Executives
Bob Jarvis - IR Manager
Frank Harrison - Chairman and CEO
Zach Graves - CFO
Analysts
John Fitzgerald - Raymond James
Mike Drickamer - Morgan Keegan
Rob MacKenzie - FBR Capital Markets
Joe Agular - Johnson Rice & Co.
Mike Mazar - BMO Capital Markets
Bronco Drilling Co. Inc. (BRNC) Q3 2008 Earnings Call November 3, 2008 11:00 AM ET
Operator
Welcome to the third quarter 2008 Bronco Drilling Company Earnings Call. My name is Tanya, and I will be your coordinator for today. (Operator Instructions)
I would now like to turn the presentation over to your host for today's call, Mr. Bob Jarvis, Investor Relations Manager. Mr. Jarvis, please proceed.
Bob Jarvis
Thank you, Tanya. Good morning and welcome. Joining me on this morning's call is Zach Graves, Chief Financial Officer and Frank Harrison, Chairman and Chief Executive Officer of Bronco Drilling.
Before we get started this morning I do want to remind everyone that during this conference call, representatives of the company may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and business. These statements generally can be identified by the fact that they do not relate strictly to historical or current facts. These statements may also include words such as anticipate, estimate, expect, project, intend, plan, believe, and other words and terms of similar meaning, in connection with any discussion of the timing or nature of future operating or financial performance or other events.
We caution you that the actual results could differ materially from those that are indicated in our forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC.
And with that, I will turn the call over to Bronco's CEO, Frank Harrison. Frank?
Frank Harrison
Thank you all for joining us to review Bronco Drilling's financial and operating results for the third quarter of 2008. As always, we appreciate your interest in Bronco Drilling. In a moment, I will turn the call over to Zach to review our financial results. I will then make a few brief remarks regarding the quarter as well as give an update regarding recent events and our view of current market conditions. After that, we will open up the line for your questions.
I will now turn the call over to Zach.
Zach Graves
Thank you, Frank. I will begin this morning with sequential comparisons, followed by our year-over-year results. For the quarter ended September 30, 2008, our average operating rigs decreased by three rigs to 42, compared to 45 for the previous quarter, due to the preparatory work performed on the rigs headed to the Bakken Shale as well as New Mexico.
Revenue for the quarter was $73 million, compared to $69.8 million for the previous quarter. Utilization for our land drilling fleet was 84%, compared to 82% for the second quarter. Our revenue days for the third quarter of 2008 were 3,208 compared to 3,355 in the previous quarter. Our daily cash margins increased 7% to $7,582, compared to $7,087 in Q2.
Our revenue per day increased 10% to $19,794, compared to $18,031 for the previous quarter. Our daily operating expenses increased 12% to $12,213 for this quarter, compared to $10,943 for the previous quarter.
Revenue per hour in our workover segment increased to 373 in the third quarter, compared to 365 in Q2. Expenses per hour increased to 323, and as discussed in the earnings release this morning, this is primarily related to some one-time items. Our average marketed workover fleet for Q3 was 54 rigs and utilization per rig was 73%, which compares to 53 rigs and a utilization rate of 75% for the second quarter.
The company generated $12.9 million EBITDA in the third quarter, compared to $20.6 million for the previous quarter. Reported net income for Q3 was a loss of $900,000, compared to $4.3 million in income for the second quarter.
As disclosed in the release this morning, there were a few nonrecurring charges in the third quarter, the majority of which related to the terminated merger with Allis-Chalmers. These charges in aggregate amounted to $9 million pre-tax. We don't anticipate any of these charges leaking over into Q4 and as was also discussed in this morning's release, fully diluted earnings per share would have been $0.18 and EBITDA would have been $21.9 million absent these charges.
Moving on to year-over-year results. Revenue in Q3 '08 decreased 4% from $76.3 million in Q3 of 2007. Average daily cash margins for Q3 '08, represented a decrease of 9% from 8,372 in the third quarter of last year. Utilization for the third quarter of last year was 76%, and our average operating land rig fleet was 53 rigs. The company generated $28.3 million in EBITDA and $11.1 million in net income in the third quarter of last year.
A few balance sheet items. At the end of the third quarter as of September 30, 2008, we had net debt of approximately $86 million, with working capital of $32 million and stockholders' equity of $413 million. Capital expenditures for the quarter were $27.5 million, which breaks down as follows.
We spent approximately $12 million on rigs being refurbished, winterized and/or converted from mechanical to electric power, as well as the new build for the Bakken Shale during the quarter. All of these rigs, except one, will rent a top drive and all will be equipped with iron roughnecks.
We spent approximately $6 million on the three rigs deployed to Mexico in the Pemex contract and two of these rigs also include top drives. So we've spent about $1.5 million on our well servicing fleet and the remainder was maintenance, CapEx, drill pipe replacement, etcetera.
We expect CapEx for Q4 to be approximately $20 million, $12 million of which will be completing the work on the rigs headed to the Bakken with the remainder maintenance level.
Also for the fourth quarter, the company expects depreciation and amortization expense to be approximately $13.3 million, D&A of approximately $5.7 million with $1.3 million of that being non-cash stock compensation expense. We expect a fully diluted share count for Q4 of $26.7 million.
One last thing I'd mention before I turn the call back over to Frank is that we reworked our credit facility during the third quarter and closed on the amended facility at the end of September. The new facility is also $450 million pricing at LIBOR plus 400 bps. It's not quite as good as the old facility, but that is to be expected given the timing. However, we are very pleased with the structure. We went from a three-year deal that amortized down $10 million a quarter to five-year money with no amortization. So with that, I will turn the call back to Frank.
Frank Harrison
Thank you, Zach. I don't think it's any secret to you guys that we appear to be headed toward more difficult times. The proliferation of new and very successful shale plays, intense drilling activity, and record rig counts have lead to meaningful supply growth and spawn genuine concern of oversupplied markets. The obvious result has been the downward pressure on natural gas prices. This has led to the anticipated response from our customers to trim their future capital expenditures. These events have been magnified by the continuing turmoil in the credit markets, limiting many of our E&P companies to spending just their free cash flow.
In spite of these developments, we feel that we are well positioned to withstand the potential volatility of the days ahead. We have a strong balance sheet and have always maintained a conservative capital structure. We have been vigilant in repositioning our assets, both domestically and abroad. And we have continued to upgrade our fleet and push term contracts during the summer when the opportunity arose. We currently have an estimated 5300 days in 2009, covered via term contracts, which is approximately a third of our available days.
Our marketed fleet in the US today is 40 rigs. We have three rigs currently being prepared for deployment to the Bakken Shale; two of the rigs are being refurbished and winterized and were previously part of our marketed fleet, while the third is a new build. We expect the first two to be completed in early December, and the new build to be finished around the first of the year which will bring our domestic marketed fleet to 43 rigs. At that time, we will have seven rigs in the Bakken, one rig in the Williston, two rigs in the Piceance, 15 rigs in the Anadarko, and one rig in the Arkoma, nine rigs in the Woodford Shale, four rigs in the Cotton Valley and four rigs in Haynesville.
We currently have three rigs in Mexico on direct contract with Pemex. The duration of the contract is for 18 months and we believe it could be extended. We have faced numerous delays in commencing operations, but we do believe that all three rigs will begin work during the fourth quarter. We continue to believe that Mexico could provide opportunities for additional rigs in the future.
Regarding our investment in Challenger Limited, we are hopeful that the long-awaited debt facility will be in place in Q4, which will provide the working capital to address some immediate equipment needs and minimize downtime on the rigs. Libya continues to be a strong market and Challenger remains positioned to capitalize. We believe we won't see any real meaningful positive effect until 2009 and expect Q4 results to be similar to Q3.
Additionally, our international efforts along with our well servicing segment and the rigs, we have sent or will send to the Williston Basin, which includes the Bakken, were all part of a design to increase our exposure to crude. Despite crude prices literally being cut in half in the last few months, we still like the long-term outlook for crude. The fact is our maneuvering domestically and internationally does give the company significant exposure to crude oil and a balance between crude oil and natural gas.
Our well servicing segment had a disappointing quarter, even with removing the non-recurring items. We experienced broad-based inflation in our operating costs, primarily driven by labor and fuel. Removing the one-time items, operating costs per hour would be around $2.25 per hour and this is probably a good estimate going forward, but we hope to get that down another 5% or so soon.
We continue to try to establish ourselves in desirable markets and are confident our results will improve in the next few quarters on a relative basis. We have experienced tremendous growth in this segment in the last 18 months and that growth has probably outpaced our personnel a little bit. However, we are cognizant of the issues and have every intention of proving this quarter's unsatisfactory results.
The potential softness in the domestic market does cause concern and we are certainly anticipating some headwinds over the coming quarters. The good news is that natural gas supply in the US is a self-correcting mechanism and if the industry lays down a significant number of rigs, there will be a supply response that returns us to equilibrium. As I mentioned earlier, the resource plays, and especially some of the emerging plays, appear to yield terrific production per well, but the decline rates continue to be very steep. It will be difficult to get off this treadmill for any extended period of time.
Beyond industry fundamentals trying to measure or quantify the effects of the current economic malaise might have on demand or some of the other issues that are bantered about, if I might borrow a line, it would certainly be above my pay grade. As we have stated on previous calls, we are in part protected by the nature of our customer base, as approximately half of our rigs are contracted with publicly-traded E&P firms, many of which have highly visible drilling programs and locked in economics due to hedging measures.
These companies' long-term production growth objectives and reserve replacement strategies make them less likely to materially reduce their drilling programs in response to perceived temporary changes in commodity markets.
As I also mentioned, we are no longer heavily levered to natural gas but expect approximately one-third of our top-line revenue in 2009 to be derived from oil directed projects giving no effect to our investment in Challenger Limited.
The last subject of our prepared remarks, I would like to mention before opening up the line to questions would be to address the terminated merger with Allis-Chalmers, which obviously had a significant financial impact on this quarter. We continue to be asked and have been asked numerous times about the deal and if the management and the Board feel somewhat vindicated given the developments of the last few months.
Our only response would be the same response we had during the deal, our only response would be that we believed in the strategic rationale for the deal and the visions of the combined company and felt the timing was favorable in spite of the gyrations while it was pending.
We believe that it was a good deal for the shareholders, which is why we cultivated it and encouraged them to weigh in. However, the shareholders made it clear that it was not the direction they wanted to go. So we will continue to enthusiastically run the company and to make it as successful and profitable as it can be. We will not run this company looking in the rearview mirror.
This chapter is closed and we've moved on. Again I mention this because we've gotten numerous inquiries and so I wanted to address it in our prepared remarks and I would ask that this is not asked during the Q&A session, and hope that you will honor that request.
I want to thank you again for listening today and now would like to open up the calls for questions which we will welcome.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question will come from the line of John Fitzgerald with Raymond James. Please proceed.
John Fitzgerald - Raymond James
Good morning, guys.
Frank Harrison
Good morning.
Zach Graves
Good morning.
John Fitzgerald - Raymond James
You mentioned that the $9 million of charges you had during the quarter just related to kind of one-off items. Could you guys give a more detailed breakdown just in terms of how much was related to the severance pay, the merger charges, and workers' comp claims and kind of where those fell on the income statement?
Zach Graves
Yes, around $6 million or so is the merger related items. A little over $1 million was the severance. Around a little over $1 million is the workers' comp and then there's a couple of ancillary items that totaled the $9 million.
John Fitzgerald - Raymond James
Then I guess most of that was just broken out on the G&A line, then into the well service side, can you break that out as well?
Zach Graves
Yes. On the workers comp that we mentioned is the Well Servicing expense line, also merger-related items are in the G&A line, as well as the severance was in the G&A line.
John Fitzgerald - Raymond James
Great. Then I guess switching over to the contract drilling side, if we saw a slow down in the market something to the tune of about 400 rigs falling off the rig count next year, what would your strategy be going forward? Are you guys going to be more inclined to hold on the pricing side or would you try to keep utilization rates higher and what is your thinking there in general?
Frank Harrison
I think we will both take a crack at this because this is something we have discussed quite a bit. But I think what I would say, it is on an individual basis and it depends on what play it's in and where it is and what customer it's with and there are so many variables. But I think the important thing to say is that the plans have been laid ahead of time and that's what we tried to do really last quarter and the quarter before that seeing what could be facing us.
Zach Graves
John, I would just add that, of course, this is a time with dilemma for drilling contractors. Utilization versus price, the scenarios that we run historically say that if the drop-off is not too severe that you are better off trying to hold the line on price, to give up a little utilization. From where we sit today, we don't know how severe a downturn we are talking about specifically to our strategy.
I think that not just in our fleet, but industry-wide whtat has been under the most pressure is the smaller rigs. With that, another resource play, those have become more difficult to market. What we have done via our international ventures with Challenger as well as Mexico is try to deploy those internationally, so they can continue to generate revenue and profit to the company. So I think that would continue to be a strategy going forward.
John Fitzgerald - Raymond James
Okay, great. Thanks, guys.
Zach Graves
I appreciate it.
Frank Harrison
Thanks.
Operator
Your next question will come from the line of Mike Drickamer, Morgan Keegan. Please proceed.
Mike Drickamer - Morgan Keegan
Hi. Good morning, guys.
Zach Graves
Good morning.
Frank Harrison
Good morning.
Mike Drickamer - Morgan Keegan
Zach, I know it's early here but can you talk about 2009 CapEx yet, higher, lower than what we saw for 2008?
Zach Graves
Yes, at this time, Mike, it would be probably significantly lower as we are anticipating things get a little softer. What we have modeled currently is about $34 million and that is basically maintenance level of a few smallish type upgrades but no refurbishments, no acquisitions or anything of that nature in that number.
Mike Drickamer - Morgan Keegan
Okay, and then Frank, I guess talking about acquisitions, are you guys starting to see more acquisition opportunities yet?
Frank Harrison
We're really not seeing the kind of acquisitions that we are really interested in yet. We think that that may come about if we are seeing some rig fleets that are on the market or some rigs that are on the market and in some cases smaller fleets. But not rig fleets that we would be an upgrade to our fleet. So I expect that that will come later, Mike.
Mike Drickamer - Morgan Keegan
I guess following up on that, then what kind of acquisition opportunities are you looking for?
Frank Harrison
The obvious answer is ones that will make money for our shareholders. But with that being said, we are looking for acquisitions that would upgrade our fleet or fill a niche that we don't have. And we are also looking for acquisitions, that is on the rig site. But we are also looking for acquisitions that would complement our rig fleet and the markets that we are trying to bid for jobs. We believe that bundling those services will be a big deal here in the US soon, and certainly as prices continue to go down and people start looking at, excuse us for a second someone started some construction outside our window here.
Mike Drickamer - Morgan Keegan
Must be the only place in the country.
Zach Graves
Yes. That's the truth.
Frank Harrison
I think it is one guy drilling something in the side of the wall but we will get it shut off. But we will continue to look at businesses that will complement what we do and that our customers are using and we feel like that we could operate at a profit. So we are not going to rule anything out and we are moving ahead and we've got our eyes wide open.
Mike Drickamer - Morgan Keegan
Okay. So not ruling anything out. Also sounds like you made and also look to expand further into more service offerings?
Frank Harrison
That's a possibility. We wouldn't rule that out. We don't have any immediate plans to move in that direction, but, yes.
Mike Drickamer - Morgan Keegan
Okay. That is it for me guys. Thanks a lot.
Frank Harrison
Thanks, Mike.
Operator
(Operator Instructions) Your next question will come from the line of Rob MacKenzie with FBR Capital Markets. Please proceed.
Rob MacKenzie - FBR Capital Markets
Good morning, guys.
Zach Graves
Good morning.
Frank Harrison
Hi, Robert.
Rob MacKenzie - FBR Capital Markets
Zach, I wanted to come back to your comments on financing for Challenger. What gives you confidence given the current state of credit markets that you guys can get this done and start seeing some positive benefits by the first quarter?
Zach Graves
Well, I guess numerous conversations, Rob there. It's something that is discussed virtually daily. I feel like based on where we are today that we will have this facility in place during the fourth quarter hopefully shortly, hopefully in the next two weeks. So it's been sort of a long road, but what gives me confidence I guess is just discussing it with the lenders multiple times. So I think that is what gives me confidence.
Then in terms of the go-forward results, we've had operational personnel on the ground there, I guess for five or six months at this point but we now have a person as well in the management of Challenger. So we feel like on a go-forward basis from a strategy perspective, from flow of information that things will improve quite a bit.
We just feel like we know Challenger is positioned well with contracts that they currently have in place and they just need to be able to perform under those contracts. So we feel like this additional working capital is going to allow them to do that and so that's sort of why we are cautiously optimistic at this point.
Frank Harrison
Rob, with this being said because we all know what the credit markets are like, but the documents are being exchanged and moving around. So what that is worth.
Rob MacKenzie - FBR Capital Markets
Okay, and can you give us some feel for what the operating statistics are like say in the third quarter here, utilization, cash margin and stuff, so we can get a feel for what the upside might be once you clear this bottleneck?
Zach Graves
Yes. Utilization at this point is around mid-60s, Rob. Cash margins, I would have to take that offline and get back to you on that one because I know generally but I don't want to give you any incorrect number.
Rob MacKenzie - FBR Capital Markets
Fair enough. Switching gears a bit, Mexico you've got three rigs there now, just have a brand new very large shareholder out of Mexico. Is there any potential benefit there that you are aware of, any conversations that lead you to believe there might be some materially more demand for moving more rigs down to Mexico?
Frank Harrison
Mexico is a very active area and one that we pursue, but as far as Mr. Slim's investments in Bronco, which we were very pleased with and we appreciate his confidence in the company. I don't think there is any connection that we know of between anything that we are doing in Mexico. But we continue to believe there is a lot going on in Mexico and it's an area that we continue to look to in the future.
Zach Graves
We haven't had any conversations with Mr. Slim or any of his representatives. I think he is pretty familiar with the company. We jointly bid with Sepomex on a tender early this year, which is a company he owns. Then obviously, he is a large equity and I think debtholder in Allis-Chalmers. So we feel like he probably has some familiarity with the company but there hasn't been any discussion. We certainly don't think it hurts us in Mexico.
Rob MacKenzie - FBR Capital Markets
Okay, great. Then coming back to the core US Lower 48 business, you mentioned a couple rigs being outfitted for the Bakken. Are all three of those, the refurbs and the new build contracted?
Zach Graves
Yes, Rob, by the first of the year, we will have eight rigs in the Williston Basin, in the Bakken. All of those are on term contracts.
Rob MacKenzie - FBR Capital Markets
Okay, great. Then where are you seeing right now the greatest weakness in your business in terms of pressure down on day rates or utilization? Is it in the Oklahoma area there, Oklahoma City area? Where are you seeing the greatest potential weakness right now?
Frank Harrison
Rob, this is Frank. It's hard to answer that question because I feel sort of like a guy falling off a 20-story building. I know I'm going to fall but every time I go by a window, my data point is everybody says how are you doing? And I say great, and I see all the data points. We are not really seeing that yet on the ground. I know that you can't trim budgets the way people are trimming them and not have a big effect. But we are not seeing a lot of that yet, but I expect that we will and my guess is that it will start in the Mid-Continent, where you have some of our smaller customers and then it will spread across the resource plays.
However, I will say this, being an old E&P guy, you cannot pay what has been paid for the acreage in these resource plays and not cover the leases. So the major players are not going to let leases expire. It's not going to happen. The other thing I would say is that drilling just continues to be a smaller and smaller part of the drilling and completion cost of a well. Though day rates are not under the pressure they have been in past years, we will say, in past cycles. So that would be my comment.
Rob MacKenzie - FBR Capital Markets
Okay, thanks. I will turn it back to someone else.
Operator
Your next question will come from the line of Joe Agular with Johnson Rice & Co. Please proceed.
Joe Agular - Johnson Rice & Co.
Good morning. Frank and Zach, I guess a lot of the questions I had were asked already. Let me just ask you a general question on the oil versus gas mix. Could you tell us if there has been any unmet demand up in the Bakken where you might have an opportunity to put more rigs or are there any other new lead developing shale plays for oil that you might have opportunities to put rigs to work in?
Frank Harrison
Joe, I'm going to defer to Zach on this because I think he can give you a better answer on this.
Zach Graves
Joe, in terms of the Bakken, there is still demand that we see, Bronco. I couldn't speak for industry-wide, but what has changed is that people aren't talking term contracts any further multi-year contracts. That has sort of subsided at this point. If Bronco were so inclined, I feel like we could move rigs to the Bakken on spec and it would work. But there definitely has been some fall off there in the Bakken. In terms of other oil plays, shale plays, at this time I am not aware of any.
Frank Harrison
I am not aware either that I see rigs moving toward, no?
Joe Agular - Johnson Rice & Co.
Okay, well that was all I had. Thank you all.
Frank Harrison
Thank you, Joe.
Operator
Your next question will come from the line of Mike Mazar with BMO Capital Markets. Please proceed.
Mike Mazar - BMO Capital Markets
Hi. Good morning, guys.
Frank Harrison
Good morning.
Zach Graves
Hi, Mark, how are you?
Mike Mazar - BMO Capital Markets
Quick question. Sorry if I missed this earlier, I was a little late getting on. But the day rate, the realized day rates for this quarter, obviously up significantly sequentially. Was that a function of sales mix largely or can you speak to that?
Zach Graves
Yes, day rates were up, as you mentioned, sequentially. Part of that was just better market. As things turned into Q1 and into Q2 and commodity prices moved up and the outlook improved, obviously there is some lag. There was run off on the contracts we had in place at that time and so we started to feel that day rate improvement into Q3. Along with that, we also pushed through a wage increase in the field. That passed through to our operator so that is also part of the day rate improvement.
Mike Mazar - BMO Capital Markets
Okay, great, then lastly, just a quick question. I know we are not at the year end yet, but just kind of given where the stock is, etcetera, any thoughts on the goodwill balance?
Zach Graves
Yes, at this point I don't anticipate, if we're talking about an impairment, we've gotten to this quarter and we will evaluate it again at quarter end, but I don't see that being impaired.
Mike Mazar - BMO Capital Markets
Okay, great. That is all I had guys. Thanks.
Zach Graves
Thanks Mike.
Operator
You have a follow-up question coming from the line of Mike Drickamer with Morgan Keegan.
Mike Drickamer - Morgan Keegan
Frank or Zach, can one of you remind me on the Challenger debt, do you guys expect to have to guarantee that debt?
Frank Harrison
No.
Zach Graves
No.
Mike Drickamer - Morgan Keegan
Okay. That was my question. Thank you.
Operator
(Operator Instructions) There are no more questions at this time. I would now like to turn the call back over to Mr. Frank Harrison for closing remarks.
Frank Harrison
Thank you, Operator. I want to thank everybody for joining us today, and we will look forward to next quarter. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!