Superior Well Services, Inc. Q1 2009 Earnings Call Transcript

| About: Superior Well (SWSIP)

Superior Well Services, Inc.(SWSI) Q1 2009 Earnings Call May 11, 2009 11:00 AM ET


David E. Wallace - Chief Executive Officer and Chairman

Thomas W. Stoelk - Vice President and Chief Financial Officer


Stephen Gengaro - Jefferies & Co.

[Joe Hill] - Tudor, Pickering, Holt & Co.

[Eric Harshman] - Morgan Stanley

Joe Agular - Johnson Rice & Company

Victor Marchon – RBC Capital


Good day, ladies and gentlemen, and welcome to the first quarter 2009 Superior Well Services earnings conference call. My name is [Karma] and I'll be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Dave Wallace, Chief Executive Officer. Please proceed.

David E. Wallace

Thanks, Karma. Good morning, everyone, and welcome to the Superior Well Services first quarter 2009 conference call. Joining me today is To Stoelk, our CFO.

I'd like to remind all those participating on the call today that a replay of our conference call will be available to listen to through May 25, 2009 by dialing 888-286-8010 and referencing the replay code number 43893142. The webcast will be archived for replay on the company's website for 15 days.

Before I begin with comments on our operating performance I'd like to make the following disclaimer regarding our call today:

Except for historical information, statements made in this presentation, including those related to acquisitions or expansion opportunities, future earnings, cash flow, and capital expenditures are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. All statements other than statements of historical facts included in this presentation that address activities, events or development that Superior expects, believes or anticipates will or may occur in the future are forward-looking statements.

These statements are based on certain assumptions made by Superior based on management's experience and perception of historical trends, current conditions, expected future developments and other factors that are believed appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond Superior's control, which may cause Superior's actual results to differ materially from those implied or expressed by the forward-looking statements. These risks are detailed in Superior's Securities and Exchange Commission filings. The company undertakes no obligation to publicly update or review any forward-looking statements.

Our call agenda is in the following format:

I will first provide an overview of our operations and turn the call over to Tom, who will review our financial results. After Tom's review I'll provide some closing remarks and open up the call to Q&A.

I'll now provide an overview of our operations.

As you've seen in our press release, the first quarter proved to be one of the more challenging in Superior's history. Since closing the Diamondback asset acquisition in November, we've been working diligently to integrate the operations, systems and infrastructure of the two companies into a seamless organization. During this integration our team has focused on maintaining a high level of service quality and minimizing any disruption to our customers. However, the integration of the two companies has occurred during a time of rapid and severe decline in activity levels across the industry.

After we closed the acquisition we took the approach of stepping back to assess the strength of both Diamondback and Superior to analyze the needs of the combined organization before making substantial changes. We added approximately 875 employees with the Diamondback acquisition and maintained a relatively high level of employees through the first half of the quarter; however, energy market fundamentals deteriorated rapidly during the quarter. We did not anticipate the convergence of the Diamondback acquisition with the velocity and severity of the recent downturn in activity levels.

As a result of weakening market conditions, demand weakened substantially and, combined with soft prices, our margins declined as well. The headcount reductions that we've put in place to reduce cost lag the activity decline. In response to the weakening market conditions we've accelerated the speed and depth of our headcount reduction and focused on reducing other costs to align our cost structure with current and anticipated activity levels. Our primary focus is to return to profitability and generate positive cash flow.

That said, we continue to maintain our exceptional service quality and development unique technologies and processes for enhancing returns and reducing risk for our broad and diverse customer base. We still have the industry leading expertise on our team which our customers and investors have come to rely on in both up and down cycles.

Revenue in the first quarter of 2009 was $122.3 million, a sequential decrease of 24.4% from the $161.7 million reported in the previous quarter ended December 2008 and a 30.9% increase from the $93.4 million reported in the first quarter of 2008.

Operating loss for the quarter was $19.1 million as compared to $22.5 million of operating income reported in the previous quarter and $5.1 million of operating income reported in the first quarter of 2008.

The year-over-year revenue growth was the result of increased revenues from the Diamondback acquisition and increased activity levels at service centers which were established within the last 12 months. The positive contribution of these revenue increases was offset by the velocity and magnitude of the decline in North America drilling activity coupled with increased price competition, which in turn led to higher sales discounts across our operating region. The overall result has been a negative impact on our operating margins.

As a percentage of revenues, sales discounts increased substantially in the first quarter of 2009 as compared to 2008 due to a pronounced decline in demand, increased capacity and increased competition. All of our operating regions experienced higher sales discounts for the first quarter of 2009 compared to 2008. We experienced the greatest pricing pressure in all our service lines.

The rapid decline in activity levels, particularly in the Southwest and Mid-Continent regions, combined with the integration of the acquisition of assets from Diamondback Holdings resulted in Superior mobilizing equipment from service centers with declining demand to areas where demand was stronger to optimize utilization. The effectiveness of this approach was offset by continued declines in activity levels and related demand for our services throughout the quarter. We are responding proactively to the current market environment by reducing costs, focusing on maintaining high service quality, bringing new services and technologies to the market, and seeking operational efficiencies.

We have reduced headcount by approximately 33% or 850 employees since the beginning of 2009 across all our operating regions to better align our headcount utilization with activity levels. While reducing headcount is never our preferred course of action, these steps should lower our monthly personnel costs by approximately $4 million a month. The full impact of these reductions will not be realized until June as the majority of the reductions started in March and continued through May.

We have also reduced the number of service center locations by consolidating redundant operations and closing centers located in markets that are exceptionally weak. Reducing our exposure to markets rendered unprofitable in the current market environment will also result in increased cost saving at Superior. We have implemented additional cost-saving initiatives that Tom will review.

Now let's turn the focus to our five operational regions. Our Appalachian service centers support the Marcellus, Huron and Chattanooga shale plays. Revenues of $30.6 million in the Appalachian region were down 15% for the quarter year-over-year and down 30% sequentially.

Seasonality always factors into this region and we've witnessed the typical drop in rig count through November and December, however, the rig count continued to fall during the first quarter of 2009, exacerbated by a cold winter unfortunately combined with consistently weak commodity prices. Drilling activity in Appalachian traditionally has slowed during winter as conditions make it difficult and expensive to move equipment. This winter was especially difficult in Appalachia, which resulted in a larger-than-expected slowdown in drilling and completion activity.

Shallow drilling activity dropped the most as the MP operators shifted their CapEx dollars to drilling wells in the prolific Marcellus shale play. Larger rigs continue to move into the Marcellus. Our Marcellus shale technical sales team continues to make progress with new customers as confirmed by the increased diversity in our customer base and the increase in our job count. Our solution-focused Marcellus shale team has specific industry experience in the play and has helped our customers maximize recovery and ensure that they're getting the highest rates of return on their investment.

From an innovative perspective, our technical team has developed our gamma frac slick-water system that reuses 25% to 50% of our customers' flow-back water, thereby reducing the amount of fluids that need to be disposed while lowering our customers' fluid disposal costs, further enhancing their returns.

While competition continues to increase in this area as other companies move equipment and crews into Appalachia in an attempt to pick up market share in the Marcellus, our ability to help companies increase recovery rates, generate stronger returns on dollars invested, and our reputation for excellent service quality will help us maintain a strong competitive position in our back yard.

Revenues in the Southeast region of $21.4 million were up 25% for the quarter year-over-year and down 35% sequentially. Our Haynesville technical sales team continues to demonstrate our proficiency in performing high quality completions in high pressure, high temperature, down hole environments like those found in the Haynesville. These are expensive wells to drill and complete and our expertise is an excellent fit with a solutions-based requirement for our customers.

Similar to the Marcellus, our team has specific industry experience in the Haynesville. On a daily basis they continue to provide innovative solutions that translate to better well performance and the preservation of economic returns to our customers. Contrary to the falling drilling activity in the rest of the nation, the rig count in the Haynesville shale play continues to increase. We remain focused on providing cementing and stimulation solutions to our existing and new customers. Additionally, we have gained access to supplies of high-strength ceramic proppant from both domestic and international sources, enhancing our competitiveness in this marketplace. Competition focused on the Haynesville continues to increase as we have seen in the Marcellus.

Revenues from the Southwest region of $36.3 million were up 158% for the quarter year-over-year and 11% sequentially. The Diamondback asset acquisition added three service centers in this region - Midland, Tolar and Cresson, Texas - which drove the increase for the quarter, offsetting declines in Alvarado and Artesia.

The Southwest region has been impacted by the downturn in our industry more severely than almost any other in the country. We have witnessed rig count reductions from a relative perspective of 50% to 65% since the beginning of the year. Activity levels are down as much as 75% in the fourth quarter of last year. As the rig count in Texas and the Permian has dropped, utilization and pricing has softened. We have reduced headcount by 36% and will continue to monitor the situation and further reduce personnel as needed.

Revenues in the Mid-Continent region of $26 million were up 48% for the quarter year-over-year and down 31% sequentially. The quarterly increase was a result of a fully quarter of contribution from the Diamondback asset acquisition.

Similar to the Southwest region, the Mid-Continent region has also seen levels dramatically fall. Since the beginning of the year, Oklahoma has lost approximately 100 active rigs. This region has dropped almost 170 rigs since the downturn began in earnest in the fourth quarter of last year, which is 55% to 67%, and has been challenged by utilization and pricing weakness. To increase utilization, we have utilized crews in other basins and reduced headcount by approximately 45%.

Revenues from the Rocky Mountain region were $8 million, down 9% for the quarter year-over-year and 54% sequentially. We expect low commodity prices to persist in the Rockies and anticipate drilling activity and demand for our services will continue to decline, keeping this market soft through the rest of 2009. Consequently, we have mobilized equipment out of this region to the east.

One bright spot in the Rocky Mountain region is the Bakken oil shale play in North Dakota, where we are continuing to expand our presence. You may recall we entered this market through the acquisition of wireline assets in late 2007. Since then we've expanded our range of services in this market, which we believe has long-term growth potential. We've reduced our headcount in the Rockies by 47%.

Also it is important to note that we experienced a major shift in revenue from last year to 2009. In the first quarter of 2008 approximately 45% of our revenue was generated in the Appalachian region. In the first quarter of 2009 about 59% of our revenue was generated in the Mid-Continent and Southwest regions combined with Appalachia contributing only 25%. This shift was the result of the Diamondback acquisition with its strong presence in the Mid-Continent and Southwest regions, combined with lower activity in Appalachia due to water, weather, low commodity prices and a move by operators to shift drilling activity from shallow plays to the Marcellus.

I'll now turn the call over to Tom for a review of our financial results.

Thomas W. Stoelk

Thanks, Dave.

As Dave mentioned, revenues reached $122.3 million for the first quarter of 2009, which is an increase of 30.9% as compared to the same period last year. Revenues from our technical pumping services, which include stimulation, nitrogen and cementing, accounted for 84% or $103.1 million of our total revenue. Down hole surveying services, completion services and fluid logistics are responsible for 5%, 3% and 8% of 2009 revenues, respectively.

Revenue by operating region in the first quarter was $30.5 million in Appalachia, $21.4 million in the Southeast region, $36.3 million in the Southwest region, $26 million in the Mid-Continent region, and $8 million in the Rocky Mountain region.

Revenues during the first quarter of 2009 were impacted by a rapid decline in drilling activity in each of our operating regions. The decline in activity caused an increase in competition as service companies competed for a lower universe of work. As a result, discounts increased significantly year-over-year. As Dave previously mentioned, company wide discounts were up quite a bit year-over-year and the majority of that increase really occurred during the first quarter. The sequential quarter impact of the increase in discounts experienced lowered revenues in the first quarter by approximately $23.2 million or 59% of the sequential decline in revenues from the fourth quarter to the first quarter of '09.

The Southwest and Mid-Continent regions continue to have the highest discounts of all of our operating regions. Cost of revenue increased 59.1% or $46.5 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

As a percentage of net revenues, cost of revenue increased to 102.5% for the first quarter of 2009 from 84.3% for the first quarter of 2008 due primarily to lower labor utilization due to the drop in drilling activity and higher depreciation expenses. Discounts in pricing fell faster than material costs, which compressed margins. As a percentage of net revenues, material costs, labor expenses and depreciation increased in the fourth quarter of 2009 as compared to the first quarter of 2008 by 6.1%, 6.7% and 5%, respectively.

Material costs as a percentage of gross revenues remained flat between the first quarter of 2009 as compared to the first quarter of 2008; however, the year-over-year increase in material costs as a percentage of net revenues was due to a larger percentage of our services being performed in regions where material costs are discounted more heavily. Although material costs did begin to decline during the quarter, most of the materials we used during the quarter were purchased before the market weakened substantially. It is our experience that it takes one or two quarters to turn the inventory and cycle down to a cost base that is more reflective of current costs.

Labor expenses as a percentage of revenues increased 6.7% to 28.1% in the first quarter of 2009 compared to the first quarter of 2008 because of lower utilization due to rapidly declining service demand.

Depreciation expense increased 5% in the first quarter of 2009 compared to the first quarter of 2008 due to the additional assets acquired through the Diamondback asset acquisition which weren't fully utilized due to the decrease in demand. Additionally, the higher level of sales discounts during the first quarter of 2009 compared to the first quarter of 2008 impacts the comparability of year-over-year increases for material, labor and depreciation. As a result of the increase in cost of revenue the gross profit loss for the quarter was a negative $3 million. That's down 121% from 2008.

SG&A expenses increased 68.2% or $6.5 million for the first quarter of 2009 compared to the first quarter of 2008. As a percentage of revenue SG&A expenses increased 2.9% to 13.1% for the first quarter of 2009 from 10.2% for the first quarter of 2008.

During the fourth quarter of 2008 we completed the Diamondback asset acquisition, which increased SG&A expenses in the first quarter by $4.7 million. As a percentage of revenue, the portion of labor expenses included in SG&A increased 2.3% to 8.7% in the first quarter of '09 as compared to the first quarter of '08 due to the additional Diamondback personnel acquired in that acquisition.

SG&A expenses increased sequentially by approximately $2 million, which was solely due to the additional SG&A expenses associated with the Diamondback asset acquisition. The first quarter of 2009 reflects the first full quarter of SG&A expenses associated with that acquisition, which occurred on November 18, 2008. We have implemented steps to decrease SG&A that will be partially reflected in the second quarter and more fully reflected in our results thereafter.

Operating loss was $19.1 million for the first quarter of 2009 compared to the operating income of $5.1 million for the first quarter of 2008, a decrease of 474%. As a percent of revenues, operating loss decreased to a negative 15.5% in the first quarter from a positive 5.5% in the first quarter of 2008. Approximately 85% of the total operating loss for the first quarter of 2009 was generated by the Southwest, Mid-Continent and Rocky Mountain regions, which were most affected by the declines in activity and pricing erosion. As discussed earlier, lower activity levels, higher sales discounts, and lower labor utilization were the primary contributors to the operating loss.

EBITDA decreased $15.1 million in the first quarter of 2009 compared to the first quarter of 2008 to a negative $1.1 million. Net income decreased $17.1 million to a loss of $14.7 million in the first quarter of 2009 compared to the first quarter of 2008 due to the activity levels and the items previously discussed.

As Dave mentioned, we are taking steps to aggressively align our costs with the lower level of demand. These steps include a 33% reduction in employee headcount since the first of the year, changes in our health and 401(k) benefit plans, working to reduce accounts receivable and inventory as revenues decline, and the elimination of nonessential overtime and travel. In addition, we are focusing our efforts on reducing material, repairs and maintenance, and fuel costs and have cut nearly all discretionary spending. We have been asking for and receiving concessions from our vendors and we'll continue to focus on maintaining cost discipline and seeking ways to increase operational efficiencies and productivity.

While we continue to look for opportunities to reduce costs and streamline our operations in this environment, we are careful not to hastily dismantle the surface capability we've built over the last several years.

Turning to the balance sheet, working capital increased $15.5 million to $103.3 million at March 31, 2009 compared to December 31, 2008, due primarily to a $14.5 million decrease in accounts payable that resulted from increased activity levels. In addition, income tax receivables increased $12.3 million for tax refunds expected to be realized through the carryback of operating losses generated in 2009. This increase was partially offset by a decrease in trade receivables of $8 million. We have added additional personnel to our accounts receivable management team and are pleased with the results in maintaining and improving cash flow.

Total long-term debt at the end of March was approximately $226 million with $145 million outstanding on our $250 million syndicated credit facility. As of May 8 we had approximately $142 million outstanding under that facility and $7.5 million of line of credit, leaving us with availability of approximately $105 million of availability at that date.

Our facility matures in March 2013 and we are currently in compliance with our bank covenants. Our credit agreement contains covenants including those that require us to maintain a fixed charge coverage ratio for the most recent four fiscal quarters not less than 1.75 to 1 and a leverage ratio of indebtedness to consolidated EBITDA for the most recently completed four quarters of 3.3 to 1. As of March 31, 2009 our fixed charge coverage ratio and leverage ratios were 3.02 to 1 and 1.64 to 1 respectively and we are in compliance with each of those covenants.

We've scaled back our 2009 capital expenditure budget to approximately $15 to $20 million. For the first quarter of 2009 we made capital expenditures of approximately $9.4 million. We plan to continue to focus on minimizing discretionary spending, limiting our capital expenditures, and managing working capital to maximize liquidity.

At this point I'll turn the call back over to Dave for some additional comments.

David E. Wallace

Thanks, Tom.

We built Superior Well Services into the fifth-largest pressure pumper in the U.S. and even in this downturn we are actively working to improve our competitive position. Creating our three basin-specific technical sales teams has positioned us as one of the leading high tech players in the most profitable and active basis.

In the current economic environment, while we're encountering persistently low commodity prices, every CapEx dollar is important, making it essential for operators to partner with service companies that can deliver results based on demonstrated performance and sound technical expertise. We believe that our strength of reliable equipment, high service quality and technical expertise in the key unconventional shale plays combine to help reduce risk and maximize return for our customers.

Our management team is experienced and has successfully weathered several down cycles in the course of their careers. Although we have made the difficult decisions required to improve profitability, we're not sacrificing service quality or innovation.

Our plans to endure this down cycle and emerge a strong competitor include to aggressively cut costs at all levels of the organization to align our cost structure with the reality of the current market environment, provide the highest levels of service quality and results to our diverse base of strong customers and acquire new customers on the basis of competitively priced high quality service, maintain our disciplined approach to managing liquidity and cash flow, strengthen our presence in the markets where we have a clear competitive advantage in high tech completion in the plays with the most durable economics, continue to innovate and build on our technological advantage, like the technologies covered by our two patents we hold for specialized fluid used in high tech and super high tech jobs, and maintain and strengthen our technical sales teams.

Last year we established three basin shale play technical sales teams to position us as the market leader for high tech and super high tech work in the most profitable U.S. resource plays. These teams have been very successful in building relationships with new customers, maintaining relationships with existing customers, and securing work in plays offering long-term potential for activity and growth. As a result, we believe Superior Well Services is well positioned for when the market eventually turns back up.

Our crews have built a reputation one job at a time and I would like to take this opportunity to thank our people for all the hard work during this difficult quarter.

I would again like to mention that our primary focus is to return to profitability and generate positive cash flow. Ours is a cyclical business and we'll continue to make adjustments to position our people and assets not only for the downturn but also with an eye towards making the most of the eventual recovery.

This concludes our prepared remarks. I'll now turn the call over to Karma to help coordinate our question-and-answer session.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

The first thing is to help us in the first quarter understand what happened, could you give us a sense for the impact on margins of both mobilization costs and severance charges?

Thomas W. Stoelk

The severance charges are about $1 million in the first quarter, Stephen.

David E. Wallace

And the mobilization, we did start moving some equipment from west to east. And when you look it, kind of a good run rate is $1.50 a mile one way per unit, so it can translate into approximately $3,000 to $4,000 per unit depending on how far they came. So I don't think I have a good number for you; we're probably looking at $300,000 or $400,000 initially in first quarter.

Stephen Gengaro - Jefferies & Co.

You mentioned you'd closed some service centers. Can you tell us where the regions are or was that kind of in line with where you mentioned headcount reductions?

David E. Wallace

Mid-Con's probably been the hardest hit. We've closed four service centers to date - one in Ohio and three in Oklahoma.

And, again, we've had some major downsizing in a lot of the other service centers. We're trying to keep a presence in some of those waiting because they've been long-term areas that we feel like are going to bounce back; we're just going to minimize our exposure in those at this time.

Stephen Gengaro - Jefferies & Co.

When you look at the next couple of quarters - and obviously you've had a bigger drop off in activity and probably faster than most people had expected - but when you look at the back half of '09, in an environment where you start to get kind of a flattening of the rig count can you get margins moving higher off of cost-cutting initiatives as opposed to actually getting price? If activity starts picking up a little as you get some cost cutting, can that get margins moving or do you need the pricing to help really move the needle - when you talk about getting back to profitability, kind of getting a sense for what exactly do you think that takes.

David E. Wallace

I think it's a combination of the cost cutting to get right sized in some of the areas that have been heavily impacted. When you start looking at some of the Western regions rig counts down 65% to 70% and then from there it gets really competitive in those areas.

One thing we're looking at is when you look at the Eastern U.S. we had a lot of seasonality there. And we usually count on first quarter through April kind of a softer environment back East, then from there you start seeing the activity pick up, so we're expecting utilization to pick up in our stronger markets, which would be the Eastern U.S. coming out of our seasonality.

So I think a combination of getting more right sized in the Western basins, getting utilization pickup in the Eastern basis, we should see improvement.

This looks a lot like 1999 when the rig count dropped roughly 50% first quarter. We saw a similar result in that we had a very negative first quarter, then from there second quarter kind of balanced out and then we actually saw a little improvement in third and fourth quarters, so it's kind of shaping up to be a very similar year to that.

Stephen Gengaro - Jefferies & Co.

Forty days into the quarter, are you any more enthused about the second quarter?

David E. Wallace

Again, I think we're starting to see, one, commodity prices have improved. When you look at the oil and gas prices, they've started to improve, so we're expecting the oily areas like Permian, Bakken, even some of the Pennsylvania Rockies, different areas that we have oily presence, we're going to start seeing some improvement there.

And if you look at the rig count, it has started flattening out a little bit. I think the biggest thing we had trouble with first quarter was getting good visibility of what our customers were going to do. They were kind of all over the board. They were saying that we're going to drill, we're not going to drill, we're actually going to increase our program, maybe drop the program. So we stayed pretty cautious as far as not getting too aggressive on our cuts until we got some better visibility there.

The one thing you can't sacrifice in this environment is service quality. You may have lower pricing or comparative pricing to the competition but if you have a service quality issue because you made too many changes, tried to make too many short cuts, you don't get invited back on the next round of bidding. So you have to maintain excellent service quality during this time period.


Your next question comes from [Joe Hill] - Tudor, Pickering, Holt & Co.

Joe Hill - Tudor, Pickering, Holt & Co.

With regard to the $4 million a month in lower personnel costs, how much of that should be allocated to cost of revenue and how much is SG&A?

Thomas W. Stoelk

About 10% is SG&A right now, Joe. The rest of it's cost of revenue.

Joe Hill - Tudor, Pickering, Holt & Co.

And what was your cash position as of March 31?

Thomas W. Stoelk

Cash position I think was $2.4 - $2.5 million.

Joe Hill - Tudor, Pickering, Holt & Co.

And finally I know this is probably kind of a moving target, but can you give us any tax rate guidance?

Thomas W. Stoelk

Right now you're right, it is a moving target. I would be somewhere in the neighborhood of probably 35% to 36%. Some of the NOLs, as you may know, aren't deductible for state purposes and that's why you're seeing that effective tax rate where it is right now.


Your next question comes from [Eric Harshman] - Morgan Stanley.

Eric Harshman - Morgan Stanley

A question for you on pricing and discounting trends across the different regions you operate in. We're hearing that prices are closing in on variable costs if not dropping below, so we're kind of expecting the number of bids to go down and the discounting to start to slow a little bit. Are you guys seeing that in any of the basins now or is it a little too early for that?

David E. Wallace

I think what we're starting to see is during the first quarter everybody was focused on chasing the rig count down trying to maintain market share and in the process there's no doubt that pricing got below variable cost. And now everybody's starting to take a different look and say, look, we're not going to pay to go out and do the projects, and they're starting to back off on pricing, which may mean a combination of turning down work, stacking out some extra crews, really getting more right sized to what you expect to have for profitable work. So I think that definitely happened in the first quarter, early second quarter; now the strategy is starting to change in that people are starting to back off from chasing the super cheap work.

Eric Harshman - Morgan Stanley

Okay, so just to clarify or to confirm this, the discounting kind of is slowing now or you're kind of seeing that in the near future?

David E. Wallace

I think we've reached a point that we feel like pricing's reached kind of a bottom level where it doesn't pay to go chase the additional business, those breaking levels.

Eric Harshman - Morgan Stanley

A question on supply side. It may be a little early to talk about this, but can you talk about the one to two-year impact that the downturn and the rapid fall in activity could have on stimulation supply? Do you expect to be scrapping or at least equipment that's not being properly maintained that may not be able to be put back in service when activity does pick up?

David E. Wallace

I think on our fleet, it's a fairly new fleet, so we don't have that much older equipment. Some of the larger competitors, they would have some older capacity that they can take out of service, but when you look at ours, the last four years, most of the capacity has came on. But with that we will in the process be taking some of the underutilized assets and instead of trying to keep them up, maintained on an ongoing basis, we'll be looking at potentially stacking out some of those units. You want to minimize the cannibalizing of those when you can with the plan that when the upturn comes you can bring them back into service fairly quick.


(Operator Instructions) Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

Tom, you walked through the balance sheet and the covenant issues or where you stand on the covenants. How are you thinking about this as we move through the year? Can you give us your insights on how you're looking at where you stand and where you think you'll stand and steps that might need to be taken?

Thomas W. Stoelk

Just to kind of go over the covenants, we've got two of them. One is kind of a fixed charge coverage ratio of not less than 1.75 to 1 and then there's a leverage ratio of 3 to 1. It looks from our view based on our ability to maintain and meet those covenants for the next couple of quarters look pretty good, but if consolidated EBITDA would remain kind of at its current level it'd be a situation where we would obviously want to enter into some discussions with our bank group because I think in the fourth quarter it would be problematic for us.

So it's something we're watching. One of the things that we're very aggressively doing, one of our goals is really to reduce to debt and the other is to reduce costs. So what you'll see us do is manage very aggressively over the next couple of quarters so that we don't really get into a pinch.

But having said that, Stephen, it may be a situation if margins continue to stay at their existing levels, although we think that some of the moves that we've made with respect to labor and overhead changing and some of the benefit plans, 401(k) plans and as such will have an impact on it. It looks like it could be problematic maybe in the fourth quarter, but we'll do something well before then.


Your next question comes from Joe Agular - Johnson Rice & Company.

Joe Agular - Johnson Rice & Company

Did you all give a CapEx number for the rest of this year?

David E. Wallace

We gave kind of a total CapEx range, Joe, of between $15 and $20 million. We had a little over $9 million - I think it was $9.4 million - for the first quarter.

Joe Agular - Johnson Rice & Company

So you're really ramping down, obviously, in the next few quarters.

The second question I had was do you have any estimate on what kind of cash you might generate from working capital?

David E. Wallace

A lot of it's up in the air a little bit. I think that hopefully 10% to 15% maybe on the receivables side as you see revenues really ratchet down and probably on the inventory side probably 10% level would be fairly realistic is kind of our view right now.

We've put a lot of focus in receivables because obviously one of our concerns is in a deteriorating economic environment in a lower priced commodity environment we need to spend a lot of diligence with respect to following up and making sure that we don't have a lot of bad debts and things like that.

But I think for purposes of this call that'd probably be my hip shot to you.

Thomas W. Stoelk

The inventory number could be a little higher, too, because it's going to be a combination of, as we consolidate crews, facilities, also see reduced pricing on materials, I think we're going to be looking at a higher number than that, maybe 20% to 25% or more.

Joe Agular - Johnson Rice & Company

And along the lines which you were just discussing there in terms of repositioning or consolidating equipment, you're still in that process, I assume? You didn't complete it all in the first quarter?

David E. Wallace

That's correct. Yes, probably if anything we didn't start until late in the first quarter and really got aggressive about mid-March on. Sitting up in the Northeast when you have a cold winter you always think that maybe gas prices are going to turn the corner, kind of like what they did a year ago. Reality came into effect that the economic demand was going to outstrip the need for gas and that gas prices were going to stay pretty soft, so we got a lot more aggressive in March through the early second quarter.

Joe Agular - Johnson Rice & Company

Did you all give a number in terms of what type of percentage reduction you might be able to get out of some of your materials and suppliers in this environment?

David E. Wallace

It's going to vary quite a bit. When you start looking at freight and some of the profit, we may be looking at 30%. When you start looking at some other stuff, other items, cementing maybe not as much, but we're shooting for roughly 15% to 20% overall.

Joe Agular - Johnson Rice & Company

A 15% to 20% overall reduction in costs?

David E. Wallace

That's correct.


Your next question comes from Victor Marchon – RBC Capital.

Victor Marchon – RBC Capital

I just had a follow up on the covenant question. In calculating EBITDA, is that pro forma for Diamondback?

Thomas W. Stoelk

Yes, it is.

Victor Marchon - RBC Capital

Do you have the number handy what it was for the first quarter EBITDA pro forma?

Thomas W. Stoelk

I do not, but if you give me a second I can probably grab it out of some of the materials I have here. Pro forma EBITDA, if you take a look at the materials that are out that were filed with respect to the credit agreement, pro forma EBITDA was about $143.3 million. And basically what you do, Victor, is you reduce it for a maintenance CapEx number which was approximately $15.6 million. So you had adjusted EBITDA for purposes of the calculation of about $127.6 million.

Victor Marchon - RBC Capital

And the only other one I have was just on the Haynesville. I wanted to see if you guys can just quantify your exposure there as to a percent of revenue or a dollar value that you guys were able to do in the first quarter?

Thomas W. Stoelk

That's a growing business for us. Let's see if we can pull that out. It's a growing market for us in cementing and stimulation. We didn't catch our first jobs in the Haynesville until late fourth quarter and since then our stimulation activity has ramped up along with our cementing activity.


And we have no further questions at this time. I would now like to turn the call back over to Dave Wallace for closing remarks.

David E. Wallace

Thanks, Karma. I appreciate everybody being on the call today and we look forward to talking to you at the end of the second quarter. Thank you.


This conclude the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.

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