Executives
Bob Jarvis - Investor Relations
D. Frank Harrison - Chief Executive Officer
Zachary M. Graves - Chief Financial Officer
Analysts
Joe Agular - Johnson Rice & Company
Andrew Coleman - UBS
Mark Brown - Pritchard Capital
Matt DeeDee - Morgan Keegan
Bronco Drilling Co., Inc. (BRNC) Q4 2008 Earnings Call March 11, 2009 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the Bronco Drilling Company Incorporated Fourth Quarter 2008 Earnings Conference Call. My name is Marianne and I will be your coordinator for today. At this time all participants are in listen-only mode, we will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Mr. Bob Jarvis, Investor Relations and Marketing Manager. Please proceed, sir.
Bob Jarvis
Thank you. And good morning. Joining me on this morning's call is Frank Harrison, Chief Executive Officer of Bronco Drilling; and Zach Graves, Chief Financial Officer of Bronco Drilling.
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 they do not relate strictly to historical or current facts.
These statements may also include words such as anticipate, estimate, expect, project, intend, plan, belief 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'll turn the call over to Frank Harrison. Frank?
D. Frank Harrison
Thank you, Bob and good morning. Thank you all for joining us to review Bronco Drilling's financials and operating results for the fourth quarter of 2008.
As always we appreciate your interest in Bronco Drilling. In a moment I'll turn the call over to Zach to review our financial results. I'll 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'll open up the line for your questions. Zach?
Zachary M. Graves
Thank you, Frank. Once again as usual this morning I'll begin with sequential comparisons followed by our year-over-year results for the quarter ended December 31, 2008.
Our average operating rigs increased by one rig to 43 compared to 42 for the previous quarter. Revenue for the quarter was $76 million compared to $73 million for the previous quarter. And utilization for our land drilling fleet was 83% compared to 84% for the third quarter.
Our revenue days for the fourth quarter of 2008 were 3,300 compared to 3,208 in the pervious quarter. Our daily cash margins increased 20% to 9,087 compared to 7,582 in Q3 and revenue per day increased 7% to 21,135 compared to 19,794 for the previous quarter. A 1,089 of the increase in both margin and revenue per day is due to contract termination revenue. Excluding this, margins dropped 416 or 5% per day and revenue per day would have been up $252 quarter-over-quarter.
Our daily operating expense decreased 1% to 12,049 for this quarter compared to 12,215 for the previous quarter. Revenue per hour on our workover segment was flat with the previous quarter at 373 an hour. Expenses per hour was down $10 to 313 from 323 an hour for the previous quarter, and our average marketed workover fleet for Q4 was 53 rigs and utilization rate is 49% which compares to 54 rigs and a utilization rate of 73% for the third quarter.
Company generated 21.4 million in EBITDA in the fourth quarter excluding the impairments and write-down noted in the press release this morning and this compares to 12.9 million for the previous quarter. And reported net income for Q4 is a loss of 19.8 million compared to a loss of 900,000 in the third quarter.
Due to the downturn in the industry and in correlation with our test work at year-end, we wrote off goodwill of 21.1 million, associated with our drilling business unit and 3.2 million of goodwill associated with our well servicing business unit.
Additionally, we wrote-down our Challenger investment by 15.3 million, based on the fair value test work performed in accordance with equity method of accounting rules and these items obviously had a large impact on our reported results for the quarter end for the year.
Moving on to those year-over-year results, revenue in Q4, 2008 increased 10% from 69 million in the fourth quarter of last year, average daily cash margins in this quarter represented an increase of 4% from 8,747 in the fourth quarter of last year.
Utilization for the fourth quarter of last year was 73% and average operating land drilling fleet was 48 rigs last year. The company generated 24.6 million in EBITDA and 6.4 million in net income in the fourth quarter of 2007.
Looking at the balance sheet at year-end, we had net debt of approximately 91 million, working capital of 72 million, and stockholders equity of 394 million.
For the first quarter of 2009, the company expects depreciation and amortization expense to be essentially flat at approximately 13.1 million. G&A to be around 5.4 million with 726,000 of that being non-cash stock compensation expense and we expect a fully diluted share count for Q1 of 26.6 million.
I will touch on our current liquidity position as of today we have approximately 37 million in cash. Our total debt is unchanged since year-end. So our net debt position has improved by 10 million or so in a little more than two months.
We have roughly 40 million available on our revolver and additionally we've taken several steps during this downturn to cut costs and preserve cash. We passed a wage decrease, reduced our work force by approximately 37% during the last few months as equipment has gone idle. We've also scaled back our plant CapEx; virtually eliminating all discretionary CapEx just to maintain levels only which we estimate to be around 27 million for 2009.
And with that I'll turn the call back over to Frank.
D. Frank Harrison
Thanks Zach. The velocity and scale of the decline in rig count and corresponding reduction in activity in our industry has been astounding. We are in a midst of a retraction that surpasses even the most dire forecast from just a few months ago. Those who follow the industry are keenly aware of the challenges we face.
For an extended period, oil and gas prices have been driven primarily by supply of the given commodity. The proliferation of new and very successful shale plays, intense drilling activity, and rig counts have had a meaningful and predictable impact on supply. Unfortunately, the game has changed and is now a two variable equation.
The current economic situation has eroded demand in both residential and commercial markets. This scenario makes the depth and duration of the current economy impossible to predict. The challenge for our company, which we welcome, is to position ourselves during these difficult times or any upturn.
In spite of these challenges, we feel that we are capable of withstanding an extended downturn. We have a strong balance sheet and have always maintained a conservative capital structure. We have substantial cash on hand and the remaining availability on our revolver. We do not have any near-term debt maturities.
As Zach mentioned, we've implemented several cost cutting measures in an effort to reduce costs. Our contract coverage has been reduced with the cancellation from the fourth quarter but we still have an estimated 3,900 days in 2009 covered via term contracts, which is approximately a fourth of our available days.
Our marketed fleet in the U.S. today is 42 rigs. We have four rigs in the Bakken, one rig in the Williston, two rigs in the Piceance, 19 rigs in the Anadarko, eight rigs in the Woodford Shale, four rigs in the Cotton Valley, and four rigs in the Haynesville. Our utilization was 76% in January and 55% in February. We have 20 rigs operating today.
After some initial delays, all three of our rigs in Mexico on contract with Pemex are operating. The initial term of this contract is 18 months. We continue to believe that Mexico could provide opportunities for additional rigs in the future.
Regarding our investment in Challenger Limited, it is our understanding that Challenger is very close to closing on a debt facility. This should provide working capital to allow Challenger to more fully implement its business plan.
Well servicing continues to be a challenge. We felt the rapid drop in commodity prices much earlier in this segment due to the short-term nature of contracts in this business. We maintained personnel on idle equipment during the fourth quarter and hopes of finding a bottom. We have since commenced the unpleasant task of large layoffs.
The current outlook for our industry is certainly challenging and we believe the rig count has yet to bottom. Managing our cost and maximizing efficiencies will be paramount during this period. We have scaled back CapEx, passed a wage decrease, and reduced our work force, and adjusted our attitude as we look forward to meeting the challenges that are ahead.
I want to thank you again for listening today. And now, I'd like to open up the call for questions which we welcome. Mary, would you open up the call please?
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from the line of Joe Agular from Johnson Rice & Company.
Joe Agular - Johnson Rice & Company
Thanks. This is Joe Agular, Johnson Rice.
D. Frank Harrison
Hi, Joe.
Joe Agular - Johnson Rice & Company
Hey. Could you give us of the 20 rigs that you have working at present, I know you broke out the fleet, the fleet rigs by region. Where are those 20 rigs working?
Zachary Graves
I think the best thing to do would be... we put the operational lease out two days ago.
Joe Agular - Johnson Rice & Company
Yeah. Okay.
Zachary Graves
And, so it's got the rigs that are working in.
Joe Agular - Johnson Rice & Company
That's true. That's true.
Zachary Graves
Based in some, yeah.
Joe Agular - Johnson Rice & Company
I guess what, what I was getting at too was with respect to the contracted, the quarter of the available days contracted relative to the regions but I will get that offline from you.
Let me ask you a couple of questions. With the cost in the cost reductions that you all are putting in place, do you think then that you're cutting your daily operating costs at the rig level. Can you give a magnitude to what you think that might come down?
Zachary Graves
Joe, this is Zach. I'll take the first. Yeah, the rate decrease and some of the other cost cutting measures. You saw our cost came down a little bit in Q4, lot of it's say 12,000 a day level, sort of the way we are thinking about it Joe, is we think apples-to-apples our cost to be down 750, 800 a day.
However, as we go through this period with rigs going down and it's backing out and laying people off and then they happen to low the rigs to a location where they can be stacked out and all that goes into that I think thatwe're thinking about as we go through this, this decline for the first quarter and second quarter, is if we can keep our cost basically flat or maybe down just a little bit over that period that would be a peak on our part.
So although in fact this wage decrease and some of those very cost cutting measures as we go through this period of decline, I think we are kind of anticipating cost being flat until we get the kind of find a bottom here.
Joe Agular - Johnson Rice & Company
Okay.
D. Frank Harrison
I can't add to that, I think that's been answered.
Joe Agular - Johnson Rice & Company
Okay. And then on the Challenger write-down, give us what sort of the current thinking in terms of contribution from that in 2009? Should we expect it to just be a non-contributor or is it going to be an expense or?
Zachary Graves
No, I don't... I think at this point Joe, the Challenger has been difficult to predict. I think it'd be fair to say that like everywhere in the world, with oil prices haven't come down as much as they have that what we anticipated for Challenger for '09 it's probably going to be something less than that. So I think for Challenger at this point what we would think in terms of quarterly contribution, there is some other things in association with finalizing our purchase price allocation with Challenger which now at this point we have to recognize some depreciation and amortization costs each quarter going forward which we haven't in the past, which we did in the fourth quarter of about 327,000.
So that's going to come out of that equity and income line. But for Challenger I think at this point, we think the contribution will probably be something in line with what we saw for Q4. Frank mentioned that debt facility, so that could provide some upside but we also know that the NOCs are slowing some because of the oil prices.
Joe Agular - Johnson Rice & Company
Okay, thank you very much.
D. Frank Harrison
Thank you, Joe.
Operator
(Operator Instructions). You'll have the question from Andrew Coleman from UBS.
Andrew Coleman - UBS
Good morning, folks.
D. Frank Harrison
Hey, good morning.
Zachary Graves
Good morning.
Andrew Coleman - UBS
Could you give me anymore color on the Pemex situation and I guess those 18 months contracts that are on those three rigs, what if NOCs are slowing down, do you think is Pemex, how much are they in that same boat and how do you think your near-term process to be like for a increased activity at Dana?
D. Frank Harrison
We don't see any correlation between NOC and Pemex. Honestly, the Pemex situation continues to look strong, certainly anything can change at any point. We have those 18 month contracts and we certainly don't expect any interruption in that and we've not seen as you've usually seen there have been several tenders. Likely, I think that Mexico is pretty much committed and they were committed at the $35 plus. So I think we're safe there.
Andrew Coleman - UBS
Okay. And then, a question on the well servicing side. Do you think that will arm up much sooner than the rig market moves, are people starting to enquire about that servicing or is that still--?
D. Frank Harrison
No, I don't Andrew; I don't think it will turn up before the rig, before the rigs do. We're seeing a lot of operators or some operators that are drilling wells and not completing them. So that cuts directly into the well servicing side. And you're also seeing kind of what I call just disorganization on peoples' production budgets. They're not sure what to do and what wells are economical and what wells are not. And so it's going to be a while before this thing washes out on the workover side.
Andrew Coleman - UBS
Okay. Thank you.
D. Frank Harrison
Thank you.
Operator
Your next question comes from the line of Matt DeeDee from Morgan Keegan.
Matt DeeDee - Morgan Keegan
Good morning, guys.
D. Frank Harrison
Good morning.
Zachary Graves
Hi, Matt, how are you?
Matt DeeDee - Morgan Keegan
Good, thanks. Question on the current well, the well rig count, I think you had seven at the end of February and maybe that's now more like five?
Zachary Graves
Right.
Matt DeeDee - Morgan Keegan
Do you guys see that, maybe going to zero or what are your thoughts on that?
Zachary Graves
Well, we certainly think that's possible Matt, at this point as you mentioned and as Frank set in a color of 20 to-date so two more others have dropped off. In our conversations with those customers, there is several that have said they intend to continue to drill.
Now, things change every single day, so it could certainly go to zero at the same time almost inexplicably to us there is the other people who are talking about picking up some rigs to drill a well here or there. So at this point I wish I had more clarity on it, but it could certainly anything that's well-to-well certainly is in danger of going down, but the same time there is some other opportunity there so, it could go to zero but it's probably somewhere in between.
D. Frank Harrison
I think from the operator standpoint, we look at our customers, they are trying to decide how cheap that they can get their wells drilled. So they are waiting, they are waiting, they are waiting, they are waiting, they are waiting to see what's going to happen and to see if they can get their costs down.
Now clearly, and I know you have, if you have even listened to the calls of the drilling contractors, those prices are down and what's the hold up is the rest of the well on the shale plays where you have a lot of other costs and the drilling cost is 20% or less of the total well cost. Those costs are all going to have to come down.
And so I don't think operators are going to move forward until that gets cleared up, which it will. And when it does, we're starting to now see people coming back to us and asking us about cost and bidding jobs. So I think we're going to see a little plateau here. I'm not going to say bottom because kind of I have been through this before and markets like this, picking the bottom is very tough.
But we're going to see a little plateau and people are going to move forward because they've got leases to cover that they paid a lot of money for. And that's going to come into play here, certainly by the middle of the year. And that's the best picture I can give you is that we're starting to see some people come to us and ask us about future drilling and they're mainly concerned about costs.
Matt DeeDee - Morgan Keegan
Okay. And then you talked about some opportunities for the drilling rigs in Mexico. I don't know if you could discuss those in anymore detail and also if there is opportunities for your workover rigs in Mexico as well?
D. Frank Harrison
The workover rigs in Mexico is a possibility. It's kind of an education process there for the industry there. They don't use workover rigs like we do to take care of their wells and to complete their wells. They use small drilling rigs in a lot of cases, not 100% of the time but you're going to have a little bit of education there that will go forward. And plus it's not like here where a customer calls you up and says be out there in three hours at the rig. I mean you go through the long process. So it makes workover much, much more difficult.
Matt DeeDee - Morgan Keegan
Okay.
D. Frank Harrison
I think that Mexico will continue to have tenders and there will be opportunities to bid on those tenders either join them with other people or ourselves. So that's just what we see and that's what our research has shown us we've been fortunate to have a tender, to get a tender especially at this time and we've learned a lot and we look forward to doing more work in Mexico.
Matt DeeDee - Morgan Keegan
Okay. Did you guys say on the call, I may have missed it, the hours that the workover business worked?
Zachary Graves
Yeah, for the fourth quarter?
Matt DeeDee - Morgan Keegan
Yes.
Zachary Graves
No, I don't have it right in front of me. I'll have to get it to you offline.
Matt DeeDee - Morgan Keegan
Okay. That's fine. Thanks.
D. Frank Harrison
Thanks Matt.
Operator
(Operator Instructions). The next question comes from the line of Joe Agular from Johnson Rice & Company.
Joe Agular - Johnson Rice & Company
Thanks. I just wanted to follow-up on some of the current bids that you are getting, if you are just getting a few, what your pricing strategy is?
Zachary Graves
I think Joe, our strategy at this point because obviously there is day rates they are much lower than what they were just in previous quarter. Our pricing strategy at this point Joe, has been we report direct costs but we're taking a very close look at our costs, our cash costs say including any sort of overhead, any sort of maintenance CapEx and ensuring that we, in an effort to be competitive on day rates in our bid, but at the same time make sure that there is a margin there, from a cash standpoint. So that's been our strategy.
D. Frank Harrison
Joe, I think that's a good question but I wanted to add this, I think it's a good answer and I think it's a good question and the one that should be asked in and the answer I think was certainly appropriate that Zach gave, but I want to add this one thing, when you are in a situation where you are laying off 37.5% of your work force, every rig that goes down, you're going to fight for that job because you're laying a lot of good people off without jobs.
And in many cases, people that are not going to be able get jobs in other places, it's not like they are going to just move over to another drilling company and go to work in this market. So you're going to fight really, really hard to try to keep those people working and try to keep those rigs running. So costs, we got the magnifying glass out.
Joe Agular - Johnson Rice & Company
Okay. And one other question as a follow-up, do you, some of the rigs that have been on longer-term contracts and are coming off this year. Let's say, obviously some of these companies have a level of work that they are going to do probably regardless and they're going to drill to some of this. Have you had any discussions at all on those rigs where you are in these resource type plays where there is going to be some level of activity?
D. Frank Harrison
Yes. And it's... you've got companies that are now going to drill with cash flow. And there is... they are all concerned about costs and commodity prices. And I think what's happened is everybody has come up out with a tool, they have taken a deep breath and they are looking around to see what's going on, and they are looking at their costs and they have taken the time to realize that the costs are... they are too high some of the plays that have been drilled.
And so they are going to reduce those costs. And as in every day and as it's happened in the past and everywhere else it will be healthy for the industry, the cost are going to come down. And they're going to come down because the customer wants them to come down. And that's kind of where we are and that's what all those companies is the same thing.
Now, there is one thing different this time around than years ago. Because we're drilling wells now in 17 days that we used to drill and 35 or 40 days and so on and so forth. And because we're... and we have a different oilfield, safety and service and speed are all, our operators are aware of those and they're not just going to get anybody to drill a well because they are cheapest, most operators certainly not the operators that we deal with. They're going to... they still want safety on the well sites and certainly they want cost. But you're going to have safety, you're going to have service as big items going forward. Because oilfield I think has changed forever in those two areas.
Joe Agular - Johnson Rice & Company
Okay. Frank, I apologize, one more question. The downsizing that you're going through right now, are you... strategically I mean this has implications for both your company and for the entire contract drilling industry. But, are you going to try to size your company to whether it's a 20 rigs working or 18 or whatever the number you think is correct? Or in sort somewhat related to that in prior downturns other public companies that have discussed how they kept on select their rig managers for in your case; you had 40 rigs or whatever and those particular like supervisory type people get put on the rig as sort of rig hands, and so you're mixing and matching peak personnel just to keep your people around that have experience should you need to crew up again in the future. Could you kind of maybe discuss what level you are gearing to, what level you think the industry is gearing to and what the implications it has down the road?
D. Frank Harrison
Well, I think it will have as it did before, I think there will be a lot of people leave the industry. And yes we're working very hard and I know other people are too but its kind of the untold stories of the oilfield that get a lot of critisms of the roughnecks and so on and so forth.
But the truth is you've got a lot of people that really want to work and will do anything to work and continue to work. Believe me we're hearing from them and their wives and so on. We've got superintendents, we've got rig managers that are doing, the’re drillers, assistant drillers, their teams, whatever they can do. These are really hard working people and we recognize that they really are a big asset of our company, a big asset.
And so we're doing everything we can to shift them around to put them to work and we're going work tirelessly to try to keep more rigs running to maintain that leadership nucleus of our company to provide the best service possible. And that's the part of the game. I mean you can't just mindlessly lay everybody off. You got to see what will work best for the future. Because there will be a future. This too will all pass. And it will all be better for it.
Joe Agular - Johnson Rice & Company
Okay. Just to simplify, are you going size your company to crew 20 rigs or you might just keep enough people on a crew, say 25?
Zachary Graves
I think Joe, we're in a position because no one, unless you have any clarity on the duration of this. We're forced to sort of right size our company to the rigs that we can run consistently.
Joe Agular - Johnson Rice & Company
Okay.
Zachary Graves
And as Frank said through that, it's a great opportunity to high grade our personnel and certainly, there'll be a lot of people overqualified for the job, they're performing but we're forced to right size the company.
Joe Agular - Johnson Rice & Company
Thank you very much.
D. Frank Harrison
Thank you, Joe.
Operator
Your next question comes from the line of Mark Brown from Pritchard Capital.
Mark Brown - Pritchard Capital
Hi guys.
Zachary Graves
Hey, Mark.
Mark Brown - Pritchard Capital
You talked about a little bit in your opening statements regarding the margin retention in the Q4 for drilling, bringing down labor costs and some early terminations. So what extent was that due to mix though?
Zachary Graves
Could you repeat the question Mark? I didn't get the last part of it.
Mark Brown - Pritchard Capital
Just in terms of the mix of the rigs running having the affect of improving your average margin?
Zachary Graves
Okay. In terms of Mexico it didn't have any affect Mark. In Q4, we only had one of the three rigs running the other two had started up subsequent through the end of the year. And that rig was basically breakeven for Q4, so didn't have any impact on margin going forward. Just to give you a little flavor, I think our rigs in Mexico run at a margin between 4000 and 5000 that's what we're anticipating at this point.
Mark Brown - Pritchard Capital
And how about for the U.S. the margins that you saw from the U.S. drilling fleet, just in terms of how much of the strong margins you saw in the quarter were due to the mix of the rigs that were running?
Zachary Graves
Yeah, we had pretty strong utilization across the fleet Mark. And so to say that the mix had a big impact a lot of times as things as peoples' assumption as rigs get down at a smaller horsepower, they are mechanical rigs and so even that utilization drop off the margin might not as much because those bigger rigs are getting a better margin. But for Q4, we had a pretty balance in mix. So I don't think there is any bias one way or the other on the margins for the fourth quarter.
Mark Brown - Pritchard Capital
Okay. And just... most of my questions have been answered. But, what percentage of your rigs are sort of levered to oil versus levered to natural gas at the moment?
Zachary Graves
At this point about five of our operating rigs would be levered to oil and of course three of those are in Mexico.
Mark Brown - Pritchard Capital
Okay. Well thanks a lot.
Zachary Graves
I appreciate it.
D. Frank Harrison
Thank you, Mark.
Operator
(Operator Instructions). There are no other questions at this time. And I would like to hand the call to Frank Harrison for closing remarks.
D. Frank Harrison
Thank you, guys for joining us, guys and gals, for joining us on this call today. And we look forward to talking to you next quarter.
Operator
Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a great day.
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