Forbes Energy Services' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.26.14 | About: Forbes Energy (FES)

Forbes Energy Services Limited (NASDAQ:FES)

Q4 2013 Earnings Conference Call

March 26, 2014 10:00 AM ET

Executives

Casey Stegman - IR

John Crisp - Chairman, President, CEO and Director

Mel Cooper - SVP, CFO and Assistant Secretary

Analysts

Scott Levine - Imperial Capital

Marco Rodriguez - Stonegate Securities

Evan Templeton - Jefferies & Company

Operator

Good day, ladies and gentlemen, and welcome to the Forbes Energy Services’ Q4 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Casey Stegman of Investor Relations. You may begin.

Casey Stegman

Thank you, and good morning. Welcome to Forbes Energy Services’ earnings call for the fourth quarter of 2013. We appreciate you joining us today. With me on the call is 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 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 Web site for disclosures about this measure and a reconciliation of such measure to the most directly comparable GAAP financial measure net income.

During this conference call, Forbes Energy Services’ management may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are subject to risks, uncertainties and other factors that may cause such future matters including Company’s actual future performance to be materially different what is discussed today.

Forbes Energy Services 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, CEO of Forbes Energy Services. John?

John Crisp

Thank you, Casey. Good morning, everyone. Thank you for joining us. After my remarks, I'll turn the call over to CFO, Mel Cooper who will provide financial details, and then we'll open it up for Q&A.

In respect of 2013 was a test was a test in terms of spend and ended with a surprising surge of energy during the fourth quarter. Pricing pressure from previous year continued into and throughout 2013 and utilization left a while until early stages of the fourth quarter when we began to see residual funds from customers’ annual budgets finally being spent. As can be expected competition remained according the fluid management business and weather presents some extreme conditions for the whole Company.

Demand for our Well Servicing business stayed hold despite the weather interruptions and fluctuation of completion schedules. Rig hours were just slightly up by approximately 3% year-over-year and 7% quarter-over-quarter. We attribute the additional rig hours, the higher utilization from our coiled tubing units. Our conventional Well Servicing business work over rigs experienced an increase in labor cost which was offset by a rate increase that ultimately had zero impact on the segment for revenue.

In our Fluid Management business, we experienced some change in our operational management which has proven very beneficial. Since repositioning of our revenues slightly increased with this new management, with the efforts of new management. Fixed cost has been reduced and margin -- yield higher margins which offset lower truck utilization. Pushing of to 2014 has been a little stronger than usual. We continue to be cautious for the 2014 year.

With that I’m going to turn it over to Mel.

Mel Cooper

Thank you, John and good morning everyone. I’m going to take you through the financial results for the quarter ended December 31, 2013 as compared to the prior quarter ended September 30, ’13. For a year-over-year comparison please refer to the tables in this morning’s press release. Consolidated revenues totaled 110 million in the fourth quarter of ’13, that’s a modest increase from the consolidated revenues of about 105 million in the third quarter. Our gross margins increased to approximately 26 million or 24% of revenues in the fourth quarter of ’13 from approximately 20 million or 19% of revenues in the Q3 of ’13.

Our Well Servicing segment revenues increased to 65 million in the fourth quarter as compared to 62 million in the prior quarter. This increased resulted from an increase in Well Servicing hours from 112,000 in the third quarter to 121,000 in the fourth quarter of ’13. This was driven primarily by higher utilization of our coal tubing services as John mentioned earlier. We also implemented a price increase in September of 2013 for our well service rigs that contributed modestly to an increase in revenues.

Gross margin in the Well Servicing segment increased approximately 16 million in Q4 from 12 million in Q3. As a percentage of revenues, this margin increased to 24% as compared to 19% of revenues last quarter. The increase in gross margin was due to the items we mentioned earlier, which were the price increases on our well service rigs and higher utilization of our coiled tubing spreads.

During the fourth quarter revenues from our Fluids Logistics segment increased modestly to 44.6 million as compared to 42.8 million in the third quarter. This increase in revenues was due to an increase in rental equipment revenues which resulted from management’s focus on deploying underutilized assets.

Additionally, our business mix for the quarter resulted in increased revenues from our salt water disposal well activities. Gross profit for the quarter was approximately 9.5 million or 21% of revenues in the current quarter from 7.8 million or 18% of revenues in the previous quarter. This percentage margin increase was due to the factors I mentioned above which are increased contributions from our higher margin business lines, such as salt water disposal wells and rental equipment revenues.

G&A expenses were comparable between the quarters, with 7.2 million in the fourth quarter and 8 million in the third quarter. In summary Forbes Energy Services’ adjusted EBITDA was approximately 18 million in the fourth quarter of ’13 as compared to approximately 13 million in the third quarter.

Moving to liquidity, as of December 31, 2013 our unrestricted cash totaled approximately 26 million. We had no cash borrowings on our revolver and had approximately $6 million in letters of credit outstanding against the revolver. This resulted in a total liquidity for the Company of approximately $105 million. As of December 31, ’13 we had total debt of 300 million which consisted of 280 million of our 9% senior notes that are due 2019 approximately 15 million of third-party equipment notes and capital leases and 4.5 million of insurance notes.

We maintain a $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 the cyclical industry.

I’ll now turn the call back to John before we get to your questions.

John Crisp

Thanks Mel, as I mentioned this year started off rather good, I think the momentum build only into mid-year. Although transportation business or fluid management business remained flat with our strategy to expand in select markets with some underutilized equipment for select customers, pricing probably will remain depressed until industry settles, whereas some of the existing equipment or just goes away.

We have higher hopes for our Well Servicing segment as customers outlined a healthy deployment plan, which includes increase in rig and well counts over last year’s numbers. We see the market that has a recurring need for our services especially our well servicing we believe all types of service works should increase through this extended time.

In summary, we expect 2014 to consist of stable utilization in both segments, fully realized rate increases in well servicing and flat prices in fluids logistics. With this in mind our focus will be further cost reductions, repositioning critical operations and support functions and improvement in delivery of our products.

Operator with that we’ll turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Scott Levine of Imperial Capital. Your line is now open.

Scott Levine - Imperial Capital

Hi. Good morning guys.

John Crisp

Good morning.

Scott Levine - Imperial Capital

So just curious I guess with regards to the fourth quarter performance looked strong and sounded maybe surprisingly strong given the impact of weather and other variables. I was hoping you could provide a little bit more color in terms of how the quarter shaped up relative to your own internal expectations? And maybe how surprised or not surprised you were with regards to the increase in demand that assumingly continued into early 2014.

John Crisp

Well Scott we were very surprised, because normally the fourth quarter you have the holiday factor, holiday hangover which slows things down. And then on top of that we experienced some weather, basically across all our operating areas, which we felt like was going to have effect. But what we saw during the quarter, it wasn’t during the weather our customers actually worked little longer days and stuff and it seems like they needed to spend their capital budgets for 2013, with all of 2014 with clean slate. And something that really shocked us was the holidays, we’re still thinking it’s due to holiday we took the holiday and went right back to work.

January blinked right on in the same scenario on January the fluid business took off just like, -- it continued just like it did in the month of December. The well servicing demand was strong, the coiled tubing we have had a lot less capital budgeted money and it started off a little slower, February has come around and around and March seems like it will continue. So, we have very positive outlook on utilization for the year unfortunately the pricing on the fluid logistics business is pretty tough, well servicing we believe is going to be very healthy through the year.

Scott Levine - Imperial Capital

Got it. And maybe as a follow-up, a little bit more regional color perhaps with regard to the fluids business, is most of the pressure still out there in the Eagle Ford or maybe are other parts of your geographic footprint behaving a little bit better than others, a little bit more color geographically?

John Crisp

We see the fluid logistics business, fluids management business is challenged in the whole industry. It doesn’t matter if you are in Eagle Ford or Permian, there are different pieces of it. In the Permian, you can work with the increased need for our services you can deploy some more assets there, but it is very price sensitive where the Eagle Ford is pretty well matured on fluid logistics, utilization you are not going to see great leaps in utilization but pricing is still pressured. In East Texas, they are more real, utilization is challenging, end price is challenging, so if you are in fluids logistics business, it’s a tough business right now.

Scott Levine - Imperial Capital

Got you. Maybe one last one if I may with regards to the pricing opportunity you see out there on the well side. We are talking comparable to what you were able to achieve in September last year, do you feel like there is incremental opportunity to drive pricing in that business?

John Crisp

I believe that we are going to have the opportunity to drive pricing, to what extent we don’t really know yet. We still need some pricing help in our Permian market, it’s like own labor and everything else whereas the rates have been a little depressed. The whole industry needs to see that go up and I believe it’s going to happen this year and everybody else does work the attitude of raising rates, we see some of our competitors, it’s time to do it. So, we believe we will see opportunity rest of the year.

Scott Levine - Imperial Capital

Got it. Thank you. That’s helpful.

John Crisp

Thank you.

Operator

Thank you. Our next question comes from the line of Marco Rodriguez of Stonegate Securities. Your line is now open.

Marco Rodriguez - Stonegate Securities

Yes, good morning. And thank you for taking my questions. Just as a quick follow-up in regard to the previous question on the pricing increases on the well servicing side. Has that been fully implemented across your client base?

John Crisp

We fully implemented the price increase that we pushed out. There were a few customers that didn’t get the increase because they are under a pricing agreement but we have experienced a full effect of it in the fourth quarter. But future I think will be the next stack up.

Marco Rodriguez - Stonegate Securities

Okay, got it. And then in terms of that pricing increase, I know you mentioned in response to the previous question that you are starting to see some competitors at least talk about increasing their prices as well. Have you seen any other competitors taking the opposite track to try and gain some market share there, any sort of color that you can provide there?

John Crisp

Now, we in the well servicing conventional work over rig business, we see it being pretty consistent, no one is trying to touch rate. In fact it’s hard to touch rates because labor is getting so expensive, you just don’t have a whole lot of room there and if we couldn’t take market share now, you are complete idiot. So, I don’t believe we are going to see that.

Now, to get the increase, we got to get everybody on-board and say, hey, there is enough utilization now there that we could get better return for our products. We should be able to offset our increases through labor and fuel and everything else and I believe that’s happening as we speak in the industry.

On the coiled tubing business side of the well servicing, it’s basically flat, I think utilization still come back around for everybody we already saw utilization picking up. I think it will shake out some pretty decent numbers. And on fluids logistics, I don’t know if you can keep pricing lower unless you just don’t give it away. So I think Fluid Logistics we are about where as far down as you can go.

Marco Rodriguez - Stonegate Securities

Got it, okay. And then in terms of your commentary that for ’14 you’re going to be focusing on cost cutting or improving the delivery of your services, can you discuss a little bit more in detail or some color? Are we talking an improvement on the gross margin side or is this is a G&A focus, any sort of color you can provide there?

John Crisp

So, Mel has always been focused on G&A and I’m sure they will continue up. On the reduction, we’re talking about being more efficient as basically in our Fluids Logistics. That’s how we were able to dig out a few more dollars versus the third quarter. We’ve changed out some operational management in different areas, late third quarter early fourth quarter they hit ground running. They realized that we’re in a market that doesn’t allow a whole lot of pricing specially price increases and so they felt like the next best thing is to look at their operations and cut out excess, but they can’t.

And they have done a great job and they continue to make it and come up with better ideas and better ways of doing business that’s more efficient. So I think we will see some effects continue through the year with this new operational management group we’ve got in place. Well servicing, we’re seeing some pricing opportunity there which is great but we’re also keeping focus on our expense side of the business. And it’s easier to stay focused on the expense side of the business especially when utilization is robust because you don’t have the order time and stuff like that. So that’s going to be main efficiencies back throughout the year.

Marco Rodriguez - Stonegate Securities

Got it. And then what are your guys’ expectations in terms of your Well Servicing rigs going into ’14?

John Crisp

We believe our Well Servicing plans will continue to meet our services. We’re seeing a lot of repairing and maintenance work on oil wells. We’re seeing that the utilization lift is staying full and with higher utilization, I believe that it give us opportunity to get the rate that we deserve as the industry.

Marco Rodriguez - Stonegate Securities

Are you expecting to add additional assets on your Well Servicing side?

John Crisp

We will add select brands yield. Marco like in certain markets you need to taller barriers there must be a rig or two that will add to taller barrier there might be some convergence of some of the smaller barrier rigs into same type rig and stuff like that. So we’re going to make sure our utilizations stayed high and as opportunity comes we will add equipment. One thing, we’re adding, we’re adding another coiled unit. We should take delivery sometime late April that give us our six units. It’s a larger diameter its 2 and 3/8 diameter. We believe that the market demand is higher for that product. As we get that deployed, we see other opportunities we might add there. But right now we’re just taking it as it goes.

Marco Rodriguez - Stonegate Securities

Got it. And one last question for me. Any sort of color you can provide on CapEx spend ’14 and how it might flow through the year? Thank you.

John Crisp

Last year, we spent about 47 million in CapEx. It was divided during the segment. This year, we’re going be very prevalent on CapEx. I can tell you, we’re planning on a significant decrease of CapEx compared to what we spent last year, what the number is we don’t have that depends on market demand and economics. We by that mix barrier we will be adding 2 and 3/8 units. We will be adding 2 or 6/5 equipment such as specialized hauler units and stuff like that. Specialized taller barriers bigger pumps and stuff like that. Up to this point, I think first quarter is almost over and we’re sitting about $3 million CapEx, is that right Mel?

Mel Cooper

Right, so far in first quarter, so we’ve only kept away that.

Marco Rodriguez - Stonegate Securities

Got it. Thanks a lot guys.

John Crisp

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Evan Templeton of Jefferies. Your line is now open.

Evan Templeton - Jefferies & Company

Hi. Thanks a lot. Can you maybe just give us the cost of that 2 and 3 inch diameter coiled tubing unit?

John Crisp

Yes, Evan, we feel lot we’ll have about full package store equipment pumps everything, it’s somewhere between $7 million and $8 million total.

Evan Templeton - Jefferies & Company

I’m sorry, how much was that again?

John Crisp

Between $7 million to $8 million total, that’s the full package.

Evan Templeton - Jefferies & Company

Alright. Okay great, now you can go from there, and just make some additional assumptions for the rest of the year. And then also can you comment on, just trying to get a better handle of what’s going on the fluid management side of the business. I think you mentioned your trucking revenues were lower, but rental was higher, can you maybe just give a little bit more color or quantify the increase and decrease in those business units?

John Crisp

Yes, on the, well one thing I have mentioned 100 times in the past, this was logistics business is a very challenging business. It’s over supply, that’s basically the problem, it is oversupply. Rentals, we are a rental company within our fluid management business we have over I think it is 3,300 fluid tanks that we’re in now. So when you look at us as a rail company, we’re a pretty good sized rental company.

We saw that business dry up, to a certain extent we saw our utilization fall down to 50% mark during ’13, a lot of it was we were disconnected on pricing. We were getting, we’re trying to hold pricing where we felt like it should be and we were getting our business taken away from us, from some of the traditional rental companies. We decided that we’d fall right in there and get utilization back up which netted us better margins on the rental. What’s going to change in the future, well we are going to have to wear out some of this equipment, whether it is transports, whether it is rail tanks, some of the stuffs either has to be used up, moved to different markets or consolidated before we see any pricing power in the fluids business.

Evan Templeton - Jefferies & Company

And you mentioned that the actual trucking was somewhat lower, and now is that due to competitive pressures, other people cutting rates in that business or what’s driving the decrease there?

John Crisp

Yes there is rate cuts, during the fourth quarter, we did a bunch work out in the third quarter and we sold some of the work that we used to enjoy go at ridiculously low pricing, in fact pricing that actually cost the company money to work for those customers and we chose not to, so that’s what affected our total revenue. We chose to leave our pricing where we least had some kind of cash flow out of it.

Evan Templeton - Jefferies & Company

That’s great, thank you for the color, I appreciate it. Thanks guys.

John Crisp

Okay.

Operator

Go ahead.

John Crisp

No go ahead.

Operator

And I’m showing no further questions. I’d like to hand the call back over to Mr. John Crisp for any closing remarks.

John Crisp

Yes I appreciate everybody’s participation on the call this morning. We were very pleased on the fourth quarter of ’13, especially coming off of a challenging third quarter on EBITDA. Our fluids logistics that was being such a issue it potential where there were various thoughts in the fourth quarter. It contributed to the EBITDA in the fourth quarter. Thing about it was our management team. We put it in place in Permian and in South Texas that takes care of operation, they dug in and they did a great job and because of their efforts we got rewarded for that.

I think we’ve got the right management team in place, they’ve got their heart in the right place, they decided they’re winners and they’re going to make things happen. Our well servicing, again another great quarter, we’re seeing utilization pick up quarter-after-quarter. We are very excited about the well servicing and we believe the management will stay strong.

Our coiled tubing side of the well servicing came in and did a great job for fourth quarter utilization finally got to where we’ve been planning it to be. We feel like we have continued, we’ve got a great management team there that’s making things happen. I believe that this market’s going to cooperate in 2014 with total industry and as well as it cooperates and utilization, there’s a chance for utilization I think we’ll be okay.

We’re going to take these challenges day-after-day, and month-after-month, quarter-after-quarter and we’re going to squeeze out every dollar margin we possibly can. With that I appreciate everybody. Thank you. Talk to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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