fragmented, but when you look at your wireline business, it continues to perform excellently even in a particularly poor Q2. Do you see more potential for consolidation opportunities in wireline?

Darron Anderson, CEO

John, when we talk about consolidation, we're not specifically talking about rigs, not that rig is excluded from the conversation, but we're definitely not talking exclusively rigs. I think we're looking at all services on the production and completion side. Wireline being specifically included in that. So we don't have exposure to the drilling market right now. That market is very, very depressed, but there are opportunities potentially to get in that market to ride an upside potentially in the back half of ‘21/’22. So I think there's nothing that's off the table right now. We're going to be very, very selective. I think we've got a suite of services that we've proven are fairly asset-light, can reduce cash flow, operate with variable cost structures, and we want to stick with that type of structure. So wireline definitely fits that model. We're going to focus on these higher margin bits just like we have.

John Daniel, Analyst

Okay. Fair enough. Well, another one for me is on the labor front as you guys are starting to put rigs and equipment back to work, can you just speak to the labor issues if any? It seems like some companies have talked about an inability to find people because of the disparity in unemployment benefits. Can you just give us your experience in the last few weeks?

Darron Anderson, CEO

Yes. I think at first we had to make some very difficult decisions early on in our downside, and as our results show we're executing and making those decisions efficiently, right? But we parted ways with a lot of good team members. Unfortunately to say that with the activity increases that we've seen thus far on the wireline and the rig side we've added back approximately 50 employees. We've not had any issues of getting these employees back. The majority of them are individuals who were with us previously. So right now we're not seeing any issues there. We don't foresee any issues that relate to ramping back up, being that it's happening at a modest level.

John Daniel, Analyst

Okay. That's all for me. Thanks, guys.

Darron Anderson, CEO

Great. Thank you for the question, John.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Darron Anderson for any closing remarks.

Darron Anderson, CEO

I just want to thank everyone for their participation today and I truly want to thank all of our wonderful team members who have endured a very difficult but have done an outstanding job, and again I can't be more proud of you. So thank you very much.

Operator, Operator

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