C&J Energy Services Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: C&J Energy (CJES)

C&J Energy Services (NYSE:CJES)

Q1 2013 Earnings Call

May 02, 2013 10:00 am ET

Executives

Lisa Elliott - Principal

Joshua E. Comstock - Founder, Chairman and Chief Executive Officer

Randall C. McMullen - President, Chief Financial Officer, Treasurer and Director

Analysts

John M. Daniel - Simmons & Company International, Research Division

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Michael R. Marino - Stephens Inc., Research Division

Benjamin Swomley - Morgan Stanley, Research Division

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the C&J Energy Services First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Lisa Elliott with Dennard-Lascar Associates. Please go ahead.

Lisa Elliott

Thank you, operator, and good morning, everyone. We are pleased to have you joining us on this conference call to discuss C&J Energy's first quarter results for 2013. Before we get started, I'd like to direct your attention to the forward-looking statements disclaimer contained in the news release that C&J put out yesterday afternoon, a copy of which is available on the company's website at www.cjenergy.com. In summary, the cautionary note states that information provided in the news release and on this call that speaks to the company's expectations or predictions of the future, including projections, assumptions and guidance are considered forward-looking statements intended to be covered by the Safe Harbor provision for the federal securities law. Although these forward-looking statements reflect the company's current views and assumptions regarding future events, future business conditions and outlook based on the current available information, these forward-looking statements are subject to certain risks and uncertainties, some of which are beyond the company's control that could impact the company's operations and financial results and cause C&J's actual results to differ materially from those expressed or implied by these statements.

I refer you to C&J's disclosure regarding risk factors and forward-looking statements in its SEC filings for a discussion of known material facts that could cause actual results to differ materially from those in the forward-looking statements. Please note that the company undertakes no obligations to publicly update or revise any forward-looking statements, and as such, these statements speak only as of the date that they were made.

A replay of today's call will be available and accessible via webcast by going to the IR section of the company's website and also by telephone replay. You can find the replay information for both in yesterday's news release. Now as a reminder, information reported on this call speaks only as of today, May 2, 2013, so any time-sensitive information may no longer be accurate at the time of the replay.

With that, I'll turn the call over to Josh Comstock, C&J CEO and Chairman.

Joshua E. Comstock

Thank you, Lisa. Good morning, everyone. We appreciate you joining us for our first quarter 2013 earnings conference call. With me today are Randy McMullen, our President and Chief Financial Officer; and Don Gawick, our Chief Operating Officer. Late yesterday, we released our first quarter earnings. Broadly speaking, our results did not meet our expectations, primarily due to the challenges we faced in the hydraulic fracturing market. Still, we are encouraged by the margins and returns we achieved across all business segments and believe our performance demonstrates resiliency when faced with industry-wide issues such as the overcapacity in domestic fracturing.

Early in the quarter, we expected an uptick in the recount which did not materialize. As a result, our fracturing operations encountered significant market pressure, particularly toward the end of the first quarter. We also experienced increased spot market exposure at highly competitive rates as some of our contracted customers with partial month commitments managed their hours to minimum levels.

We have not previously seen notable declines in contracted activity as customers have typically opted to maximize their utilization to take advantage of our highly efficient operational results. This deviation had a negative impact on our quarterly performance, as it was short notice which made it difficult to timely deploy the available fleets on similar type jobs in the competitive spot market.

We expect spot pricing to remain at current levels moving through the second quarter and potentially through the latter part of 2013. In response to this environment, our near-term goals are to increase utilization and grow our customer base while also improving our margins through continued vertical integration and cost controls. One of our primary strategies is to target customers who appreciate our superior performance and operational efficiency, recognizing the cost savings that are generated relative to many of our competitors. With the understanding that building a solid customer base is a great importance for generating long-term results, our approach is to not only expand our customer base but to retain and build upon existing relationships. Our operational quality and reputation help us in this regard.

Our wireline services and coiled tubing businesses produced solid results for the first quarter. Within Casedhole Solutions, our wireline division, performance was strong. We made improvements quarter-over-quarter through targeting marketed efforts that added new customers and increased utilization by existing customers.

The first quarter was a record quarter for Casedhole even with a slow start at the beginning of the year due to the extreme weather conditions in some of their operating regions. Coiled tubing also maintained solid activity levels, although there was a slight decrease in revenues due to a change in job mix as we encountered less intense work in certain basins. However, we did see an uptick in the amount of jobs performed quarter-over-quarter. Coiled tubing had space in recent industry-wide challenges but these issues have not had a significant impact on C&J's performance today. We believe this demonstrates the strength, quality and reputation of our coiled tubing division. The performance within this division has continued to be strong and steady.

We are selectively adding capacity to our coiled tubing and wireline operations as we continue to increase our market share through the expansion of our customer base and geographic footprint.

Before turning the call over to Randy to discuss our first quarter results in more detail, I want to highlight our commitment to a broader diversification effort in terms of geographic footprint and business lines. We recently made a key step in our international expansion with the hiring of our head of international development, Jim Prestidge. Jim comes to us with over 30 years of large cap industry experience and has managed operations in several regions around the globe, including the Middle East and North Africa. We believe his expertise and guidance will greatly benefit our global expansion plans and we're pleased to have him as this part of the team. We're also working on a number of research and technology projects that I'll provide further commentary on later in this call. With that, I'll turn it over to Randy.

Randall C. McMullen

Thanks, Josh. Good morning everyone. For the first quarter, we generated $0.46 of earnings per share and $276 million of revenue. As Josh mentioned earlier, the primary reason for the 4% decrease in the revenue quarter-over-quarter was the weakness in our fracturing operations due to less contracted activity and therefore more spot exposure in a highly competitive pricing environment. The decline in recount over the quarter further impacted utilization as spot pricing remain and continues to remain highly competitive.

Revenue for our fracturing services, which declined 6% sequentially, accounted for 63% of our first quarter revenue. We performed 5% more fracturing stages compared to the previous quarter and revenue per stage dropped by 11% sequentially to $102,000.

Our fracturing services generated monthly revenue per unit of horsepower of approximately 218 in the first quarter, a decline of 15% from 256 in the fourth quarter. A sequential decrease in the revenue per stage and revenue per horsepower primarily resulted from the pricing impact of more spot work and the addition of our eighth fleet in late January.

As we have previously stated, our revenue per stage will fluctuate depending on the type of fracturing jobs we are completing and their underlying complexity.

We recently took delivery of our ninth fleet, which is targeted for deployment in the Bakken and given the overcapacity in the pressure pumping market, we are delaying its deployment. At this time, our primary focus is on increasing the utilization of our fracturing equipment in existing areas of operation. The addition of the ninth fleet brings our horsepower capacity to just over 300,000.

Coiled tubing results were fairly consistent during the quarter. Revenue declined 5% due to the mix of jobs worked over the quarter. However, we performed 5% more jobs and those jobs were less service intensive, which resulted in slightly higher margins. We've steadily grown this division by adding new customers and maintaining quality execution in spite of additional capacity added over the past 12 months.

Our wireline business generated a 16% increase in revenue over the quarter, a record for Casedhole. These strong results were achieved through improved utilization as we grew our presence in domestic basins and implemented targeted marketing to well-established operators. Both revenue per truck and wireline runs increased significantly during the quarter, primarily due to more 24-hour operations.

Our manufacturing operations generated approximately $1 million of third party revenue during the quarter. Despite the limited third party activity, Total provides significant internal cost savings for new equipment as well as replacement parts. Total is also being increasingly incorporated into our research and technology efforts as we vertically integrate certain service lines.

Moving onto gross margin. Our gross margin decreased to about 34%, representing a decline of about 250 basis points from the fourth quarter. As previously mentioned, quarterly margin compression primarily resulted from increased spot exposure on our fracturing operations.

SG&A costs decreased 7% quarter-over-quarter to $37 million, representing about 14% of revenue. The drop in SG&A is mainly due to the impact of a nonrecurring charge on the fourth quarter of 2012. This was partially offset by higher personnel and administrative costs associated with the growth of our business, including costs in connection with our vertical integration efforts across each of our service lines.

Depreciation and amortization expense was up 8% quarter-over-quarter to $17 million due to the growth of our asset base. Our adjusted EBITDA decreased 19% from the fourth quarter of 2012 to $57 million, and adjusted EBITDA margin was 21% in the first quarter versus 25% in the fourth quarter.

With regard to the balance sheet. At the end of the first quarter, we had a cash balance of approximately $22 million and $250 million available under our $400 million revolving credit facility. We currently have $145 million outstanding after repaying $75 million of the $220 million drawn last summer to partially fund the acquisition of Casedhole.

Now on to the cash flow statement. During the first quarter, we generated $62 million of cash from operating activities compared to $77 million for the fourth quarter. In terms of capital expenditures, we had $37 million of CapEx during the first quarter, the majority of which consisted of construction costs for new coiled tubing and wireline equipment. We expect our remaining CapEx for 2013 to range from $50 million to $60 million. Despite the challenges based in our sector, we've continued to generate significant cash flow that has allowed us to delever the balance sheet and reinvest in our service lines where market opportunities have arisen. Our returns on capital continue to be amongst the highest in the industry and the company is well positioned to continue to expand existing service lines and launch into new service offerings both domestically and internationally.

At this point, I will turn the call back to Josh for closing remarks.

Joshua E. Comstock

Thanks, Randy. As we move through 2013, we recognize that the fracturing market will likely remain challenging in the near term. By continuing to diversify our service offerings and differentiate ourselves from similar sized peers, we have better positioned the company in the current market and increased our ability to capitalize on future market improvement.

As I mentioned earlier, one key element of this growth plan is the build out of our Research and Technology division. This group is actively evaluating differentiated service products that will bolster our diversification efforts. To highlight a few examples, I would note our ongoing efforts to develop directional drilling technology and related down hole tools, as well as through tubing completion tools and drilling and completion fluids. Our Research and Technology division is focused on identifying services and tools that will allow us to more effectively compete against larger integrated oilfield service companies, both domestically and internationally.

Before we open the call for questions, I want to reiterate that I'm excited about where we are as a company. The groundwork that we are laying today is a foundation for what C&J will become over the long term, which is a leading large-scale geographically diversified provider of the most technologically advanced services, focused on delivery of value to our customers, employees and shareholders.

With that, operator, we'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Daniel with Simmons & Company.

John M. Daniel - Simmons & Company International, Research Division

First question for me is -- relates to your performance versus peers. For some time now, you guys have posted higher revenue per horsepower versus the competition. Sort of a long question, but first, remind us what you attribute that to. And second, it looks like you should generate decent cash flow for the remainder of the year while you've got a very strong balance sheet. So with that background, does the operational performance, does that give you any confidence and possibly a desire to acquire smaller companies in effect implement best practices?

Joshua E. Comstock

Well on the first question, the first part of your question, we have historically focused on factory type operations, 24-hour operations, zipper fracs, all of our fleets, other than the vertical fleet, that's the type of work they've done. So that's what's generated that revenue per horsepower and made it so much more efficient than others. That, coupled with the fact that operationally, we tend to average more stages per day than anyone and that's just a tribute to the guys in the field and the quality of service we provide. On the second part of your question, we are experiencing [ph] an awful lot of cash flow. We're going to use that to pay down debt. There are companies out there, smaller companies, that are distressed that are for sale, that right now, it just has not made sense for us. And it's primarily because most of them are 1 and 2 fleet companies that pay a lot of money for their fleets, much higher than what we pay for them when we build them at Total. And so even at $0.50 on the dollar, you're looking at almost a new cost for us just to replace equipment. So I understand the benefits of consolidation, however, a lot of those fleets currently aren't having much impact on the market anyway. And so it just hasn't made sense to purchase them.

John M. Daniel - Simmons & Company International, Research Division

Okay. Randy, just hopefully a little bit help on the modeling, can you give us some color, any color on the exit rate revenue per stage and margins given that some of this slowdown was in the back half of the quarter?

Randall C. McMullen

Yes. I would. I mean, the business is -- each service line [ph] was a little bit different during the quarter. Our wireline business had a slower start to January, but really developed a lot of momentum and an increase in margins exiting the quarter. Coil was fairly steady during the quarter. On the frac side, obviously, we had to roll off of the contract that renewed into a pricing agreement that was reset at the beginning of February. So given that, given that and the fact that we did have less contractual work over the last few months of the quarter, our margins were lower at the end of the quarter than at the beginning. But again, at least as it relates to the contract that rolled off, that was expected.

Operator

Our next question comes from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Recognizing the spot market is challenging right now, do you find your contracted fleet at a greater disadvantage because of their status that is, when it does roll off minimum hours, are third-party less inclined to take the fleet because they know the fleet is headed back to contracted status or am I not thinking about that the right way?

Joshua E. Comstock

Well, you're sort of thinking about it the right way. The fact of the matter is, the 2 contracted fleets that have availability, they're half-month commitments and historically, those contractor -- those E&P companies have used them for the full month or the majority of the month. And so what's happened and what happened in the first quarter is, on short notice, they didn't use them for the full month and so it's hard to go fill that with the market being as competitive as it is, most of the jobs that are sitting out there, waiting to be done have fleets on them or fleets available to do them. So it's not a point that E&P operators are saying, "Well, this fleet's going to move back." It's not that, it's just more challenging for us to -- that they already have service providers in place -- for us to fill in the spot market when we have availability, just pop up unexpectedly. That said, we have taken efforts and the sales team was doing a great job. We're trying to create a backlog of work and reaching out to more customers with availability, whereas when we have these unexpected weeks pop up, we can fill them.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And then as my follow-up, can you provide more details on that, on the spot bidding process? Is it really just a function of price being too high, is it, or there are other factors at play? And you mentioned kind of stuff that you could take to raise utilization, maybe if you could give us more details on those steps, that will be helpful.

Joshua E. Comstock

Right. So on the spot market, if you've not worked for a customer and it's a new customer, it essentially comes down to price. Either price or the relationship that the sales guy has with the customer. But the majority of the time, it's price. If we perform, if we made it out and we performed for the customer, typically, due to our performance, they want us back. We've seen that time and time and time again. And in that scenario, you don't have to be the lowest price, but you have to be in the ballpark. And so for us, to increase utilization, what we are currently doing is making sure that we're targeting the customers that have the backlog at work to do the 24-hour jobs at full month utilization so that once we get out for a customer, demonstrate our capabilities, that customer retains us and it turns into a full utilization project. And so that's the customers we're talking about. That's how we can get utilization up. In the first quarter, as I said before, as we had availability, as we had fleets become available, a lot of the work that we were taking was trying to get out and audition for new customers and it may be a vertical job, it may be a 12-hour daylight operation, it wasn't -- in the spot market, it wasn't our typical 24-hour operation full-month type utilization. So that's what we're targeting. We think we know who those customers are. We think we have the ability to get that work, we're working on that now. And hopefully we can get that utilization in the spot market back up. That said, pricing is extremely challenging in the spot market.

Operator

Our next question comes from the line of Byron Pope with Tudor, Pickering, Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just with regard to the contracted work, you mentioned kind of the slowdown in activity with those couple of customers on the half-month structure during the month of -- and you talked a little bit about kind of the exit weights -- rates [ph] for Q1. In the month of April, for the contracted work, are you seeing kind of the work volume start to improve above those minimum levels? Just kind of curious what you're, again, kind of what you're seeing here in the month of April?

Joshua E. Comstock

No, not in the month of April.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then with regard to the ninth frac fleet that you took delivery of, that's in the Bakken, help us think about kind of the conditions or kind of what do you need to see play out in the Bakken before going in and deploying that ninth fleet? And kind of what are you watching? Obviously, it's a competitive pricing environment or would you consider moving that fleet elsewhere? Just curious as to how you think through the decision-making process?

Joshua E. Comstock

Yes. It's not necessarily that we need to see anything play out in the Bakken. If we have utilization up with our current fleets in the existing basins that we -- we're at full utilization and this fleet would be at the Bakken right now and we would be building a base of business and taking jobs as they come. Hopefully, they eventually end up with full utilization. The fact that currently, we're challenged in the existing basins, we think it's best for us and the sales team to focus on making sure we get this utilization up and expanding the customer base with our current fleet. And so that's why we've not deployed it. It's just operationally and financially not anything we want to tackle until we can get this utilization up under our existing fleets in the current basins. The second part of your question? I'm sorry, I forgot.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

It's okay. You addressed it. And then last question for me, just relates to the 2013 CapEx guidance. It seems as though it's still towards the high end of the range, initial range, that you laid out on the fourth quarter call and my assumption is that, that 10th fleet that you had potentially talked about might be on the shelf now, but the fact that the full year guidance range is still towards the high end of the range, is it just that you're feeling more constructive about the coiled tubing and wireline businesses and deploying kind of that incremental capital there, just curious about the full year CapEx?

Joshua E. Comstock

Well, it's just -- so right now, there's no commitment to the 10th fleet. We're not -- as it stands currently, we won't be deploying that 10th fleet this year or ordering that 10th fleet anytime soon. As far as the CapEx, we are doing things internally through the Research and Technology division to organically grow new lines. There's CapEx associated with that. There's additional CapEx associated with coiled tubing and wireline and so that's why we are at the high end of the range. But mainly it has to do with the new lines that we're building organically and for competitive reasons, we don't want to get into too much detail, so we gain traction there, but there are some things we are doing internally towards the growth of the business that are new and that's why the CapEx is to the high end of the range.

Operator

Our next question comes from the line of Matt Conlan with Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

I just would like to delve in a little bit deeper into the actions of your contracted customers. Why did they, for the first time, manage to minimum hours? Was it because of reduced needs or because your contracted rates are not in the ballpark of spot rates?

Joshua E. Comstock

Both. I would say not in the ballpark, but we definitely had mainly large-cap service companies that targeted and our contract customers that had availability and price work extremely low to get it. That said, one of those customers has already come back due to the poor quality of service they received. And the other one is we're working on a deal right now. So it's mainly pricing outside of the contract though that's driving that.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. So if they come back, if one of those guys comes back, do you think that second quarter utilization could be higher than first quarter?

Joshua E. Comstock

Second quarter, probably in line with the first quarter. Utilization exit at the second quarter may be higher.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. And that's with overall a little bit lower pricing because of the contract roll off in the first quarter?

Joshua E. Comstock

Exactly. So the 2 -- we had 3 contracts that were set to roll out this year. Two of the 3 have already been renegotiated and commitments made by the E&P company to us. And it is at lower pricing, pricing that is more consistent with spot market.

Operator

Our next question comes from the line of Brandon Dobell with William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Just a couple of things. Just to get a better feel around price. It doesn't sound like you're expecting any improvement in Q2 and the odds of it kind of going lower as you were from April to May sound like they're higher than going -- than things getting better. Just want to make sure I understand how you expect things to play out in the next 6 weeks or so?

Joshua E. Comstock

Yes. We don't -- I mean, definitely pricing is not going to rise. We're not seeing pricing go lower. Pricing has stabilized. It's more now just around utilization, there's a lot of equipment out there and it's just once you're in the ballpark with price it's developing those new customers and getting the utilization back up. But we don't -- pricing has definitely, definitely stabilized over the past few months, for sure.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. Similar question over in wireline, coiled tubing. What are your expectations for, I guess, price and utilization of those assets as you work from March into April and how confident are you that, that trend keeps going through the balance of the quarter?

Randall C. McMullen

We've, through the quarter to date, and we're expecting from a margin perspective and utilization perspective, rates will be fairly similar, specifically for the wireline.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay, okay. And then final one for me. I would assume that, that CapEx number you gave, $50 million to $60 million for the rest of the year, is just more about maintenance, maybe be a little bit of in-roof [ph] capacity expansion. But it doesn't sound like anything in the plans for any real material international spend at this point yet, but could that change in the back half of the year?

Randall C. McMullen

Yes, as it stands now, you're correct. That is not including anything related to international expansion.

Operator

Our next question comes from the line of Robin Shoemaker.

Robin E. Shoemaker - Citigroup Inc, Research Division

Josh, in terms of your expiring term contracts, I know you've renegotiated a couple, I just want to clarify this. I had that Fleets 1, 3 and 5 were kind of scheduled to come to a conclusion in terms of their term contracts in the third quarter. But have some of those been extended or -- how many contracts would you expect to expire in the third quarter?

Joshua E. Comstock

We had 3, right, you're right on the 3, and on the fleet numbers, I think that's correct. 1, 3 and 5. The first one was rolled off in January. And we said on our fourth quarter earnings call that it had been repriced and signed, extended through the end of 2013. It's actually now been extended through the end of 2014 at a little bit lower pricing than the original extension. We thought it prudent to lock that work up. The other 2 are in July, July-August. One of those has already been renegotiated and extended through the end of 2013. We just got that done. The other one, we are currently negotiating on and hopeful that we'll get that one for another 12 months.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. So these are...

Joshua E. Comstock

I want to be real clear though, they're not, obviously -- there's no longer take-or-pay contracts and the terms have changed, but they are commitments, full commitments, by the customer to C&J for the term of the contract.

Robin E. Shoemaker - Citigroup Inc, Research Division

And they specify a minimum number of days per month?

Joshua E. Comstock

No. They do not.

Robin E. Shoemaker - Citigroup Inc, Research Division

Oh, they don't. Okay. So they're just like a pricing agreement? I see.

Joshua E. Comstock

They're like contracts were before 2010.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. I wanted to ask you about -- you've commented on some of your smaller competitors -- about some of the behavior you see in very larger frac-ing companies in the Eagle Ford, which I guess is your critical market. How much -- is there any change there from what you've seen previously and just kind of comments on the competitive landscape would be helpful.

Joshua E. Comstock

Well, the larger competitors, really, it's 2 of the 4 large cap guys that are, have really done the most of it. They were consistently dropping prices through third quarter last year and fourth quarter of last year. What -- that appears to have stabilized or has stabilized, but what we have seen is what I would call predatory actions where they have specifically targeted, and rightfully so, specifically targeted those E&P customers with 24-hour operations like the ones we work for. And they've targeted them with price because they can't compete operationally. And so in that, we've had that happen recently and the customers used a large-cap provider for about 30 days and realized that he wasn't giving the service quality that he was getting with C&J and has already moved back. And that typically -- if it happens, that's typically what happens, they move back pretty quick. But they've definitely been predatory. That said, they have just overall when bidding work for new customers that we don't have a history with, we have seen that the pricing has stabilized.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And then finally, I just wanted to ask about the guar issue. Is that -- of course a year ago, that was the big problem -- that is -- are you incurring any issues with regard to guar providing it's part of your services, is it a total pass-through item at this point?

Joshua E. Comstock

Yes. There's no issues with guar. We were, unlike others, we were fairly fortunate that we had negotiated in our existing contracts that as guar went up, we were able to pass that through. And so we didn't get hit by it. But currently, guar price has come down significantly and it's available and we're not having any issue and no margin hit with regard to passing through expensive guar or any of that.

Operator

Our next question comes from the line of Michael Marino with Stephens.

Michael R. Marino - Stephens Inc., Research Division

Question on the contracts renegotiations and the roles that you've seen to date. Have you seen customers drop their utilization below the minimums as they roll to kind of the new structure or is it just the pricing that's really changing?

Joshua E. Comstock

Just the pricing that's changing. I mean there's -- as far as the utilization, there's nothing that's changing there. I mean, the one that renewed and -- or I shouldn't say renewed, the one that we reached an agreement with in January was a full month high utilization contract and the hours have averaged just as high as they averaged before. So there's not been any change there.

Michael R. Marino - Stephens Inc., Research Division

And is that your expectation for the other 2 as well, that utilization kind of continues where it was but pricing comes down?

Joshua E. Comstock

Yes, definitely. One of the other 2 is actually picked up a rig. So that would help utilization but the other one was historically has used it for a full month and up until recently and we expect them to use them for full month utilization.

Michael R. Marino - Stephens Inc., Research Division

Okay. And then also on the contracting side, does that -- if my notes are correct here, that leaves one of your larger crews still on contract into early next year on the old kind of legacy contracts, the take-or-pay?

Randall C. McMullen

Yes, that's correct, Michael. The fleet that we have in West Texas is still contracted under a take-or-pay construct through the first quarter of '14.

Michael R. Marino - Stephens Inc., Research Division

Is that likely to remain contracted through the rest of -- until early '14 or are there parts of it?

Randall C. McMullen

That's our expectation.

Operator

Our next question comes from the line of Ben Swomley with Morgan Stanley.

Benjamin Swomley - Morgan Stanley, Research Division

So you're posting margins approximately in line with some of your larger competitors. But some of the larger competitors are pointing towards their margins heading higher from here, whereas it seems like you're pointing to a highly competitive environment, potentially a little bit more pressure before things get better. Can you just help me understand, what are the differences in the business models that might explain the divergence. I mean, is this a logistical issue? Are there some economies of scale that are emerging for some of the larger competitors or do you think this is a temporary issue where some larger competitors perhaps undertook like a land grab or something and locked up some work agreements and that this could reverse?

Joshua E. Comstock

Yes. I mean, it's hard to tell what the large competitors have done. I will say that as guys begin, the larger ones, begin to see -- began to see margin erosion last year, way, way before we actually did, and my guess is they reacted and reacted strongly. And so right now, obviously, each one of those guys, one of them had a guar issue that they worked through and so they got some margin there. We'll see what their margins do going forward. But for us, it's just the fact that we've been contracted with all of our fleets, which everyone knew this was coming, but we've been contracting with all of our fleets. It's hard for us to go out and sell in the spot market when you have most of your work locked up. And so we were fortunate, more fortunate than others, that we had these contracts and they lasted end of this year and one of them into next. And so the reason we're talking about margin compression is as those roll off, obviously, they're going to be repriced lower. But the other instances that -- as those roll off, if they're not renewed -- which we've already said 2 of them have already been -- we're targeting those customers that we can get the high utilization up. As we increase our utilization, hopefully, we'll do that through the second and third quarter. The efforts that we're taking now will hopefully show up as we increase that utilization and we can get margin improvement. The other thing we're doing now is we have taken several measures internally on cost controls that will help also.

Benjamin Swomley - Morgan Stanley, Research Division

So I guess, I mean that largely makes sense, but the one point you had on cost structure differences, especially with the guar issues, I mean at this point you're more or less at the same margins and the cost differences have sort of resolved themselves. And yet you're diverging. So what's the -- I mean, I guess, if you fast forward 6 months, do you see you approaching -- moving higher as well? Or do you see the rest of the industry, I guess, or some of the larger competitors coming back down towards this level or how do you see things evolving?

Joshua E. Comstock

I mean, 6 months from now, hopefully we'll have -- well, it depends on these contracts that roll off, right? But I mean, if we can get utilization up and cost down then we can get margin up. I don't know what the big guys are going to do as far as margin and it's hard to specifically look at those guys when they don't break out pressure pumping -- they're hydraulic fracturing with regard to the other pressure pumping than some of the other services. So it's all lumped in. So our coiled tubing and our wireline services are performing strong. You just don't know what -- where their margin is actually specifically coming from other than what they tell you.

Benjamin Swomley - Morgan Stanley, Research Division

So then in the instance with the customer that you were able to win back, the one that went and worked for a larger competitor for 30 days. When you won the customer back, did you have to match on price or, I guess, what were the new terms of the work there?

Joshua E. Comstock

We didn't have to match on price, but we had to get price down.

Operator

Our next question comes from the line of Ryan Fitzgibbon with Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Josh, can I start off first on the new product offering that you're trying to work on in-house, the R&D side of the business. Can you touch on of a bit more on what's furthest along in the process and if there's something we can expect to come to the market maybe in the back half of this year?

Joshua E. Comstock

Well, as I said earlier, for competitive reasons, we prefer not to disclose that. I will tell you that there are services that we are working on, 3 that I mentioned were directional drilling technology, through tubing completion tools and then drilling and completion fluids. On the through tubing side, on our coiled tubing, we've started a motor division, that's probably not a secret in the market and we've just recently started that and we're starting to see some revenue there. So back half of the year, that could increase, some of these other items we're working on, we just prefer not to talk about, but to your question as far as, can we see some benefit late in the year, possibly. We could see some benefit.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Thanks. Randy, couple of quick modeling questions for you. What were frac EBITDA margins in the quarter?

Randall C. McMullen

Well, we don't disclose the frac independently, but what we do disclose is what we refer to as stimulation and well intervention, which includes both frac and CT. EBITDA margins for that -- for those 2 lines was a combined 25.7%. And again, that excludes -- this question was asked last quarter, that excludes corporate overhead.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Got it. And then percent of revenues that came from the spot market and the percent of horsepower on the spot market?

Randall C. McMullen

Percent of revenues from the spot was approximately 35% and approximately 45% of our horsepower was in the spot during the quarter.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Got it. And then with spot horsepower, I mean the way I'm looking at it for what's rolled over, your spot exposure should be relatively flat, Q2 versus Q1. I'm assuming revenues as a percent hold fairly similar. Would you expect margins for overall frac to be flat, up or down, sequentially?

Randall C. McMullen

Well, I mean, I will say, and I said this earlier, I mean we did have that 1 contract in place for 1 month during the quarter that will be the full 3 months in the second quarter at the renewed pricing. So that particular fleet will experience lower utilization due to the repricing. And because of that and the fact that we did see the lower utilization in the back half of the quarter and that, at least currently continuing into the second quarter, we would expect margins to be down for the frac division.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Got it. And then last one for me on the coil side of the business. How many units were delivered in Q1 and what's the delivery guidance for the rest of the year?

Joshua E. Comstock

Right now, we have received 2 of the coil units and we expect to receive the additional 4 over the next couple of months. I would guess with the ramp-up period associated with building the business around a new unit, we'll start to see the benefit of those in the latter half of the year. The first 2 units that we received, we received one in the middle of the quarter and the second at the very end of the quarter.

Operator

Our next question comes from the line of John Daniel with Simmons & Company.

John M. Daniel - Simmons & Company International, Research Division

Josh, any chance you could tell us what color the large-cap service provider was that you displaced?

Joshua E. Comstock

No, that's not -- that's probably not the right thing to do.

Operator

Our next question comes from the line of Matt Conlan with Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

I just wanted to follow up on the guar. Now the guar prices have come back down to earth, has it incentivize customers to pursue more gel-based frac jobs instead of slickwater jobs?

Joshua E. Comstock

We've not seen that. We've expected that, Matt, but we've not seen that to date. And I just think it's a fact that a lot of these guys just got comfortable pumping slickwater in and -- or just still doing that. We've not seen -- we've not seen any one that made a big switch from cross-linked to slick to go back to cross-linked. But that said, we have had customers tell us, specifically one large one recently, that if gel got down a few more dollars a gallon that they would probably move to cross link.

Operator

I would now like to turn the call back over to management for closing remarks.

Joshua E. Comstock

All right. We appreciate everyone joining us today. We'll talk to you in about 3 months.

Operator

Ladies and gentlemen, this concludes the conference call. This conference will be available for replay after noon Eastern today, through May 9, 2013, at midnight Eastern. You may access the replay system at anytime by dialing 1 (303) 590-3030 and entering the access code of 4614932. Thank you for your participation. You may now disconnect.

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C&J Energy (CJES): Q1 EPS of $0.46 misses by $0.09. Revenue of $276.1M misses by $12.21M. (PR)