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Pioneer Energy Services Corp (NYSE:PES)

Q2 2013 Earnings Call

July 30, 2013 11:00 AM ET

Executives

Anne Pearson - Dennard - Lascar

Stacy Locke - President and CEO

Lorne Phillips - EVP and CFO

Analysts

John Keller - Stephens

Jason Wrangler - Wunderlich Securities

Emmett Wright

Michael Cerasoli - Goldman Sachs

Travis Bartlett - Simmons & Company

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Pioneer Energy Services Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Tuesday, July 30, 2013.

I would now like to turn the conference over to our host, Ms. Anne Pearson of Dennard - Lascar. Please go ahead ma'am.

Anne Pearson

Thank you and good morning everyone. Before I turn the call over to Pioneer CEO, Stacy Locke, and CFO, Lorne Phillips, for their formal remarks, I have a few of the usual items I need to cover.

First of all, a replay of today’s call will be available and is accessible via webcast by going to the Investor Relations section of Pioneer’s website, and also by telephone replay. You can find the replay information for both in this morning’s earnings news release. As a reminder, information reported on this call speaks only as of today, July 30, 2013. So any time-sensitive information may no longer be accurate at the time of a replay.

Management may make forward-looking statements today that are based on their beliefs and assumptions and information currently available to them. Although they think the expectations reflected in these statements are reasonable, they can give no assurance they’ll prove to be correct. They are subject to certain risks and uncertainties and assumptions described in this morning’s new release and also in recent public filings with the SEC. If one or more of these risks materialize or should underlying assumptions prove to be incorrect, actual results may differ materially. Also, please note that this conference call may contain references to non-GAAP measures. You’ll find a reconciliation to the GAAP measures in this morning’s news release.

Now, I’d like to turn the call over to Stacy Locke, Pioneer’s President and CEO. Stacy?

Stacy Locke

Thank you Anne and good morning everybody. Joining here in San Antonio this morning is Red West, President of our Drilling Services segment; Joe Eustace, President of our Production Services segment; and Lorne Phillips, our Chief Financial Officer.

As you can see from this morning’s press release, we have decided to take a $45 million impairment charge on our Go Coil acquisition from December 2011. As we previously talked about, operations in our coil tubing business are improving, just too slowly, to support the $110 million purchase price paid. I would actually say that today I am more optimistic about coil tubing prospects than I have been at any time over the past year.

We have made many personnel changes, equipment changes, process improvements, and are building a solid base of clients here over time, and we are absolutely committed to the coil tubing business over the long term and firmly believe that it will be a profitable business as our well service and our wireline businesses have been.

Now taking a look at the quarter, excluding the coil tubing write off, we had a very nice second quarter. Revenues were up 8% overall, particularly from our production service segment which was up 14% and EBITDA also improved by 14% during the quarter to $64 million. So overall a very nice quarter.

In addition we held the line on expenses and capital expenditures and were able to begin paying down on our debt as we talked about for a number of quarters now. We paid $10 million down during the quarter and another $10 million in July. So we are very pleased about that.

Looking at our diluted earnings per share, without the write off we would have been $0.2 for the quarter. Looking into our drilling services segment, overall the segment performed very well in the quarter. Utilization continued to be a surprise at the high end at 87%, despite losing three of the earning, but not working rigs in west Texas from the utilization at the end of the quarter in June.

Our margin as well, at 88.41 was considerably higher than we had anticipated. A lot of that is somewhat artificial in that it was onetime benefits like the contribution from the earnings, but not working. I think we underestimated their contribution during the quarter. And then we had fuel reimbursement and some other onetime thing. So we will adjust that down accordingly as we go forward here.

Overall the rig fleet performed very, very well. We’re running less than 2% downtime fleet wide and that’s including downtime on the many top drives that we have on these rigs. That is extremely good performance. Most of the new-build rigs are running less than half of 1% downtime, so they are just doing exceptionally well and there are also performing pad drilling moves exceptionally well.

Release to spud on these pad moves is generally less than 12 hours for across the board and many under 12 hours. That's release, nipple up, test and go back and they work on the next call, so really outstanding performance.

Equally as good are the 7500 PSI fluid in mud systems we put on, matched up with the 2000 horsepower mud pump packages that we have on eight of the 10 rigs, six of those in the Bakken, one in Utah and one in Eagle Ford and these systems have really given us a competitive advantage. We've now drilled along this lateral so far in Utah and we've drilled some of the record lateral wells in the Bakken, one a little over 15,000 foot lateral.

These mud pump packages and mud systems, with our program the operators can run a continuous pressure at 5000 PSI and greater, which is what allows for this good penetration rate out in these long laterals, and it just gives us really a competitive advantage for these new AC rigs.

We have quite a bit of good comparative performance data in many of the areas that we operate in and our engineering staff looks at that, and I would say that we consistently perform in the areas where we work in, at the top of the pack and that's not just our AC joystick rigs but our SER rigs and some of our top drawer mechanical rigs as well. So we're really pleased with how everything is running on the drilling side.

When you look at utilization, the few pockets of issues that we have, we've talked about in the past, East Texas is hit or miss, currently it's pretty dead, West Texas has become a little softer on the vertical side, the vertical drilling for oil but we have put three rigs back to work since our last conference call. We’re running 78% utilization there, but it is a little pocket of weakness.

The other pocket of weakness is with our 60 series style rig which is the 1000 horsepower trailer managed rig that we originally built for the Barnett shale when they were drilling 3000 to 4000 foot laterals and you went to base them early on and basically the depth and lease the laterals are just outgrowing these rigs' capability.

Now we have a total of nine of them, two were down in Utah, one other one will be going down in Utah and then we had one go down in East Texas, but we still have five more that are working and I would say it's a challenge keeping those 60 series rigs busy.

South Texas is another area where we're not really at a 100% utilization but we average anywhere from 75% to 100% just depending on the timing, but generally those things stay pretty busy too. And in Columbia we were 92% utilized in the quarter. That was mostly just waiting on location otherwise we would have been a 100% utilized, had another very strong quarter of margins, drilling margin per day and so Columbia continues to be a bright spot for us.

Also, kind of at the request of some of our clients, we continue to upgrade some of these rigs. Currently we're adding walking systems to four of our SER rigs, one we've already done and put out in the field. We got another one in process that will move out here shortly and then we've got a third one that will go into the Eagle Ford, and then we're beginning a walking system on our rig in the Bakken.

So that's a total of four that we will do this year. With the walking system, we usually put a, well we do put a festooned system on it to keep it cabling nice and neat and track along as the rig walks and BOP and line equipment. And in exchange for coming out of pocket for these costs, we usually get an improvement on the day rate and some form of termed to help offset the cost.

But the rigs are performing well. The clients want to continue using us, using the SER rig as opposed to picking up an AC rig that already has a walking system and so we feel like that these will keep these rigs very competitive for a long time to come.

Turning now to the production services segment, going by our three core business, well service toward a 109 rigs, very solid performance, 92% utilization in the quarter, over $600 an hour. Margins are very firm, generally have anywhere from six to 12 rigs on 24 hour work, which really amounts to about a fifth of our working hours.

Revenue and EBITDA were both up in the quarter. Wireline 118 units. We still have two skid units coming for offshore that we ordered at the end of last year. We’ve made some modifications to those and so they've been delayed a little bit, but they're coming pretty soon now.

There the activity levels have been good, pricing has been firm, margins have been basically firm with a slight downward bias. That's mostly due to just a few areas that are not performing as well as some of the other ones. But having said that, revenue and EBITDA were both up in the quarter. Coil tubing, that really already addressed by 13 units, profitability is slowly improving and we are absolutely seeing some bright spots for the future there in coil tubing.

Now let me turn the call over to Lorne to give you a financial recap.

Lorne Phillips

Thanks Stacy, Stacy already went over the EBITDA, EPS, and the impairment. So I'll start by talking about drilling services where the revenue was up 4% from the prior quarter to $138.3 million. Again based on the strong utilization of 87% and inclusive benefit of all our new build rigs working for the entire quarter.

Margin per day was 8,841, up from 8,258 in the prior quarter. The increase was driven the strong utilization, more efficient operations from the new build rigs, revenue from the earning not working rigs of 1.8 million, fuel reimbursement we negotiated in Colombia and a $0.8 million gain from the sale of two rigs.

In Colombia all eight rigs worked during the quarter, although one of the rigs generated revenue for only one month as planned. And the revenue in Colombia was $30.6 million during the quarter which included the fuel reimbursement.

As we’ve mentioned in the last call, we sold two mechanical rigs during the quarter which leaves our count at 70 drilling riggings. Currently 60 of our 70 drilling rigs are generating revenue including 43 under term contracts. One of those rigs is earning but not working.

During the quarter, the revenue from rigs earnings but not working totaled 4.8 million and we expect that number to be down to approximately 800,000 in the third quarter. Of the 37 rigs working on term contracts in the U.S., six are up for renewal this quarter, nine in the fourth quarter, 10 in the first quarter of 2015 and 12 expire beyond that point.

The percentage of the total Company’s gross margin from non-top drive mechanical rigs in the second quarter was approximately 11% and if you include all mechanical rigs in the fleet, that number is approximately 15% of the total Company’s gross margin.

Turning now to production services, the revenue increased 14% to $110.1 million, due primarily to the seasonal benefit we typically experience in late spring. Gross margin for production services was $39.8 million, which is up 10% versus the first quarter.

Margin as a percentage of revenue dipped slightly to 36.2% from 37.4% in the prior quarter. As Stacy mentioned, this is due to some modest activity and related pricing pressure in certain markets and also some slight inflation in labor cost in some of our businesses as result of the higher activity levels.

Our utilization for well servicing increased to 92% from 89% in the prior quarter. Utilization of our coil tubing units was 46% compared to 41% in the prior quarter and 61% in the year earlier quarter. The average rate per hour for well servicing was 606, up from 596 in the prior quarter while pricing for both wireline and coil tubing was flat or slightly down.

Looking at our company wide expense trends for the second quarter, interest expense was $12.3 million and increase of approximately $900,000. Capitalized interest was less than $100,000, compared with about $800,000 in the first quarter. Interest expense is expected to be flat for the third quarter.

General and administrative expense was $23.8 million in the second quarter and we expect G&A to be in the $24 million range again in the third quarter. Depreciation and amortization was $47.3 million, up approximately $1 million sequentially as a result of the recent fleet additions. We expect third quarter depreciation to be around $48 million.

Our effective tax rate for the quarter is 36.6%, and excluding the impact of currency gains or losses we continue to expect a tax rate of 38% to 40%. Looking now at our balance sheet, we had cash and cash equivalence of $17.6 million at June 30th and a $130 million outstanding under our revolving credit facility.

We paid down an additional $10 million in July. So our current outstanding balance on the revolver is $120 million. With our capital spending requirements declining significantly, we expect to continue paying down the revolver in the second half of the year. CapEx spending in the second quarter was $41 million, down from $71 million in the first quarter. Our full year estimate of CapEx pending remains $140 million to $160 million.

And with that I’ll turn back over Stacy.

Stacy Locke

Thank you, Lorne. As we look out over the rest of this year, I would say that we see a fairly good market ahead of us. I say we still hold out hope that we’ll see capital budgets turned upwards a little bit towards the end of the year. Hopefully that will impact rig count a little bit that we’ll have to wait and see but we’re cautiously optimistic there.

When you look at our business specifically, first looking at our drilling, we do know we’ve got some rigs coming down. As I already mentioned two more of the 60 series rigs, we have two down now, so two more coming down that will be four of the nine.

We think we have another rig in West Texas possibly coming down; our East Texas units are down now. So with that in mind understanding that these are kind of our lower end units and therefore lower margin contribution units, we are going to revise our guidance on utilization downward to 78% to 82% for the drilling segment.

Margin, I would say we're looking at it being flattish, but that's after adjusting for about $1,000 a day in these one-time related expenses that Lorne detailed a second ago. So we're bringing our guidance down to margins of 7,600 to 8,000 a day, which are more or less the guidance that we originally had for the second quarter before these one-time expenses and for recognizing that the earning but not working rigs were contributing more than we thought.

Turning to the production services business, the outlook looks good. Our June quarter as we reviewed was good and particularly good for the environment we're in. We expect well servicing to continue to be solid, wireline to continue to be solid, coil tubing flat to improving and therefore we're going to guide the overall production service business revenue and margins roughly flat with maybe a little risk on margins to the downside but not much.

So with that I will conclude the remarks and open to questions at this time. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of John Keller with Stephens. Please go ahead sir.

John Keller - Stephens

Stacy, you had talked about I think on last quarter's call about seeing some pockets of opportunity or at least maybe some firming of pricing in the land rig business. Just if you could give us an update on what you are seeing out there sort of real time on a spot basis? Obviously you are bidding all these contract rules into the market I presume, and just kind of directionally and qualitatively what's going on with day rates out there?

Stacy Locke

Well it varies a little bit by region, but I would say that the AC joystick rigs that are coming off term, there is quite a bit of variability quite honestly. For us, I would say that we're seeing those rigs kind of come in the 20, 23 to 25 range on reprising. I have heard of others offering up the AC joystick rigs quite a bit lower than that, just because they have got ongoing build programs.

But we've been able to hold our rates well there, and then you look at your FCR rigs; I would say that when you look across the regions including the Eagle Ford, I would say those range from 20,000 to 23,000 a day for the FCR rigs. I would day the mechanical rigs with top drives are probably in the 17 to 19 range, and the mechanical rigs without top drives probably in the 14 to 16 range, more or less.

So that's kind of where we are. I would say that the day rates are I would say pretty firm. It's fairly competitive in certain markets on the high end rigs just because of competitors continuing to rollout new builds. They have got to do something with them and they have a number of ACE new builds that are op-term contracts, they have got to put it in the market as well. So we're seeing some activity there, that's putting a little pressure on rates. But so far we've faired very well.

John Keller - Stephens

Got it. And then just to turn into your outlook a little bit. It sounds like you are cautiously optimistic about maybe some rig counts improving in the back half of the year and as we enter 2014. But assuming, I guess you noted in the press release four to five rigs that you don't expect to renew here in the third quarter, I guess that would take you to about 54 or 55 active rigs, something in that range. I mean do you think that is kind of the bottom or is there further downside risk to that, as you kind of sit here today.

Stacy Locke

I think that's the bottom from what we see. Everything else is vibrant and busy, if things are going to come down, we certainly don't see them at this point at all. So I think that's kind of the bottom for us. And some of that can be improved, as we move towards the winter if gas prices firm up, because a number of those are kind of gas related as well. So if gas strengthens a little bit, we may be able to do better than that. But, I would say that’s kind of flow.

Operator

Our next question comes from the line of Jason Wrangler with Wunderlich Securities. Please go ahead.

Jason Wrangler - Wunderlich Securities

Just curious, in Columbia, what you’re seeing obviously been great for the last couple of quarters. As we get in the third and fourth, do you see the performance continuing as the historic has been?

Stacy Locke

As far as we know, it will continue and continue on into 2014. It’s going very well. We’re doing good business where the rates are at a very acceptable level. We expect the contracts to be renewed going into 2014, possibly for longer term again. So, best we could tell that outlook is positive.

Jason Wrangler - Wunderlich Securities

Great, and then just on the coil tubing side, with the struggles you guys have had, could you maybe just elaborate or maybe talk about is there thoughts of moving some units around or what’s the plan of trying this utilization higher in the tough market that we’re in?

Stacy Locke

Well, I would say our safest area for that business has been Louisiana onshore and offshore. And all but six units are over there. And the utilization has been pretty steady there. Four of those are in the offshore maintenance market and those rates are little lower. But overall those markets have been pretty firm.

Where we’ve been hurt has been in lower utilization in Oklahoma and the Eagle Ford and we are evaluating exactly what you’re pointing out there. We see opportunity to reduce cost and focus on areas with the greatest upside and that’s what we’re doing. So we’re definitely taking action on many fronts there and that’s why I am optimistic about what we see over the next four quarters.

Operator

(Operator Instructions). Our next question comes from the line of Emmett Wright. Please go ahead sir.

Emmett Wright

Year-to-date you spent about $112 million. Now you’ve projected $140 million to $160 million in CapEx. Can you describe the type of assets that you may be acquiring with the $30 million to $50 million remaining CapEx for the year?

Lorne Phillips

Mostly going to be retained in maintenance. So as you look forward, I mean, Stacy did mentioned, we’re putting some walking systems on. So include some of that. We have some, a little bit of payments left on the wireline skid units but that’s not really consequential. And then the majority will just be routine in maintenances. We’ve taken delivery of all of our units. And so I would say walking systems, the upgrade items as Stacy mentioned and routine maintenance are the primary use of funds for the rest of the year.

Emmett Wright

And looking back on a year-to-date basis, on the roughly $112 million you’ve spent, can you likewise break that out by maintenance?

Lorne Phillips

We spent $32 million on routine and maintenance year-to-date and approximately $41 million on the new builds, on the drilling rig new builds and then another probably $4 million on production service items, fleet additions and then the remainder would be items such as facilities, some other walking systems that have been installed, some higher horsepower pumps, some wireline tools, items like that, catwalks.

Emmett Wright

And at this point in time looking into 2014, have you offered a CapEx budget and if so, how fluid is that?

Lorne Phillips

We have not presented a CapEx budget for 2014. It is fluid at this time. But, a primary focus that we’ve set for some time now is to make sure that we’re able to be in a position to continue paying down our revolver and deal with reducing our total debt in 2014. So, when you look to that land, it obviously impacts how we look at CapEx spending in ’14.

Stacy Locke

The new build rig expenditures that we had in the first quarter, so that won’t be there.

Emmett Wright

And in conclusion, what does the ideal capital structure look like for you on a longer term basis?

Lorne Phillips

We’ve talked about targeting in two times total debt to EBITDA or less and we’ve talked about wanting to get our total debt down to a $250 million to $300 million level in total and we feel like we can achieve that in time. It would be a 2014 event. That’s what we’ve talked about.

Operator

Our next question comes from the line of Michael Cerasoli with Goldman Sachs. Please go ahead sir.

Michael Cerasoli - Goldman Sachs

Let me ask that CapEx question just a different way. It seems like your first half run rate for a routine and maintenance is around $15 million. It seems like the back half for the year you’ll be somewhere along those lines. So if you just kind of think about that in 2014 terms, is a good base for CapEx around $60 million and then kind of on that, we’re not sure exactly what the growth CapEx will look like is that a good base for just a routine and maintenance portion of 2014.

Lorne Phillips

Michael I think, I would use $65 million to $75 million for routine and maintenance but it maybe a little bit high on the $75 million side. Obviously it’s activity dependent. So if utilization dropped off, it would come down a little bit but I think that number should be fine. I think also you may have some additional walking systems that you need add or some catwalks but wouldn’t be many. So, I don’t know, it would be little bit more than the $65 million to $75 million at this point but that's about what I could say right now, routine and maintenance, $65 million to $75 million, we have some on related to some of that other equipment I was just talking about and you'd also have probably some wireline tools and things but those are not much. So it will be a reduced number.

Michael Cerasoli - Goldman Sachs

That’s very helpful and just real quick on the drilling your new build area. Remember, you guys talked about overtime they would become more efficient and the earnings power of those 10 new builds would grow et cetera. But from what it sounds like, you got some very low down time on those rigs. So does that statement still hold up and kind of just thinking maybe orders of in magnitude or just exactly how much kind of efficiency you can still extract out of those rigs and maybe if you can explain how you will get those efficiencies it might be helpful too.

Stacy Locke

They’re already performing well now. What we were really referring to it when those rigs first come out, their cost run higher in the first two to four, five months somewhere in there. They is just a higher level of expense associated with them when they first come out. Now that was more so on the earlier rigs and the later rigs that were brought out but I say they’re pretty lined out already right now doing well.

Operator

(Operator Instructions). Our next question comes from the line of Travis Bartlett with Simmons & Company. Please go ahead sir.

Travis Bartlett - Simmons & Company

Couple of quick one's for you, just wanted to get the update on well servicing. It seems like pricing is been pretty firm for the past couple of quarters. Do you have any expectations for pricing increases going forward and if not what do you think it takes to the next step higher here.

Stacy Locke

Well, it’s hard to say, it depends on, if activity levels pick up a little bit definitely if there is opportunity for some pricing improvement there but I would say that in the market we’re seeing right now, we’re looking fairly flattish I would say. Maybe a slight upward bias that we really need activity levels to increase little more reach out for that to really strengthen.

Travis Bartlett - Simmons & Company

And then second one here when you think about the guidance where production services and the flat to down margins there quarter-over-quarter, what’s driving that possible down ticking margin sequentially. Is that from wire line thinking about Q3 margins?

It’s primarily from wireline, we just have a few pockets there that are weak and we’re just trying to see how those will maybe improve over the going forward here but right now they’re kind of weak. Some of that is gas related. In some cases its customer related where we had a big customer doing lot of the work and they’re doing some different now. But we just put that in there. It’s a possibility it could go down slightly.

Operator

Mr. Locke. There are no further questions in the queue at this time. Please continue with your closing remarks.

Stacy Locke

Okay. That concludes the second quarter call and we appreciate everybody’s participation. Thank you.

Operator

Ladies and gentlemen. This concludes the Pioneer Energy Services Second Quarter Earnings Conference Call. If you would like to listen to our replay of today’s conference, the information was included in today’s press release. ACT would like to thank you for your participation. You may now disconnect.

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