Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Forbes Energy Services Ltd. (NASDAQ:FES)

Q2 2014 Earnings Conference Call

August 14, 2014 9:00 AM ET

Executives

Casey Stegman – IR

John Crisp – Chairman, President and CEO

Melvin Cooper – SVP. CFO and Assistant Secretary

Analysts

Scott Levine – Imperial Capital

Marco Rodriguez – Stonegate Securities

Operator

Good day, ladies and gentlemen, and welcome to the Forbes Energy Services Q2 2014 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Casey Stegman, Investor Relations. Sir, you may begin.

Casey Stegman

Thank you, and good morning. Welcome to Forbes Energy Services earnings call for the second quarter of 2014. 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 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 on the company’s website 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 the company’s actual future performance to be materially different from what is discussed today.

Forbes Energy Services undertake 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.

And 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 today. After my remarks, I will turn the call over to our CFO, Mel Cooper to discuss financial highlights, and then we’ll turn it over for questionings.

During the second quarter this year, utilization rates were healthy across both business segments, consolidation revenues has more declines, or margins followed up some extent led by fluid logistics segment. This segment strides performance was mainly a result from increased utilization of our specialized equipment and services, and to a lesser degree of more vacuum trucks on the road around the clock, and continuous improvements by our management team.

In the well services segment, we had a nice mix of business demand for both conventional and coiled tubing rig packages which led to higher utilization and effective overall segment revenue growth. Our repairs in maintenance cost and non-capitalized costs associated rigging up new equipment effectively suppressed our gross margins in this segment for the quarter. We also rigged up the six coiled tubing unit and it was deployed on the first job in the last couple of weeks before, so we didn’t realize the full effect of all six rigs. With all the pieces in place now, we believe margin growth for the well services segment should be attainable in the third quarter.

On the pricing front, we expect pricing to remain stable but we believe there are selected opportunities in niche markets to strengthen our position. Going in the second half, we are marching forward in the intent to maintain margin and gain market share by excelling customer service revenue and weakened pricing sector. We believe there is still opportunity for operational improvements, and we’ll continue to execute in first-class equipment, personnel and services.

With that, I’ll turn the call over to Mel to discuss financial details.

Melvin Cooper

Thank you, John. Good morning, everyone. I’m going to take you through the financial results for the quarter ended June 30, 2014, as compared to the prior quarter ended March 31, 2014. For our year-over-year comparisons, please refer to the tables in this morning’s press release.

Consolidated revenues totaled $113 million in the second quarter of 2014; those were comparable to consolidated revenues of $110 million in the first quarter of 2014. Our gross margins increased to $27.5 million or 24% of revenues in Q2 from $27 million or 25% of revenues in Q1 of this year. Our well servicing segment revenues increased to $70 million in the second quarter as compared to revenues of $69.1 million in the first quarter of 2014. This increase resulted from an increase in revenues in the coiled tubing division of the well servicing segment. Well servicing hours were 128,000 in the first quarter of 2014 as compared to 126,000 in the second quarter.

Well servicing gross margins were $16 million in Q2 as compared to the $17 million in Q1, as a percentage of revenues gross margins decreased to 23% in the second quarter as compared to 24% in the first quarter. During the current quarter revenues from our fluid logistics segment increased to $42.8 million with increased trucking hours, versus approximately $40.8 million in the first quarter of 2014. Fluid logistic segment gross profit for the quarter was $11.2 million or 26.2% of revenues, as compared to $10.5 million or 26% of revenues in the previous quarter. This percentage margin increase was due to the increased truck hours I just mentioned, and a decrease in operating expenses as management continues to focus on operating efficiencies in this challenging market segment.

G&A expenses were $9 million in Q2 as compared to $8.5 million in Q1. Adjusted EBITDA was $19.6 million in the second quarter of 2014, as compared to $19.5 million in the first quarter. Moving on to liquidity, as of June 30, 2014, our unrestricted cash balance totaled approximately $16.8 million. We had no cash borrowings on our revolver, and we had approximately $5.9 million in letters of credit outstanding against the revolver. This resulted in a total liquidity available to the company of approximately $93 million. As of June 30, 2014, we had total debt of $295 million, which consisted of $280 million in the face amount of our 9% senior notes that are due 2019, $13.5 million of third-party equipment notes, and capital leases, and $1.5 million of insurance notes.

We maintain our revolving credit facility with Regions Bank and other lenders. This facility remains available for general and corporate purposes, including the financing of capital expenditures, if necessary. We currently intend to use the facility primarily for the financial stability of our company in a cyclical industry. Currently we have approximately $76 million available under the line, after taking into account our covenants and restrictions. As of August 12, we had $31 million in unrestricted cash.

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

John Crisp

Thanks, Mel. We feel like the activity levels will continue in the second half and revenue performance should follow soon. We also believe that utilization will be the primary source for growth in these markets in the second half for these market conditions. Considering the historical performance in the previous quarters, it should be realistic to see margins edge up as long as the market stays – as long as the margins crisis stay where they are at, but more sustainable revenue growth we believe is achievable over the longer term. We’ll continue to focus on running efficient operations which means managing our labor and streamlining processes as you’ve noticed over the last couple of quarters in the fluid logistics business, that’s a big part of our improvement.

The well servicing business, as I talked about earlier, we added the sixth coiled tubing unit late June. We believe there are some growth opportunities there, we had seen the effect of the utilization on math, we’re continuing to work on the mix of work, we push for 24 hour work on our conditional well servicing rig, we’re going to continue to try to work that issues in. Also we’re – we will be adding at least one to two well servicing rigs just next quarter.

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

Question-and-Answer Session

Operator

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

Scott Levine – Imperial Capital

Good morning, guys.

John Crisp

Good morning.

Melvin Cooper

Good morning.

Scott Levine – Imperial Capital

So maybe a little bit more color on in detail with regard to how the quarter played out relatively to your initial expectations at a high level. And then also on a segment basis, it seems like your comments in the press release suggest that are gradually improving industry outlook but maybe a little bit more color on how the quarter played out versus how you thought it would at the time you announced your 1Q results?

John Crisp

We believe the quarter played out – we’re very satisfied with the quarter. If there could be any more better piece of quarter it would been low better margins on the well servicing but rigging up the six coiled tubing unit, sure most of that is capital extended [ph] with, there is labor involved and stuff like it that’s associated on new rig up. Also, some of these rigs as you get your utilization toward a high, you have some rigs that you happen to get back in shape, to go back to the customers, so there are some calls there, if we had that just in or that was made what we considered a very nice quarter. Our Fluid Logistics was actually a very good nice surprise, our management team, they’ve been working very diligently on driving cost out, and improving the mix of work, and this is about the third quarter that we’ve noticed the improvement off through our management, we believe that will continue. Of course you know, there is a level where you bring out all the cost you possibly can, we’re not there yet but we’re not going to see these leaps and bounce off the efficiencies.

Our work mix, this is not a great deal, specialized equipment plays a big part of it instead of the more commoditized trucking, and one of the specialized equipment such as mixing equipment, hot water treatment trucks, hard water treatment trucks, stuff like that. And along with disposals and the product sales, which all amount to better margins in your tradition of this trucking margin. So overall we’re pretty satisfied with the quarter, yes, we see a lot of capital being deployed by our customers in these markets, we feel like there is opportunity to continue an upward trend, of course, the challenge is our pricing, especially in the fluid logistics, and – because there is – some markets are over supplied but we feel like that works itself out. So we feel like if everything stays like it is, we should continue this trend.

Scott Levine – Imperial Capital

Got it. One follow-up as well, I know it’s not your practice to provide specific financial targets but maybe a little bit of help with regard to seasonality and what that might imply for Q3? And then, also what we can expect or in terms of the contribution from the new coiled unit, also the new rigs I think you talked about, little bit of general help there would be appreciated.

John Crisp

Historically the third quarter as the industry has always been a good quarter for most of us because just the holidays are over you still have some long work days and if it puddles [ph] to, it’s going to be a great quarter on utilization as long as the process and everything stays where they are at right now on commodities, we don’t see – we don’t foresee any fluctuations that will be damaging there. On the coiled tubing unit, on our coiled tubing unit we got basically less than always – it’s basically almost half a month on utilization, so that could drop another couple of hundred thousand dollars a month in the quarter. Also, our well servicing rig, once we get those and we probably won’t get that till – towards the end of the month, so we won’t get much effect, we’ll see more effect on that in fourth quarter.

Scott Levine – Imperial Capital

Got it. Thank you.

John Crisp

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Marco Rodriguez with Stonegate Securities. Your line is open.

Marco Rodriguez – Stonegate Securities

Good morning, guys. Thank you for taking my questions. I was wondering if we could talk maybe a little bit more about the well servicing units and truck units, I know obviously, you added a rig this last quarter, also coiled tube units. Then you mentioned you’re going to be adding one to two here in Q3, it looks like you reduced trucks on the fluid side sequentially. Can you maybe give us little bit more color in terms of what you might be looking to add potentially in Q4 on the well servicing side? And then what there we should be thinking about as – of on the fluid logistics side as well?

John Crisp

On the well servicing side, we – like we have mentioned earlier Marco, we will be adding – trying to add a couple of units this quarter, this solemn depends on deliver schedule. We’ve actually had a total of four year Marco, so if we get to this in this quarter that means we’ll have one in the fourth quarter. On the fluid logistics, we’re just not investing in traditional backing trucks, that’s really stressed on margins, it’s more commoditized, and as some of those trucks fall out because of age, you don’t see a slight decrease in truck count.

Marco Rodriguez – Stonegate Securities

Understood. And then on the fluid logistic side, you mentioned obviously that you’ve been doing a pretty good job in terms of optimizing the efficiency there, and margins have somewhat followed with a relatively flat revenue quarters. Just kind of trying to get a sense here, you’ve mentioned you have a little bit more work that you can do to take some cost out, if we assume that there are no changes in the fluid logistics side from a revenue utilization standpoint, I mean, how much more of an increase in the gross margins do you think we can see this year?

John Crisp

Getting large leaps beyond our margins in fluid logistics you have to have some pricing, and we feel like pricing at the best is going to be flat for rest of the year. We’re just so satisfied that we feel like, we finally bottomed out in this sector as the industry, and we feel like as time goes by just as bottomed out, we’re losing some competitors. So that means demand will be picked up in the segment which gives us little bit more leverage on pricing but we’re still away from – couple of quarters away from getting substantial price increases. Our biggest advantage could be mix work, add on such as product sales, mix work, get some of our real tanks back out that’s been suffering over the last couple of years, stuff like that.

Marco Rodriguez – Stonegate Securities

Got it. And how much more of the cost itself that you think you can improve upon in the current environment, ship out cost that is?

John Crisp

We land right now – it’s like improving a golf game, you can go from a hundred pretty quick but you get down to the age of harder time, so you don’t slide here. I don’t think we’re going to see a whole lot more on that but we’re not going to lose focus.

Marco Rodriguez – Stonegate Securities

Got it. And two rather real quick questions, and especially cementing the cash about double tier from June to August, what were the main drivers there?

Melvin Cooper

Yes, what happened there was we made our bond timing before the end of the last quarter, and now we’re building cash back up after that.

Marco Rodriguez – Stonegate Securities

Got you. And on the G&A side, at about $9 million level, is that a fairly good number to model off or are there any one items in there?

Melvin Cooper

No, that should be a reasonable number.

Marco Rodriguez – Stonegate Securities

Got it, thanks a lot guys.

John Crisp

Thank you.

Operator

Thank you. Our next question comes from Joe Lu of Mast Capital [ph]. Your line is open.

Unidentified Analyst

Good morning, guys. Just hoped on the call little bit, so maybe you guys already gave color on the industry as a whole but if you can just help me think about the well servicing side, in terms of the new competition or existing companies and players adding rigs, certainly you guys are adding rigs in the back half of the year but what about your new competitors entering into your market? Thank you.

John Crisp

Yes Joe, we’re adding few rigs and we’re seeing some of our larger competitors, not some of them but three big ones, they add rigs, they lose rigs, I think they are about stagnant there. We have another larger public competitor that’s added probably 8 or 9 rigs over the next twelve months. Our mom-and-pops in the Permian Basin – we see a few mom-and-pops adding rigs or starting up, but in the Eagle Ford, we don’t see that, in some of those markets we don’t see that. But you know, here is the thing about it, I think it is going to be a barrier on the well servicing ads to find good qualified employees. So that’s going to keep the lid on some of the people just throwing money at this time.

Unidentified Analyst

Got it. And what kind of lead time right now does it take, is it required for a new rig order?

John Crisp

Do what Joe?

Unidentified Analyst

What kind of lead time, how many months does it take to get a new rig?

John Crisp

You know Joe, its still – we’re getting ours to drag and we’re within 90 to 120 days. So – there is not a whole lot of rigs being manufactured because if there were, like in – when we started this company up, we’re right in 18 to 19 months.

Unidentified Analyst

Got it. And, just maybe a better question for Mel, how should we think about financing for additional rig additions going forward? Do you think we’ll be looking at leases or some other forms of financing?

Melvin Cooper

Cash, Joe.

Unidentified Analyst

Cash, great, thank you.

John Crisp

Thank you, Joe.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Casey for closing remarks.

John Crisp

Okay, I appreciate everybody on the call. This quarter’s not much different than the first quarter, our team worked pretty hard, there were lot of moving parts in both segments and we’re building new rig foundation, marching forward. We feel like the markets here, we feel like we’ve got a slight upward trend going, sure we’d love to be able to go out and push pricing in both sectors but reality that’s not going to happen, in some of the niche markets that we’re able to push pricing, we’re going to, we’re going to try to work smarter by getting the better business mix and drop more dollars to bottom line. We’ll continue this, we’re going to add some equipment, the equipment would been adding our specialized fluid equipment, the well servicing equipment, this year we’ve basically been doing that out of cash, not acquiring more debt, we’re going to continue that in the future.

With that, I appreciate everybody’s time. 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Forbes Energy Services' (FES) CEO John Crisp on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts