Forbes Energy Services Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: Forbes Energy (FES)

Forbes Energy Services (NASDAQ:FES)

Q2 2013 Earnings Call

August 09, 2013 10:00 am ET

Executives

Casey Stegman

John E. Crisp - Chairman, Chief Executive Officer, President, Chairman of Forbes Holding Company, Chief Executive Officer of Forbes Holding Company and President of Forbes Holding Company

L. Melvin Cooper - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Assistant Secretary

Analysts

Marco Rodriguez - Stonegate Securities Inc., Research Division

Colin Wilson-Murphy

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Operator

Good day, ladies and gentlemen, and welcome to Forbes Energy Services Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Casey Stegman, Investor Relations. Please proceed.

Casey Stegman

Thank you, and good morning. Welcome to Forbes Energy Services earnings call for the second quarter of 2013. We appreciate you joining us today. With me on the call is Mr. John Crisp, Chief Executive Officer; and Mel Cooper, Chief Financial Officer.

The purpose of today's call is to review the company's financial results for the quarter, as well as provide you with some additional color on the business. Following our opening remarks, the operator will provide instructions regarding Q&A.

During today's call, management will discuss adjusted EBITDA, which is a non-GAAP financial measure. Please refer to this morning's press release and the company's website for disclosures about these measures for a reconciliation to the most directly comparable GAAP financial measure.

As a result of this conference call, Forbes Energy management may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally and may materially differ from actual future results involving any one or more such events.

Forbes Energy undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see the company's filings with the SEC.

Our format for today begins with general comments provided by Mr. Crisp followed by financial details from Mr. Cooper. We'll return to Mr. Crisp for closing comments and end with Q&A for participants.

Now I'd like to introduce John Crisp, CEO of Forbes Energy Services. John?

John E. Crisp

Thank you, Casey. Good morning. Thank you for joining us this morning.

To summarize the second quarter, utilizations sparked by drilling programs that finally shifted into high gear. The effects of our cost management has helped generate $20 million in EBITDA for Q2. That's a 15% increase over the quarter.

We had about 8% increase in rig hours. We ended up with 107,000 rig hours offset by a decrease in trucking hours -- of 307,000 truck hours. This speaks to the nature of the transportation industry in a healthy market. It's a low barrier to entry, creates more competition and discount rates.

Our fluid management revenues decreased nearly 5% over the quarter to approximately $49 million, while gross margin rose 2.4% of revenues to $14.6 million, which is partially was related to the benefits of our past CapEx, as well as cost control measures I mentioned.

Our Well Servicing segment contributed slightly more revenue than the Fluid Logistics, topping out at about $56.6 million and gross margins of $12.1 million, a little more than 22% of revenues. We had a progressive increase through the quarter in our coiled tubing rig utilization, which helped round out Well Servicing numbers.

Overall, we're encouraged by the improvements from Q1 to Q2, much of the correction is simply in utilization. We see these improvements as a sign of not only stability, but also the general health of the industry.

With that, I'll turn it over to Mel to outline the financial results.

L. Melvin Cooper

Thank you, John. Good morning, everyone. I'm going to take you through our financial results for the quarter ended June 30, 2013, as compared to the prior quarter ended March 31, 2013. For year-over-year comparisons, please refer to the tables in yesterday's press release.

Consolidated revenues of $103.7 million in the second quarter of 2013 was a 2% increase compared to consolidated revenues of $101.7 million in the first quarter of 2013. And our gross margins increased to $26.7 million or 25.8% of revenues in Q2 2013 from $24.1 million or 23.6% of revenues in the first quarter of 2013.

Our Well Servicing segment revenues increased 9% to 55 -- or approximately $55 million in the second quarter as compared to revenues of approximately $50 million in the first quarter. This increase resulted from an 8% increase in rig hours between the quarters, as well as a positive impact from our coiled tubing services.

In terms of dollars, Well Servicing expenses increased to approximately $42 million from $40 million in the prior quarter. As a percentage of revenues, Well Servicing expenses amounted to approximately 78% in the current quarter and approximately 80% of revenues in the prior quarter.

As a result, gross margin in the Well Servicing segment increased to $12 million or 22.2% of revenues during the second quarter as compared to $9.8 million or approximately 20% of revenues in the first quarter of 2013. The increase in gross margin resulted from a small increase in our composite Well Service rates, decreased repair and maintenance costs and contributions from our coiled tubing services.

During the second quarter, revenues in our Fluid Logistics segment decreased to approximately $49 million as compared to approximately $51.6 million in the first quarter of 2013. This was consistent with the decrease in trucking hours from approximately 324,000 in the first quarter to approximately 308,000 in the second quarter of 2013.

Operating expenses for Fluid Logistics were approximately $34.4 million or 70% of revenues in this quarter as compared to $37.4 million or 73% of revenues in the prior quarter. This resulted in an improved operating margin in absolute dollars of $14.6 million or 29.8% of revenues for the current quarter as compared to $14 million or 27.4% of revenues in the prior quarter. This increase in margin was primarily attributable to a further reduction in third-party expenses made possible by prior capital expenditures, lower repairs and maintenance costs -- or and lower repairs and maintenance costs.

General and administrative expenses were comparable at $7.6 million for the second quarter as compared to $7.3 million for the prior quarter.

As John mentioned, adjusted EBITDA from U.S. Operations was $20 million in the second quarter of 2013. That's a 15% increase as compared to the $17.4 million we had for the prior quarter.

As we just covered, this was driven by improved performance from our Well Service segment and continued attention to cost management. We generated a net loss from U.S. Operations attributable to common shares of approximately $700,000 or $0.04 per diluted share in the current quarter.

Moving on to liquidity. As of August 6, 2013, our unrestricted cash totaled approximately $32 million. We had no cash borrowings on our revolver and we had approximately $3 million in letters of credit outstanding against the revolver related to our insurance program. This resulted in total available liquidity for the company of approximately $120 million.

As of June 30, 2013, we had $280 million of our 9% senior notes that are due in 2019 and approximately $19 million of other notes payable comprised of equipment notes. Equipment notes were approximately $16 million, plus we had $3 million of insurance notes.

We continue to main our revolving credit facility with Regions Bank led by syndicate of lenders. On July 26, we amended our existing agreement with Regions Bank to increase our credit line from $75 million to $90 million. We also were able to reduce our interest rate and reduce our required financial reporting. Please refer to our 8-K filing for the complete details on the amendment. While this facility remains available for general corporate purposes, including financing capital expenditures, if necessary, we currently intend to use the facility primarily for financial stability in a cyclical industry.

And now I'll turn the call back over to John before we get to your questions.

John E. Crisp

Thank you, Mel. For the majority of the second half of the year, we're expecting consistent flow in terms of customer activity and ultimately, utilization of Forbes, notwithstanding normal seasonal impacts.

The Eagle Ford continues to be the hotspot and we believe we have a fair share of this market. As competition falls off in other areas, there'll be an opportunity to gain additional market share and better pricing.

Our operator's spending, our customers indicate healthy budgets for an extended periods. We believe drilling programs that were at least 2 months behind of reaching the full run rates earlier this year, which means there should be sufficient capital in their budget to continue spending throughout this year end.

Drilling efficiencies may mean fewer rigs, but we don't see this as a downside to spending. In fact, with excess in the budgets, some of these operators might be able to drill additional wells toward the end of the year.

On pricing front, we're seeing some opportunity in our Well Servicing segment for pricing rates. Rate increases are long overdue for our industry. We're seeing healthy oil prices, increasing busy operations and more demand for our services.

In the Well Servicing business, we see no reason to continue to operate under inflated price structures. So we have started to implement a price increase for our Well Servicing business in August. This price increase will take effect during this quarter. We'll probably start seeing the benefit of this price increase in September and we're talking about a significant price increase from the past. We anticipate the pricing for fluid management services will continue to be challenged, though. Until supply starts diminishing, well, we're very optimistic that this will turn around in the next few quarters.

In closing, business is relatively good, and the market is behaving as expected. We'll see how the rest of the year plays out, but overall, we're very positive on long-term potential for Forbes. We see lots of opportunity from our customers in the Permian Basin, also in the Eagle Ford trend. We are basically discounting gas for the rest of the year, but the liquid-rich plays, we think there are plenty of opportunities for Forbes to benefit. Thank you.

Operator, we'll turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Marco Rodriguez with Stonegate Securities.

Marco Rodriguez - Stonegate Securities Inc., Research Division

I was hoping you could talk a little bit more, maybe perhaps provide more color in terms of the industry itself. You seemed to be a bit more enthusiastic about second half results, which is a little bit different than a lot of other competitors in the industry. And wondering if you could provide a little bit more color, a little bit more granularity in regard to what you're kind of attributing this to. Is it the basins you're in or just see more activity, you're taking share? Any sort of additional information would be helpful.

John E. Crisp

Well, I can't speak for the rest of the industry. But at Forbes, we're in 2 great basins. That's Permian Basin, with all the plays going on out there. We're in South Texas, which is the Eagle Ford, and we see lots of opportunity. Our customers we've talked to, they've got CapEx budgets that mean there's lots of opportunities for Forbes. Actually, there should be opportunity for everybody. I don't know what other people were saying, but I know one thing, our Well Servicing business, right now we're above 90% of our rigs are being utilized. We're seeing increased calls. We're also raising rates. So with that being said, we feel like this is going to be a great second half. We're halfway through the third quarter now. Our rate increases for the Well Servicing, we'll basically get some benefit in September but the fourth quarter, we should see full benefit of it. Our coiled tubing services, we're seeing net utilization picking up on that. Pricings are stable. The only challenging piece of our business is our Fluid Logistics. It's challenging. It's a good thing. It looks like it's bottomed out over the last couple of quarters. Utilization's starting to come back. I believe it'll take a couple of more quarters before we have opportunity to see any rate increases in that business. It might be additional quarter, I don't know. But I'm definitely very bullish on the Well Servicing. Over 50% of our Well Servicing rigs now are doing repair and maintenance work on the Eagle Ford wells. This Eagle Ford is a brand-new play, speaking a couple of years old, and we're already having a lots of calls for Well Servicing repair work, and we feel like that's going to continue. So what we consider a perpetual revenue stream or annuity effect on Well Servicing, I believe it's finally started.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it. That's very helpful. And then in terms of the price increases, I believe I heard you say that you're going to be implementing that here in August. Is that correct?

John E. Crisp

We started this month. It'll take us most of the month to get price increases. It'll be in different basins, but it will take effect by September 1. Customer that's under a pricing agreement, it takes a little bit longer, but we believe that we'll be able to get a overall price increase on about 50% of our fleet in the month of August.

Marco Rodriguez - Stonegate Securities Inc., Research Division

And so does this price increase, has this already been discussed with your clients or is this something you're going to start rolling out here now, start talking to them about?

John E. Crisp

We've already started rolling it out.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it. Okay. And can you help kind of quantify what sort of percentage increase we're talking about?

John E. Crisp

I think this first phase of it, we're looking better than a 5% to 6% increase across the board.

Marco Rodriguez - Stonegate Securities Inc., Research Division

And then as we start thinking about the second half of the year, it obviously sounds like you're pretty confident, pretty enthusiastic about things. Can you perhaps just give us a little bit more color on terms of how we should be thinking about utilization levels for both Well Servicing and also Fluid as we progress through the rest of the year?

John E. Crisp

Well Servicing is going to be basically, fully utilized if the market stays where it's at. And we believe we have the fundamentals where the market's going to be at this level, with the repairs and maintenance work. In fact, we are talking about going ahead and ordering a few more rigs and either take delivery of the -- of them during the fourth quarter, first quarter. We're getting their names in line for that. On Fluid Logistics, we're seeing utilization picking up again. Fluid Logistics is still a challenging market on pricing. We won't be adding any Fluid Logistic trucks. We have plenty of supply here. We might be adding some specialized equipment for niches. But we're seeing a pickup in utilization.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it. And then I think I heard you say that you're thinking about adding some more rigs on the Well Servicing side. So are you, by chance, changing your CapEx guidance for fiscal '13?

John E. Crisp

Our CapEx will more than likely be above what we've been forecasting since we're adding a few more rigs.

Operator

Our next question comes from Colin Wilson of Bowery Investment.

Colin Wilson-Murphy

Yes. John, could you just give us a little more color on what you think the full year 2013 CapEx number will be?

John E. Crisp

Colin, I don't know what that number is going to be. It's going to depend on deliveries. Is it going to be anything like last year? Nowhere near it. That's about as close as I can get.

Colin Wilson-Murphy

Okay. So if we just look at your CapEx spend for this quarter though, right, it's a little over $10 million and it seems to me like you still have some more opportunities here in the pipeline to spend. So I'm just wondering if you could give us any, even ballpark goalpost numbers, John, I think it will be very helpful.

John E. Crisp

About the delivery schedules, I can't give you a ballpark. I do know that we will be above last -- our last estimated CapEx.

Colin Wilson-Murphy

Okay, above estimated last CapEx, but I guess from the last guidance, it was just over $20 million, and now is -- it's history. Am I hearing you correctly?

John E. Crisp

What now?

Colin Wilson-Murphy

The last guidance you gave of roughly $20 million in CapEx for fiscal year 2013 is -- does no longer hold water.

John E. Crisp

I think our last guidance on CapEx was around the mid-$23 million to mid-$27 million. It's never been $20 million. That's what our last estimate was. Here's the facts we know. We've got demand for some additional rigs, demand for some specialized equipment. If -- as this stuff materializes, we see as a good fit for capital. We will spend it, but now on those sides of the equation is delivery schedules, will it be delivered in the fourth quarter? Will it be delivered in the first quarter? We don't know that. So what I'm telling the world right now, we will be increasing our CapEx. I wish I could give you closer brackets, but it's not going to be anywhere like it was last year.

Operator

[Operator Instructions] Our next question comes from Evan Templeton of Jefferies.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

I wanted to ask, I guess a similar question but hopefully, maybe you can help us out. Just in terms of the spending without giving that, how many rigs do you think you would order? Understanding that, you don't know what kind of what the delivery schedule might be. You're talking 10 rigs, 20 rigs, 5 rigs? Just ballpark.

John E. Crisp

Right now, Evan, it'd be somewhere less than 10, more than 5.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Okay. That's great. Yes, I think people are just kind of concerned about probably just the overall magnitude, but that's fantastic. And then also just maybe you can talk a little about the pricing increase? That's good to hear. You're starting to get a bit of leverage. From what you've heard out there, I mean, are other people pushing pricing higher as well? Are you kind of following the trend? Or are you guys out in front a little bit on that?

John E. Crisp

It's like same old story. It seems like we'll actually lead it. And we have, over the last week, we have talked to some customers, and they actually have had no pushback on it. They realized they've got a book of business they need to take care of that are looking for good services with basically good equipment, highly qualified employees. And to maintain that, we have to have more rate. And it's been accepted so far. It's early in the stage but we're going to continue to roll it out.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Great. And then just one final question. Just on the -- I think you mentioned the coiled tubing, utilization had improved. Can you give us an idea of just what that was during the second quarter versus first quarter? Or just how much those did work?

John E. Crisp

This second quarter, it's hard to keep up. We're ramping up with folks and everything else. If I had to ballpark it, Evan, I'd say second quarter had about 50% utilization.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Okay. And what would you say it was in 1Q?

John E. Crisp

It was probably a little less than that.

Operator

At this time, I'm not showing any other questions in the queue. I'd like to turn it back over to John Crisp for closing comments.

John E. Crisp

I appreciate everybody's time this morning. We're very bullish on the next couple of quarters in the future. I know there's lots of mixed messages out there on the state of the industry, but I can comment that in the Eagle Ford and in the Permian, where we operate lots of equipment, that's our 2 largest markets, probably 2 greatest markets as far as I'm concerned in the whole U.S., we're seeing very bullish comments from our customers. There's niches that's going to be challenging. But overall, like I mentioned at the beginning of the year, I still feel like the fourth quarter's going to be the strongest quarter for Forbes and the industry in 2013. I appreciate your support. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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