Earnings Call Transcript - RNGR Q1 2020

Operator, Operator

Good day, and welcome to the Ranger Energy First 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, sir.

Darron Anderson, CEO

Thank you, operator. Good morning, and welcome to Ranger Energy Services first quarter 2020 earnings conference call. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. A lot has changed since we last spoke. But before we focus on the changes, I'll briefly discuss what has remained constant across Q1. Record rig revenue per hour and record wireline stage count again led to consistent revenue and EBITDA performance, both approximately flat to Q4 2019 results. Strong cash flow from operations was directed toward modest growth CapEx items, debt reduction, and stock buybacks, which Brandon will cover in detail momentarily. I think our results speak for themselves, and frankly, we were off to a start on top of our 2020 plan. Now let's move to the market changes and our new path forward for 2020. While we are experiencing some relative outperformance versus peers, on an absolute basis, the reduction in activity over the last several weeks has been extraordinary. The activity reductions have been dramatic in scale but also swift in timing. While this downturn has outpaced all previous market declines, our management team has weathered previous storms, and we know exactly what actions have to be taken. While we've always taken pride in operating a lean and efficient cost structure, we immediately redesigned and rightsized our business to match current activity levels. Starting with our High Spec Rigs, for April, rig hours declined approximately 53% as compared to our first quarter monthly average. While forward visibility is near nonexistent, we do not believe a bottom has yet been reached. Pricing has been impacted to a lesser extent, as activity declines to date have been driven purely by work stoppages, not pricing debates. That being said, we do expect to see more rate pressure moving forward. Over the last several quarters, our high-spec rig group has continuously gained market share while high grading its customer base. Although these efforts have not shielded us from this downturn, I could provide several examples of our range of rigs being the last rig currently operating in select customer fields. Even in today's market, we're doubling down our efforts to target large, integrated, and independent operators with new multi-rig proposals, implying the potential for market share gains if not today, at some point in the future when activity levels return to some form of normalcy. I want to emphasize that with any new business discussions, we are setting pricing discussions in a full cycle sustainability context. To us, it seems pointless to win additional work that has no contribution margin and simply wears out our equipment. Moving on to wireline, we averaged 11 trucks of utilization during Q1, effectively maxing utilization. We averaged approximately six in April and ended the month with five trucks running on a dedicated basis. While this is materially better utilization in the somewhat Permian wireline period, it is still dramatic on an absolute basis. Again, visibility to future activity cannot be determined, but given the dramatic pullback in frac activity within the Permian, downside exposure continues to exist. Now regarding our processing solutions, as discussed in our last call, our Torrent business saw a significant decline in the fourth quarter driven more by business-specific issues rather than industry or structural issues. We recently implemented management changes within this business and expect to see some improvement in results, though any improvements, of course, are likely to be modest given the current macro environment. Moving on to the cost side and actions taken to date. I'll give you some metrics in a moment. But qualitatively, I would say that our work in this brand has been equally aggressive and swift as activity changes experience, all with the objective of ensuring our business lines continue their positive contribution while maintaining at least neutral cash flow at the corporate level. Our headcount is currently down approximately 50% from mid-March. This reduction spans across every location to our corporate office. With staff reduction of this magnitude, we've lost some great team members. But we've also made the necessary adjustments to maintain a talent base that will continue to provide a high level of service to our customers and one that will quickly allow us to respond operationally in an improving market environment. Additionally, we've implemented salary reductions across our entire organization. Within the first few weeks of implementing these difficult steps, our payroll expenses were reduced by 60%. We have consolidated two of our eight rig locations, decreasing to six, and expect other costs such as repair and maintenance to decline materially on both an absolute and per unit basis. These actions, along with several other operational, travel and organizational expense reductions to date will result in more than $100 million of annual cost savings. On the capital spending front for 2020, all new CapEx has been eliminated. We will have modest final payments on asset commitments made in late Q4 2019 and early Q1 2020, but no further growth CapEx will be spent. Our maintenance CapEx has historically been extremely low due to the quality of our asset base. Here again, we expect an absolute minimal spend for the remainder of the year. In summary, one good quarter has not been followed by a service industry fighting for survival. We have and will continue to make the necessary adjustments to maintain the health of our business. Although our industry is facing unprecedented challenges, we look forward to relying upon our incredible team members, the strength of the organization, and a sound balance sheet to allow us to excel when others cannot. I will now turn the call to Brandon for more detail on the quarter.

Brandon Blossman, CFO

Thanks, Darron, and good morning to everyone on the call. All right, we're moving back to Q1 and going to jump right into a full walkthrough of the numbers. First, on a consolidated basis, relative to last quarter, Q1's revenues were up 1% or approximately $1 million, moving from $80 million to $81 million. Adjusted EBITDA was flat at $11.4 million while adjusted EBITDA margins held in at just over 14%. Now moving to the segment level and starting with revenue. Quarter-over-quarter revenues saw an increase in our Completion and Other Services segment, which was partially offset by declines at processing solutions, while high-spec rig revenue was just up from flat. Specifically, high-spec rig revenue was up $100,000 to $35 million, with an increase in rig rates being offset by a decrease in period rig hours. Notably, hourly rig rates set a new peak this quarter, moving from $534 an hour to $558 an hour, which was an increase of $24 an hour or a 4% increase. On the other hand, revenue hours went down from 64,400 to 62,400, a 2,000 hour or 3% decline. In the Completion and Other Services segment, revenue was up 5% or $2.2 million, moving from $41 million to $43 million for the quarter, with wireline showing growth and the other non-wireline services seeing some declines. Here, wireline revenues were up 10% sequentially driven by a record 22% increase in period stage count, partially offset by a 10% reduction in rate per stage. Note that the 22% increase in stage count is on top of a previous Q4 record stage count. While the drop-off in other non-wireline service lines was primarily driven by a soft January in the DJ Basin service lines. Finally, at our Processing Solutions segment, revenues were down $1.5 million or 35%, moving from $4.3 million to $2.8 million. The driver of this decrease, similar to last quarter’s decrease, was a reduction in MRU utilization with an incremental three units coming off contract and not being deployed during the quarter, moving the average unit count down from nine to six. As Darron just noted, we have made recent management changes in this segment and expect this trend to reverse over time. Now moving on to segment level EBITDA and margins. Overall, consolidated segment level adjusted EBITDA, before corporate G&A, saw an increase of 5% sequentially, moving from $17 million to $17.9 million. Here, at the segment level, the sequential increase in EBITDA at Completion and Other Services was offset by declines in High Spec Rigs and Processing Solutions. Specifically for the quarter, Completion and Other Services saw an EBITDA increase of $2 million, which was offset by a $700,000 decline at processing solutions along with a modest $400,000 EBITDA decline at the High Spec Rigs segment. On the margin front, consolidated segment margins again before corporate G&A were up slightly from 21% to 22%. Disaggregating that overall 22% margin to the segment level, in completion and other services, margins were sequentially up from 23% to 27%. Here, a mix shift towards higher-margin completion work, along with continued cost management efforts, helped to push margins up. High-spec rig margins saw margins decline just slightly from 15% to 14%, driven by some modest increases in early year tax and benefit costs. Processing Solutions segment margins were at 48%. Moving on to G&A expense. As adjusted, G&A was down slightly year-over-year but up $900,000 sequentially, and that $900,000 expense uptick offsets the $900,000 EBITDA increase at the segment level, which leads to the unchanged quarter-over-quarter adjusted EBITDA result. This sequential G&A increase was driven by expected expenses associated with 2019 year-end reporting and early in the year compensation-related items. Now moving on to the net income line. For Q1, we reported net income of $2.8 million, which was a $2.9 million improvement from Q1’s loss of $100,000. This improvement was largely driven by a $2.1 million gain on the retirement of the $5.75 million ESCO debt, which was settled during the quarter. Now moving on to the balance sheet and some cash flow items. During Q1, $9 million of cash flow from operations was offset by $6 million worth of CapEx spend and $3 million worth of stock repurchases. However, net debt did decrease by more than $2 million due to the gain on the debt retirement I just mentioned. Moving net debt inclusive of vehicle leases from $46 million at the end of 2019 to $43 million at the end of Q1. Our term debt at the end of the quarter stood at $25 million, which was down the usual $2.5 million from Q4 per the quarterly amortization schedule. Moving to CapEx, total CapEx recorded for the quarter was $5.5 million, which breaks down into $3.8 million related to High Spec Rigs. As with last quarter, the spend was attributable to new assets and upgrades to rig packages in preparation for work for our new and existing integrated customers. We also incurred $1.2 million of expense for the purchase of two incremental wireline trucks and associated equipment, maintenance CapEx came in at $500,000, and we did add $500,000 of new leased light-duty vehicles to our fleet. During the quarter, we repurchased a total of $3.1 million worth of stock, which equates to about 340,000 shares. The majority of those repurchases were through a single privately negotiated transaction. Finally, to liquidity, we ended the quarter with $21 million worth of liquidity, consisting of $12 million worth of cash and $9 million of capacity on our revolver. That’s down $6 million from Q4’s $27 million of liquidity, and that’s primarily on the back of the reduction in outstanding term debt and stock repurchases. That’s it from my prepared comments, and I will move it back to Darron.

Darron Anderson, CEO

Thank you, Brandon. I’ll wrap up with a couple of strategic comments. First, while I’m sure everyone would like an update on our controlling shareholder take-private offer, I did not have anything incremental to share beyond what has been publicly filed. Secondly, we continue to spend time on the consolidation front. If anything, this downturn magnifies the need to rightsize our industry. Costs must be managed tightly and organizational efficiencies have to be gained. We think we’re pretty good at this and plan to not only demonstrate it through our internal performance, but hopefully, across a larger platform. While this market is extremely difficult, I’m highly confident that we are taking the correct and necessary steps to be an even stronger organization on the other side of it. This concludes our prepared remarks. And operator, we’ll now open up the call for any questions.

Operator, Operator

Thank you. And our first question will come from Dylan Glosser with Simmons Energy. Please go ahead.

Dylan Glosser, Analyst

Hi, good morning, guys.

Darron Anderson, CEO

Good morning, Dylan.

Brandon Blossman, CFO

Good morning, Dylan.

Dylan Glosser, Analyst

I apologize if you guys mentioned this; my call dropped about midway through. But I think you mentioned that in April, the high-spec rig segment saw a 50% decline from the Q1 average. Solaris came out and said that they expect a 75% to 85% activity decline quarter-over-quarter. Are you guys seeing something similar as you go through Q2? Or how are you thinking about overall activity in both your high-spec rig segment as well as your Completions segment?

Darron Anderson, CEO

Yes, great. Thanks for the question. Yes. The comment was that we had a 53% rig drop for April as compared to the average for Q1. I’ll follow with a comment of saying that we do not think we’ve seen the bottom yet. If you were to ask me what I think about the industry overall and align me with Solaris commentary, I think if you think about Q4 and the first two months of Q1 as kind of being somewhat stable activity; mid-Q2 may see the industry at 75% to 80% down activity-wise. That being said, Ranger is not at that level across any of our various levels. We've enjoyed having a high-quality customer base. Some of our customers have maintained a level of activity greater than many of the customers out there, so we're not at the 75% to 80% level. Again, there's some downside exposure we do have, of course, but we're not at the 75% to 80% mark. I can provide several scenarios of competing service companies on a smaller scale that have gone to zero activity. So when I think about 75% to 80% being an industry average, that factors in those who have gone to zero and others that have maintained a kind of 16% activity level.

Dylan Glosser, Analyst

Okay. Great, thank you for that. I guess my clear questions are, from the $100 million in annualized cost savings you mentioned in your release, how much of that lies within SG&A? And what do you suspect might be a good run rate for you guys in the remainder of 2020?

Darron Anderson, CEO

Brandon, you can help chime in here. I think our SG&A cost historically has always been low and that's one thing that we definitely have prided ourselves on. We had the headcount reductions that affect our SG&A group, and a large part of the cost savings was from that headcount reduction. Brandon, do you have any comments you want to add that are more granular?

Brandon Blossman, CFO

No. Darron, certainly offline, we can go through line item-by-line item and give you some color on where those cost buckets lie. But in general SG&A, here’s a big picture comment. We're moving the business structurally and redesigning it on the fly, and so that is a point-in-time cost savings estimate, and anything that we say today could change tomorrow in terms of how we design the business and how it functions going forward, especially at the corporate level. So that is an inclusive number. There certainly is a material contribution from the SG&A component, but I would hate to give you a forecast of a go-forward SG&A, other than to say it's materially lower than it has been historically. And there's a possibility that steps down again.

Dylan Glosser, Analyst

Okay, thank you. I guess one last point of clarification. I think I heard you guys mention that for the remainder of 2020, you expect to be cash flow neutral. I just wanted to confirm that. And then also regarding CapEx, you had about $0.5 million in maintenance CapEx in Q1. Is this a good quarterly run rate to consider for the remainder of the year, or what's a good number to use for CapEx?

Brandon Blossman, CFO

Let's do CapEx for maintenance CapEx first. My expectation, and I'll get Darron to chime in here too, is that it approaches zero for the rest of the year.

Darron Anderson, CEO

Yes. The Q1 is not the proper run rate for moving forward. I mean, we had a very nice first 2.5 months of the quarter, right? And our maintenance CapEx reflected that. But as the activity has pulled back, we will see the same relative pullback of maintenance CapEx; to Brandon's comments, we're targeting to get that to nil. I'll let you provide comments.

Brandon Blossman, CFO

Yes. So the commentary from Darron on neutral cash flow is a target, and our objective is to do better than that. But that is our worst-case scenario. Now, we may stumble for a month or so, but as we think through the business design and look at current and the best of our ability, future activity levels, we want to do no worse than neutral cash flow and take the necessary actions to at least achieve that target, if not a bit better.

Dylan Glosser, Analyst

Thank you guys so much for your time, and I'll turn it over. Thank you.

Darron Anderson, CEO

Thank you.

Operator, Operator

Our next question will come from Tom Curran with B.Riley FBR. Please go ahead.

Tom Curran, Analyst

Good morning.

Darron Anderson, CEO

Good morning, Tom.

Tom Curran, Analyst

Brandon, what's your battle plan for deleveraging in this kind of environment? And based on this scenario as you modeled, what's the most likely range for where aggregate debt should aggregate?

Brandon Blossman, CFO

I'm sorry, that last part of the question, Tom?

Tom Curran, Analyst

Where aggregate debt, the most likely range based on the modeling you've done, where aggregate debt will end the year?

Brandon Blossman, CFO

So I'll tell you we are updating our model once a week right now. So I don't feel confident in a forecast that is even a few days stale. I don't know is the answer. So the game plan to deleverage, game plan one is to ensure that we have at least neutral to positive cash flow. Given the changes in activity level that we've seen over the last six weeks, I think I'd be remiss to even pretend that I had an idea of where we were going to be at the end of the year in terms of leverage. But the point there is, if we're at neutral cash flow, it should get no worse. If we do better than neutral cash flow, it will be better, because we certainly aren't going to be spending any money on CapEx. So that will be the only source or the only thing for any incremental cash flow will be leverage reduction.

Tom Curran, Analyst

Right. That's reassuring me here. Darron, when we do get to the other side of this oil consumption activity canyon, you're one of the best-positioned contractors to benefit from the restart of shutting wells. When it comes to that initial wave of wells that will be brought back online, how do you expect that activity to break down by basin? And what's your strategy to ensure you capture as large a share of that work as you should?

Darron Anderson, CEO

Yes. So I think one of the opportunities that our balance sheet is affording us right now is we're not worried about making it to the other side. We're still actively managing the business and engaging customers. Our engagement is not necessarily because we're going to load out formal wireline trucks and 10 more rigs tomorrow, but it's in preparation that we will make it to the other side. I don't think everyone will make it to the other side. We're going to be in a position to be able to service immediately. As we're having customer discussions, customers are concerned about wells being shut in, tariff, and buildup inside of tubing, all leading to additional workover opportunities. We're going to be in a position to capitalize on that. I made the comment about why we have reduced our headcount; we strategically positioned the organization's staffing levels, which I won't go into detail on, that will allow us to quickly respond when a rebound does occur. I think we're going to be very well positioned, we're preparing for it, we're engaging with customers on it through calls literally every other day, and we're still working very hard. So it's going to be a tough few months, but we're going to be very well positioned on the other side of this.

Tom Curran, Analyst

Last one for both of you. On the M&A front, given how the outlook is evolving for U.S. shale, how would you characterize your interest in extending within completion services versus production services at this point? And how does the asset attractiveness and valuations you're seeing compare between the two?

Darron Anderson, CEO

So I think on the completion side, we’ve had objectives to grow the completion side of our business, even prior to this downturn. I think that on the other side of it, we will see the basis activity come back quickly. I think we're going to see completion activity follow that because there are wells that are going to start to build up the DUC inventory, and there are going to be opportunities there. So our objective hasn’t changed; we want to grow the completion side of our business. What was the second part of the question? I apologize.

Tom Curran, Analyst

I was just curious, when you look at the deal flow you've been seeing within Completion Services and then compare that to the prospects arising within Production Services, how have the asset attractiveness and valuations compared?

Darron Anderson, CEO

Well, I would say that we've always wanted to participate in consolidation, and we've been very disciplined in doing that with the right organizations that meet our value expectations and asset quality. So the opportunities are definitely more heightened than the way we look at them; we've eliminated a lot of opportunities. That being said, I think facing the condition of the market, there are more open and willing discussions, I say today than there have been historically. So we are participating in discussions; we'll continue to participate in those. And again, we'll figure out what is the right opportunity that creates value for our shareholders.

Tom Curran, Analyst

Thanks for fielding my questions, guys. Stay safe.

Darron Anderson, CEO

Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Darron Anderson for any closing remarks. Please go ahead.

Darron Anderson, CEO

I just want to thank everyone for joining us for today's call, and we look forward to speaking next quarter. Everyone stay safe, and we'll visit here in a quarter. Thank you, everyone.

Operator, Operator

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