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C&J Energy Services, Inc. (NYSE:CJES)

Cowen and Company Oil Services and E&P Conference Call

December 4, 2013 11:30 AM ET

Executives

Randy McMullen – President, Chief Financial Officer, Treasurer and Director

Unidentified Analyst

Okay. We’re up here for the pre-lunch presentation with C&J Energy, I’m pleased to introduce Randy McMullen, who is President and CFO, he joined in 2005, previously held positions with Credit Suisse 2005 previously held positions with Credit Suisse, GulfStar and Growth Capital Partners. And with that, I will give it to you, Randy McMullen.

Randy McMullen

Thanks Mark. Good morning everyone, and we’ve got a short slide deck here going to go over the three primary service lines for the company our positioning within the U.S. land market, a brief overview of the financial position of the company as well as the capital structure and then generally our growth strategy.

C&J is a simulation services company currently providing hydraulic fracturing, coiled tubing and wireline services throughout the U.S., all three services lines that have similar model and that we focus each on 24-hour horizontal completions, the high utilization or this high utilization is what drives the returns on the equipment and given the various challenges operating the domestic land market our continuous focus on service quality execution and efficiency are the key drivers of the market share growth in each service line.

We have also been focused on several initiatives in response to the challenge in on shore market these include the establishment of our research and technology group, introductions of a number of cost controls across each service line and the further progress on international expansion.

In addition, we are actively pursuing a number of compelling opportunities to grow C&J into a more diversified firm in terms of service offerings and geographic reach and customer base.

Our largest service line is hydraulic fracturing which is currently 61% of our overall revenues, and currently we have over 300,000 horsepower primarily operating in the Eagle Ford and the Permian and each of our crews are staffed with 24 hour horizontal frac completions.

C&J recently began offering their service in Western Oklahoma to capitalize on our strong presence there in both coiled tubing and wireline, we entered the service line in 2007 and early on capitalize on the efficiency as the operators saw the value and the quality execution, the rapid growth within the service line has all been organic and has been funded to internal cash flow generation.

We continue to target the high volume, high efficiency customers and are sticking to model of leading with efficiency, experience personnel and quality equipment, we continue to add new customers and are committed to adding more dedicated crews, it’s important to mention that the recent demand has resulted in us building an additional 20,000 horsepower for deployment in the first quarter of 2014, next our coiled tubing division is approximately 13% of LTM revenue, this is the original service offering by C&J and currently positioned in the most active domestic basins including the Marcellus.

We began offering CT services in the Marcellus last month capitalizing on our strong presence there in wireline, currently we have 24 CT units and have recently added several large diameter units to capitalize on the market demand for the larger pipe, we have a leading position in the Eagle Ford and are looking to expand our presence in our market share in each of the Permian, Bakken and the Marcellus.

As for same for frac all growth within the service line has also been organic and has been funded to internal cash flow generation. It’s also worth mentioning that we grew revenues 5% in Q3 for this service line and despite the challenging environment. Overall we have held utilization, pricing and margin while operating in the very competitive market.

Moving into 2014, we’re expecting relatively stable steady demand for our coiled tubing services as we continue to add capacity based on customer demand.

Turning now to our wireline subsidiary which is approximately 24% of our overall revenue, C&J entered in to this entered into wireline through the acquisition of Casedhole Solutions in June of 2012. As you may know wireline is a very complementary service to both frac and CT and allow us the opportunity to bundle the three major completion service offerings to the operator.

We will continue to invest in new equipment in this service line as we have expanded our fleet to 65 trucks and over 30 pumpdown units, we currently have a presence in all of the major basins and are continuing to increase market share within each and this was evidenced by our Q3 results where you saw our revenues go up a 11% without any additional equipment deployed during the quarter and this success has been driven by the targeting of high utilization operators.

And our wireline outlook for 2014 remains positive and we plan to continue to add more wireline trucks and expand our operations within our existing regions. Next is our manufacturing company Total Equipment a unique aspect to C&J versus our similar size competitors is that we control our equipment supply chain with the ownership of our own manufacturing business, this ownership gives us direct control over the cost of the equipment, mitigates supply constraints and enable C&J to quickly respond to changes in the industry demand and also through our manufacturing division, we can continue to look for advancements and equipment life and reliability.

Page 7 is a brief snapshot of our operational positioning within the U.S. land market and as you can see we have a presence in all of the major basins specifically with wireline and with most recently with coiled tubing, our hydraulic fracturing business is currently focused in the Southwestern part of the U.S. in the Eagle Ford, Permian and Western Oklahoma but our long-term plans are to expand and grow that service line into the northern regions in the Bakken Shale and the Marcellus.

So in summary, our operational model is what drives our performance. As mentioned earlier we’re focused on 24 hour horizontal completions where quality of service and job execution matter the most, it’s what we do best and it’s where we can add the most value and this holds true for all three service lines and maximizing the utilization on a daily basis will give the stability to generate high returns on the equipment.

Page 9 is an overview of the most recent financial performance of C&J as you can see we’ve sustained a significant growth over the past five years and impressively continue to grow and expand through 2012 and even when the market was challenging specifically in a pressure pumping sector.

We continue to generate significant free cash flow recently and have continue to invest in the company as evidenced by the asset charts.

As we look to the future C&J’s growth strategy is as follows, we will continue to expand market share both in existing basins and into new basins for all three service lines, we will also look for opportunities to enter into new business lines focused on technology and specifically downhole completion tools, directional drilling and fluids we’re also actively evaluating acquisition opportunities, both small and transformative, as we have ample capacity to move quickly should the right opportunity arise. We’re also actively working to expand our presence internationally, specifically in the Middle East, and lastly we will continue to use our research and technology group as well as, total equipment to continue to push new product developments and bring more equipment manufacturing in-house.

As you [indiscernible] over the balance sheet summary, here on Page 12, you can see the C&J is well capitalized with the debt-to-EBITDA ratio of just under 0.6 times. We expect to continue to generate significant free cash flow and as a result we can be very, very flexible with our approach to growth. This flexibility applies to organic growth through expansion of existing services, the development of new service lines and the funding of new initiatives like our research and technology group.

We also benefit from this flexibility in terms of potential M&A opportunities that provide solid platforms for new service lines or allow us to enter into new geographic regions and expand both our customer base and existing service lines. With that open it up to questions.

Question-and-Answer Session

Unidentified Analyst

I’ll kick it off Randy with the increased capacity was a surprise to us, but you guys are feeling pretty confident about placement of it. Can you talk about where it’s going I think you discussed about it going to the Permian but maybe just review that and then in terms of the customers that you will be having are they new customers, are they customers that you’re following into the basins, are you think they under represented may be just walk through that if you could?

Randy McMullen

Yes. We've had recent success at building our backlog of business, which gave us the confidence in adding the horsepower it’s 20,000 horsepower and the point of making that reference is the fact that we have existing equipment that we can put together with that 20,000 horsepower to provide a new fleet into the market. So we're not having to invest on what is usually a $25 million to $30 million fleet we can do that on a $17 million, $18 million basis.

And have a new fleet that we can go out in the market and sell and based on current demand we feel confident that we'll be able to do that in the first quarter, our placement of our equipment is actually going to be in the Eagle Ford. We’ve had success in the Eagle Ford with not only expanding our fleet exposure to high volume operator in the region and by adding a second fleet recently.

But also have some new customer wins both in the Eagle Ford and in some of the other regions. That's given us the confidence that the demand is going to be there in 2014 for additional equipment.

Unidentified Analyst

One of the things that's been really great about C&J and since you guys became public was your ability to align yourself with customers that were really efficient and enabled you to be as efficient as they are, as you look at new customers and you got new customers how can you be certain that you will be able to maintain those efficiency levels, how can you be certain that they’re going to be up to the same efficiency expectations that you have?

Randy McMullen

I think it's pretty consistent in the market to the high volume operator, see the value and the efficiency not only on the drilling, but the completion side and the cost savings that come with that. We’re able to price our services differently when our volumes are up significantly, and it becomes a situation where we can save some costs, and we can deliver for C&J more margin and more profitability by doing more stages per day.

And so what we do is actively target those high volume operators like, we have in the past, we had a very small percentage of those in the market. But we’re able to take sort of what we’ve done and use that in marketing to new customers and the pricing that’s in the environment specifically as it relates to pressure pumping has been fairly stable for us over the recent times, we’re not expecting that to go up anytime soon, but we have we do feel confident and that looking out at the business we have a fairly good feel of pricing and margin expectations.

And so how do we get our margins up, the biggest way that we can get our margins up to increases in utilization and that’s going to be the key for us in 2014 is getting all of our fleets looking similar to our most successful ones and our most successful ones where the ones that pump the more stages per month. And in the Eagle Ford it’s very predominant knowing just the 24 but the pad completion process, the zipper process it just maxes the utilization on the equipment and generates more and more returns.

That’s why we’ve got the majority of our equipment in Eagle Ford not only as it sort of our home-base where the company started and where we have the most deep rated customer relationships but the actual type of work is what we’ve always focused on and done so well doing and we can compete very well in that environment and which is why this next 20,000 horsepower we are going to be putting in the Eagle Ford.

Other basins are similar as far as the completion process, one area of upside that we see for the Permian is when that basin moves to the pad completion process which currently is not and internally as we look at our utilization, we’ve got fleets that are has utilized on a daily basis as our fleets in the Eagle Ford but the actual throughput of the stages is significantly less than the Permian, what is in the Eagle Ford just because of the efficiencies that you have with the multiple wells on a given pad.

And the fact you can really max out your stages per day with your equipment in that environment more so than the single well environment where you’re having to mobilize your equipment costly and you lose a lot of the through earning time with rigging up and the rigging down of the moving of the equipment.

Unidentified Analyst

Okay. Just a sense as to the growth in 24/7 demand in the Eagle Ford and how quickly you expect the Permian to convert in that regard, I mean meaning in 2014?

Randy McMullen

Yeah, the Eagle Ford is getting fairly matured as far as it’s 24/7 what we do see and we have seen more advancement is between more wells per pad which is great and we’ve seen more adoption of the zipper process and we’ve had more success recently getting on more of that work but the Eagle Ford has been fairly developed for a while and fairly advanced in that process, so not significant upside as far as the amount of completion that can come through efficiencies a lot of that is already being gained but the Permian honestly we don’t have an exact timetable for at least the customers that we’re most focused around and work for.

They seem to be in the exploratory mode where they’re trying to find that sweet spot, that a lot of the operators in the Eagle Ford have and know. So that they can just move into manufacturing mode, so to be determined on when that happens but the expectation is in the near future you’ll start to see more of that.

Unidentified Analyst

So the big guys quote a number of 20% or 25% over supply in pressure pumping in North America, do you agree with that number and you’re heading back from your current fleet that’s kind of on the sidelines is that 20% or 25% number a real number or is there stuff that’s just never going to come back because it’s been cannibalized or it’s too old and just cost too much to get it back to online?

Randy McMullen

I have to speculate on that, I know internally our equipment we haven’t retired anything. And we continue to reinvest in our horsepower and all of it is available to work and I just wanted to mention the equipment that we are adding in the first quarter is not replacement of anything that we have, it is additional capacity for us, as far as year-over capacity for the market I think generally we agree with the 20% to 25% now what percent of that is unavailable to come back and work is a big unknown.

There is I guess a lot of speculation that a decent part of that, is perhaps in that position where a significant reinvestment would be required to bring it on to the market and with the lot of the private operators do they have the ability to reinvest in that equipment, I think that’s the big question right now, so it was hard to really estimate what amount due or couldn’t come back.

But for us and it’s worth mentioning this as well, we’ve been asked a lot about why build an additional 20,000 horsepower, we’re not looking for some smaller operators that’s for to sell their equipment and buy their horsepower, and we looked at that, and that is something that we clearly evaluate and took a very strong look at. But the part of the issue is what you touched on is just the quality of equipment that you’re getting how much you’re going to have to reinvest in that and how does that compare to the new build costs and the way that we see it and the opportunities that are out there is that to bring someone else’s equipment out for par.

And then sort of the same sort of working condition that our existing equipment has it would actually be more expensive to do that and still have a used piece of equipment versus building new. And the timetable of doing each is really about the same, so we’re building in that scenario, now evaluations are a lot of the values that had been asked for the existing equipment continue to come down which we expect that will happen then that if the construction can make more sense, the [indiscernible] existing capacity as opposed to adding, but that’s the advantage that we have of owning our own manufacturer is that we control the timeline of one that’s going to be build and obviously know the cost and we’re building that equipment of costs which gives us pretty big advantage.

Unidentified Analyst

Thank you. Just following up on the comment about the manufacturing capacity you guys are making your own coil units and you are taking share in a market that’s over supplied what’s different about your product is there something that’s different in terms of the product offering mechanically, and then the next question is how should we think about bundling the services with wireline coiling frac?

Randy McMullen

Yeah, we do build our own equipment, on the coil side and as we transition to 2013 the demand for longer reach pipe and larger diameter pipe just is becoming more and more. And majority of our units are built to handle long streams and that did give us an advantage and still does and for the units that we had in service we have the ability for some of them to modify and so that they can handle the large pipe the two and three eights and a lot of that just goes into the, the type of unit that we build and we’ve always been focused on wanting to have the solidity with the equipment to shrink down 2 inch in the quarter and shrink up to 2 inch plus. So the units were built with that thought in mind from day one, so it’s always allowed us to be very flexible in sort of moved with market demand and not had to down equipment and purchase new equipment to try and meet new needs in the market.

We’ve bought that service line, we’ve always had it focused on the complex work and just similar to the frac and a 24/7. So it’s more and more of that work was coming up in the market, we were suited to go after it and go after it successfully, we put a lot of emphasis on that service line individually, as we do wireline and as we do frac and that will lead into your second question on bundling that, it’s not a throw in service line for us we market that individually and we sell it individually and it’s not part of a package with frac where we just say we want to frac and you can take our other two service lines just as long as we did the frac.

We take pride in the coiled servicing, we’ve done a really good job of protecting market share, we were competitive on the pricing front, and we do as good job as anyone on the service side and very reliable on the service front. So we’ve done a good job of insulating ourselves and getting our strongest customers reasons to look elsewhere and it’s just that consistency in the product and again in the same message for frac is just about efficiency and the quicker that you drill out the plugs, the quicker that well is online and you can get to the next one and that’s really our focus, it’s a focus with all three since wireline, plug and perf as many stages we can on a daily basis and doing that for the same type of customer is the high volume customer and that’s what we did with wireline in the fourth quarter of last year there was a different revenues and we really had a change in focus of going after the high volume operators, the 24 hours and doing that with discount in your pricing a bit but making up for that margin give through utilization and you can see that in our numbers throughout 2013 is the margins have gradually been taken up a bit and just because our volume isn’t going up not our pricing.

Bundling three it is an advantage that there are some operators that prefer to have a package deal that they want wireline and they want frac and they want coal from the same company, and previously we were locked out of that ability to build our network without having wireline, but having added wireline, we can now compete effectively, we’ve got 65 wireline trucks and we’ve got just depending on the day 8 to 9 frac crews, so we obviously had to sell wireline above and beyond what we are building on the frac basis and I would say generally we got eight, to nine fleets either wireline or coal are on probably half of those. But again they are not on them because we discounted them to get them out there and we own them because they want on their own standalone merit with competitive pricing and with good service.

Unidentified Analyst

Can you operate your frac operation more efficiently if your wireline guys are doing the wireline work, so you’ve got just talking to each other a little bit better than maybe to take our wireline guys would be if they were on site?

Randy McMullen

Absolutely, that’s a key advantage and that’s what we sell and you can price your services that way based on efficiency, you can price your services where you guarantee your specific amount of runs at a specific rate and if you missed on that and there is maybe there is discounts that apply, so it really incentivizes our guys and our crews to bring out as many stages per day, so absolutely we control that a little bit better having the wireline.

Unidentified Analyst

Any questions?

Unidentified Analyst

Can you talk a little bit more about the international initiatives and where you stand with that right now?

Randy McMullen

Yes no real update than what we mentioned on the call, we recently opened an office in Dubai have been staffing up there more on the administrative side, but we’re chasing a few opportunities not mentioned specifically where those are but obviously in the Middle East region, we’ve gotten pretty qualified in a few countries there, a lot of the interest that we initially is around coiled tubing and so we are chasing those, as far as giving guidance around when we expect really to benefit from the operations there, we are not giving out specifically but we are expecting by some time in 2014 at least by the end of 2014 to have the equipment working in that region.

Unidentified Analyst

The built-in backlog that you mentioned that’s causing you to take some equipment of the sidelines is that more market share gain than it is activity gain that’s leading to that?

Randy McMullen

Market share gain. Yes. Okay. That’s right.

Unidentified Analyst

Any other questions for C&J? All right, thanks Randy.

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