Forbes Energy Services Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 8.13 | About: Forbes Energy (FES)

Forbes Energy Services (NASDAQ:FES)

Q3 2013 Earnings Call

November 08, 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

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

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Evan Richert - Sidoti & Company, LLC

Marco Rodriguez - Stonegate Securities Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Forbes Energy Services Q3 2013 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Casey Stegman of Investor Relations. Please go ahead.

Casey Stegman

Good morning and welcome to the Forbes Energy Services earnings call for third quarter of 2013. We appreciate you joining us. With me on today's 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 opening remarks, the operator will provide you with instructions regarding Q&A.

During today's call, management will discuss net income and adjusted EBITDA from U.S. operations, 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 and for a reconciliation of this measure 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 statements. 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.

With that, I'd like to introduce John Crisp, Chief Executive Officer of Forbes Energy. John?

John E. Crisp

Thank you, Casey. Good morning, everyone. Thank you for joining with us. After my remarks this morning, I'll turn the call over to our CFO, Mel Cooper. He will provide the financial details, and then we'll open it up for questions.

We had three primary forces that impacted our business this past quarter: pricing, utilization and operating expense. Well Servicing segment revenues improved over the quarter as utilization of both our coiled tubing units and our conventional Well Servicing rigs rose. And the rig rate increase took effect. The gain in revenues were just slightly offset by increase in wages that was implemented before the higher rates could be realized. Moving into 2014, the potential exists to continue to improve EBITDA of our Well Servicing.

Our Fluid Logistics and Management segment, we believe it's bottomed out, but apparently it wasn't. Similar to other providers in this market segment, our Fluid Logistics business has been stressed by excess equipment in the market and severely discounted pricing. Last quarter, we saw smaller fluid transportation companies exiting the Eagle Ford, which represented -- which represents a large percentage of our Fluid Management business at Eagle Ford. This observation led us to believe that the competitive pressures would subside as supply equipment was balanced out. This didn't happen. In fact, there were a few new companies moved out. Two companies moved out and few other ones moved back in, so the net effect was greater pricing pressure, particularly in the rail services but also on our hourly truck rates.

We believe the market is near, if not already, at the bottom. Moving forward, we're focusing on restructuring our supply chain, our infrastructure to achieve efficiencies, substantial cost reductions in our Fluid Logistics business.

We don't anticipate in any rate increases in the business segment until the fundamentals change on the supply side.

On a more positive note, our customers have indicated generous budgets for 2014. Certain major customers are abandoning international assets to focus more on U.S. shale and ore. And other customers indicate increasing spend in primary ore operate market next year. Through the year end, we expect the Well Servicing utilization to be flat, potentially improving earlier next year, and the Fluid Logistics and Rental business remain challenged.

To give you more insight on the state of Fluid Logistics, as I mentioned, there were three factors that had the greatest impact on our business: pricing, utilization and operating expense. The pricing pressure is somewhat we've had to deal with all year in the Fluid Logistics business. At some point, we have to draw a line and decide whether to meet the market price or run risk of losing utilization in the market. There are thousands of frac tanks and rail tanks in circulation, driving rates down 50% to 60%. We have had to discount our rates to sustain utilization in this market and continue the rail business. We're hoping that some of the basins that we haven't quite -- that haven't quite hit tired [ph] here yet on the outskirts of the Permian and Eaglebine in East Texas to ramp up and cause a shift in supply and take the burden off the Eagle Ford supply chain. Until we have -- until then, we have to continue to cut costs and be more efficient in running our business.

In the Well Servicing segment, utilization has risen, and we have been able to achieve the rate increases as we mentioned last quarter. Well abandonment stays fairly flat, but it's been a good revenue generator. And our coiled tubing business is fully engaged now with 5 total units and most replaced with customers on a consistent rotation.

With that, I'll turn it over to Mel. Thank you.

L. Melvin Cooper

Thank you, John, and good morning, everyone. I'm going to take you through the financial results for the quarter ended September 30, 2013, as compared to the prior quarter ended June 30, 2013. For a year-over-year comparison, please refer to the tables in this morning's press release.

Consolidated revenues totaled $105 million in the third quarter of 2013. That's a modest increase from the consolidated revenues of approximately $104 million in the second quarter. Our gross margin decreased to $20 million or 19% of revenues in Q3 2013 from approximately $27 million or 26% of revenues in Q2 of the same year.

Our Well Servicing segment revenues increased to $62 million in the third quarter as compared to revenues of roughly $55 million in the second quarter. This increase resulted from an increase in rig hours from 107,000 in Q2 to 112,000 in Q3 of 2013, as well as higher utilization of our coiled tubing services assets as John mentioned earlier.

Well Servicing expenses increased to approximately $50 million, up from $42 million in the prior quarter. Gross margin in the Well Servicing segment was consistent in terms of dollars at $12 million for each quarter. As a percentage of revenues, gross margin in this segment decreased to 19%, as compared to 22% in the prior quarter. The decrease in gross margin was due to wage increases that took effect during the quarter before we are able to implement our pricing increases for the majority of our customers. An increase in insurance costs and an increase in supplies, repairs and maintenance expense for the quarter incurred in the normal course of business. Insurance expense will fluctuate between periods based on claims as we are partially self-insured.

During the third quarter, revenues for our Fluid Logistics segment decreased to $43 million, as compared to approximately $49 million in the second quarter of 2013. This was consistent with the decrease in trucking hours from approximately 308,000 hours in Q2 to 282,000 hours in Q3, as well as a decrease in frac tanks rental rates and days. Operating expenses for Fluid Logistics were roughly $35 million versus $34 million in Q2. This resulted in a decrease in gross margin to $7.8 million or 18% of revenues in the current quarter, from $14.6 million or roughly 30% of revenues in the previous quarter. The percentage margin decrease was partially due to decreased frac tank rental revenues, which had no associated costs to be eliminated as utilization declined; an increase in insurance expense and for the reasons we just mentioned, with the balance related to fixed costs and to expenses such as labor, as adjustments tend to lag behind revenue decreases. G&A was comparable between the quarters.

Adjusted EBITDA from operations was $13 million in the third quarter of '13, compared to $20 million in the second quarter. As previously mentioned, the primary cause for the decrease in EBITDA was driven by trucking hours, frac tank rentals and additional labor costs for the quarter.

Moving to liquidity. As of September 30, 2013, our unrestricted cash totaled approximately $32.9 million. We had no cash borrowings on our revolver, and we had approximately $3 million in letters of credit outstanding against the revolver. This resulted in the total liquidity for the company of approximately $118 million. As of September 30, 2013, we had total debt of $296 million, which consisted of $280 million of our 9% senior notes due 2019, $15.7 million of third-party equipment notes in capital leases and $211,000 in insurance notes. We continue to reduce our equipment notes as evidenced by the fact that our balance sheet at December 31, 2012, reflected a balance of $18.4 million in these notes.

We maintained our $90 million revolving credit facility with Regions Bank. 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

Thanks, Mel. Summarizing, we were successful at increasing utilization and rates in our Well Servicing segment, which we believe to fully realize this quarter here. I would say the results in our Fluid Logistics didn't meet anybody's expectations, especially ours. The demand is there, but the supply is grossly overbalanced when it comes to Fluid Logistics. Our objectives going forward are to develop new and existing customers and work the efficiencies -- inefficiencies in cost out our business.

With that, operator, we'll turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from the line of John Daniel of Simmons and Company.

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

Just a sort of a big picture question here. You guys have your pulse on the market. The competitive pressures just really don't seem to go away, right? Even though you've got good group price. And to your point, it's because of too much capacity. And I just wonder, if you look to next year, I mean, spending is going up, which is a good positive. But we're still seeing some folks adding rigs, adding trucks, putting a new disposal well, et cetera. I mean, You know the story. And I'm just wondering with supplies still rising a bit here, I mean, how do we get out of the oversupply mess that we're in today? Because it doesn't seem like we're going to get the huge demand bump that we really need. And just thoughts on acquisitions, consolidation within the space, just big picture question for you.

John E. Crisp

Well, John, on the Well Servicing, yes, there are a few new rigs being added. In fact, we added three this last quarter. We feel like the supply in the Well Servicing business is only stressed here as these wells mature. In fact, we are seeing a lot of our rigs now go to repair and maintenance. We feel like Well Servicing is a bright spot, this is going to be a perpetual type business for long -- many years. Now on Fluid Logistics, that's a little tougher. It's now got to a point, where we're probably the last one to report the quarter. None of us did very well. And the thing about it, investment's going to have to stop. We saw some people move out of the Eagle Ford, but darn, we have a few more move back in. I think what it's going to take is some of these other plays taking off. And the Eagle Ford is oversaturated, and that's such a large piece of our Fluid Logistics business. That's why it's -- we got hit so hard. We're trying to move assets into the Permian, and it's a little bit slow on taking off, the decline hasn't cured like we figured it would. The Wolfberry's coming along just fine. But some of the other plays like the Eaglebine, it -- we felt like this thing would relieve some of the supplies, but it's a little slow taking off, but building a great foundation. And of course, the gas market. Fluid Logistics is going to be challenged. And it's like we were talking over the last couple of weeks on our Fluid Logistics, we've got a book of business. We just got to figure out how we can make money out of it, and that's going to be the tough part.

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

John, is it a function of too many trucks or too many disposal wells?

John E. Crisp

Well, the trucks, we definitely got a lot of trucks out there. And right now, these customers, they're using the supply leverage. Some of these guys cannot transport or meet the customers' transport needs, but the customers are using that as leverage. We're fine. We're going to have to just draw the line in the sand and say, "This is our price" and challenge some of these mom-and-pops because they can't handle it all. But the problem is when we stand up, one of our competitors, they give in and here price goes down again. We lost a pretty sizable customer. We weren't making a whole lot of money off of it. It came back to us that we were underpriced by 18%. Well, hell, we didn't have 18% in the whole dollar deal there. The disposal areas are -- our wells are getting pretty crowded. I don't see how that can continue. We're seeing rates go down, disposals up in the northern part of the Eagle Ford, just trying to get volumes in. The South Eagle Ford, that's such a tight area to dispose of. But we're still seeing rates pretty good there. But it's just a cut-throat business right now, and we've got to figure out -- you got to take all the fluff out of it and you got so many dollars in revenue, you got to figure out how to make some kind of return out of it, John.

Operator

Our next question comes from the line of Evan Templeton of Jefferies.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Can you just maybe give us a little bit more insight on the fluid side as to how much is derived from the trucking business? And can you separate that from frac tanks rental, just so we can get it kind of an idea of the overall magnitude of both businesses?

John E. Crisp

We'll just give you a rough scenario here, Evan. Truck revenue, it probably makes up about 70% of your total revenue in the Fluid Logistics business. The rental business probably makes up 10% to 15% of your business. Now the thing about it, that 10% or 15%, the majority of that falls to the bottom line, the EBITDA line, because those are assets that don't require much maintenance, very little labor. So that has the biggest bang for the buck right there.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Got you. And then also just another question. Because it sounds like obviously that segment is still challenged. But it sounds like Well Servicing, obviously much more stable. Given the fact that you have kind of pushed through the price increases and that should be matching the wage increases or hopefully exceeding, do you expect to see margin improvement in the fourth quarter?

John E. Crisp

Well, Evan, we start pushing our rate increases for Well Servicing out last quarter. We didn't get it pushed out before the wages. We had to increased wages. Now what we did notice that the last month of the quarter were -- I mean, last month of the quarter was actually about where it was before. So we're starting to see an effect. With the holiday effect, shorter days and stuff, I think that's going to have some effect on total Well Servicing margin, but we should be in real good shape in that.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

Okay, good. And then just last question, maybe Mel, just a little guidance on fourth quarter capital spending? And if you have -- I don't know if you're there yet, but what you're thinking in terms of 2014 in terms of capital spending planning?

L. Melvin Cooper

Yes, we've spent the bulk of our capital this year in the first 3 quarters, I think is the answer. Q4 would certainly be less. We don't have a number, as needed by the customers, but we're halfway through it. And as we indicated, we purchased -- as John indicated, we purchased 3 rigs in third quarter. We purchased some coiled tubing equipment, some specialty tanks, different things. We don't have a lot in the pipeline for the fourth quarter is the best I can -- best guidance I can give you.

John E. Crisp

But we've got a couple of commitments. I think we've got a swab rig and another rig that should might be delivered in the quarter. If not, it will go to first quarter. It's a few more specialized equipment. On the first quarter -- I mean, next year, we haven't really had a chance to work out our CapEx. Now we feel like it will be time to add some CapEx to our coiled tubing business. We are very pleased on utilization and how everything is working there. We feel like our 5 units that we've had in the company's hands now for approximately a year, we've got our hands around it, so it's probably time to add another unit or so.

Evan S. Templeton - Jefferies LLC, Fixed Income Research

And I forgot, can you just refresh -- did the coiled tubing units you have, what's the diameter on that?

John E. Crisp

4 of those 5, Evan, are actually 2-inch. And we run one maintenance rig with 1.25 inch on it. It's capable of going 2-inch, but we found a niche here, so we're running that. And that's why -- what we're talking about, the large coiled tubing utilization is great. The pricing is fair with it. We think we might have room for even a larger unit, maybe a 2 and 3/8 unit or something.

Operator

Our next question comes from the line of Evan Richert of Sidoti & Company.

Evan Richert - Sidoti & Company, LLC

Just wondering if you've gotten any feedback from customers with respect to gas prices. I know we were above $4 in spring, kind of bouncing around $3.50 now. Any kind of feedback on where we'd have to settle before gas started getting people interested?

John E. Crisp

No, we haven't had a whole lot of feedback from customers now. What we have noticed that we've got $3.50 to $4 gas, we're seeing a little bit of maintenance activity coming in. But we haven't had any discussions what it's going to take to go wide open again.

Operator

[Operator Instructions]

Our next question comes from the line of Marco Rodriguez of Stonegate Securities.

Marco Rodriguez - Stonegate Securities Inc., Research Division

I apologize, I jumped on the call a little bit late. So if you've covered this, again I apologize. But the increase, the price increases that you guys are expecting to push to the clients, I understand that it came in a little bit later than expected. Do you get any pushback? Or can you provide any kind of color on what terms your clients are seeing?

John E. Crisp

We had some pushback. What really surprised me was in the -- in the over there, over the U.S. market in the U.S. Permian Basin, but rest of it went pretty -- we think it's very successful, Marco.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay. And did you have any clients that maybe just stopped using your services because of that or went elsewhere? Do you have any feel for that?

John E. Crisp

No, we pretty well kept our book of business. Now there were a few clients that -- we had long-term contracts on, where we just couldn't get anything accomplished here. But overall, we're pretty pleased with our increase.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it. And then on the coiled tubing units, the news is that you've taken on orders. Is everything going as expected in terms of units up and running?

John E. Crisp

Do what?

Marco Rodriguez - Stonegate Securities Inc., Research Division

The coiled tubing units, are those moving according to plan?

John E. Crisp

Oh, yes. Yes. In fact, we're now considering -- we're -- our utilization is the way we look at in the company, we've got them all working. And we've got commitments where they're on rotation with different customers, they're pretty steady. Do we have a little room? Sure, we have a little room for additional utilization, but we're very pleased on where we're at.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

John E. Crisp

We appreciate everybody joining us this morning. This was a very challenging quarter. This Fluid Logistics, it seems like just about the time you feel like you have your arms around it, the next shoe drops. As you go through our numbers, you'll see our Fluid Logistics is all up $6 million from previous quarter. We feel like revenues -- that took our revenues about to bottom. Could it go down a little bit more? Sure, it could. But what our challenge is, as a company and management, is take that book of revenue and figure out some way to make some respectable returns on it, drive costs out, whatever it takes, until this market changes. Just using the excuse, "Everybody is in this business and it's going to stay bad," we can't do that. We've got to figure out better ways of working our Fluid Logistics. And we -- that's going to be job one for us this quarter, to figure out how to drive out inefficiencies, how to gain some utilization on things such as rentals and stuff like that, that doesn't require so much fuel or any fuel or labor like that. I think our Well Servicing business is on track to continue to grow. We feel very good about that business. Our coiled tubing business, it's meeting expectations. We just need to get everything hitting on all cylinders.

With that, I appreciate your support and thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.

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