Seventy Seven Energy Inc. (NYSEMKT:SSE)
Q4 2015 Earnings Conference Call
February 17, 2016, 04:00 PM ET
Bob Jarvis - Director of Investor Relations
Jerry L. Winchester - President and Chief Executive Officer
Cary D. Baetz - Chief Financial Officer
Karl Blanchard - Chief Operating Officer
Jason Wangler - Wunderlich Securities
Alexander Nuta - Evercore ISI Group
Peter Wollman - Invesco Ltd
Brooks Braden - Stephens Inc.
Ladies and gentlemen thank you for standing-by. And welcome to the Seventy Seven Energy Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]
I would now like to turn the conference over to Mr. Bob Jarvis, Investor Relations, Director. Sir, you may begin your call.
Thank you. Good afternoon, everyone. Joining me on the call this afternoon is our Chief Executive Officer, Jerry Winchester; Chief Operating Officer, Karl Blanchard; and Chief Financial Officer, Cary Baetz.
During this call we will be making Forward-Looking Statements which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance, and the assumptions underlying such statements. Please note that there are a number of factors that may cause actual results to differ materially from our forward-looking statements, including those factors identified and discussed in our earnings release today and in the company's SEC filings. Please note that except as required by law we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements.
I would also like to remind everyone that we will not be addressing questions regarding the ongoing review of strategic alternatives to reduce the level of our long-term debt and lower our future cash interest obligations.
With that I will turn the call over to Jerry Winchester. Jerry.
Jerry L. Winchester
Thank you, Bob. Good afternoon, everyone and I hope you had the opportunity to review the release issued earlier this morning. In a moment, I'll turn the call over to Karl and Cary to review our operational and fiscal results, but before I do that, I want to first make a few comments. Regarding the ongoing strategic review process as Bob mentioned although we believe that we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements based on current market conditions.
We believe that a reduction of our long-term debt is needed to improve our financial position and flexibility and to better position us to take advantage of the growth opportunities that are likely to result from the current industry downturn. As Bob mentioned, we will not be taking questions regarding this process.
So now let's talk about the current market conditions. I think it goes without saying that this downturn is one of the most challenging we have seen. Unfortunately, we believe that we'll continue in 2016 as our customers make deeper spending cuts. So well I'm not thorough with the current commodity prices and lower utilization rates, I'm pleased with the execution of our management team and our fuel operations.
We make great strides in expanding our customer list in 2015and customer diversification remains a top goal for us in the coming year. Our total customer count is now over 150 different operators and currently nearly 80% of Nomac's active rigs are working for customers other than CHK. We've now fracked for 13 different operators and PTO is currently working for three non-CH customers today.
Great Plains oil field rental continues to exemplify how important diversification is to the overall strategy at SSE and has well over 120% different customers in their portfolio positioning itself for dynamic growth as the industry activity levels improves.
We would also like to highlight our safety and efficiency record. Our teams continue to see impressive results while leveraging the downturn through comprehensive training and attrition processes. As Karl will discuss, our commitment to safety and operational excellence more than just top, it is reflected in our numbers and our personnel in the field are to be commended for it.
In addition to our focus on customer diversification and service quality, I want to also briefly touch on cost control execution and our contractual backlog. Obviously, the rig count continues to drop industry wide, it is now at level we haven't seen since 1999. That said, Nomac currently has 51 revenue generating rigs under contract.
All of our operational teams continue to manage their cost wisely on the pressure pumping side PTO continues to do an effective job executing our cost reduction initiative and we see the benefits that are infrastructure investments and supply chain relationships provide. Pricing remains a challenge but we believe that we're balancing along the bottom. As we anticipated overall industry capacity shrinking which should help stabilize the pricing environment.
Great Plains is another area of our business where we're encouraged by the effects of our cost cutting initiative. To increase gross profit margin quarter-over-quarter in the face of historic activity declines is notable accomplishment. This is the segment of our business where we're seeing the greatest number of competitors exiting the market. This should help our business as customers start looking for reliable suppliers and quality assets.
Let me close by restating that we're pleased with our execution and we look forward to strengthening our relationships with our growing group of customers. While we believe that the near term outlook for commodity prices will lead to further declines in activity level, service quality will continue to be an area of strength for us and we remain confident in our operational execution.
As we discussed last quarter, our team began preparing and planning for this cycle in Q4 of 2014 and the team has managed through many tough cycles in the past. We're focused on maximizing efforts for all stockholders while positioning the Company for dynamic growth when activity levels increase.
Now, I'll turn the call over to Karl who will walk you through the operational results, Karl.
Thank you, Jerry, and good afternoon everyone. Let me begin with our drilling segment, similar to the third quarter, Nomac Drilling averaged 52 rigs under contract in the fourth quarter and at year-end we had 50 rigs under contract. Currently, nearly 80% of our active rigs are drilling for non-CHK customers and over 90% of our peak rigs are under contract.
At the end of the quarter, Nomac had a contractual backlog of over $355 million in revenue with an average duration of roughly 16 months. Nomac's fourth quarter cost control measures contributed to an 8% decline in costs per revenue day and a 16% decline in operating costs quarter-over-quarter.
Operating cost declined 54% year-over-year and as a percent of revenue cost decreased to 53% for 2015 compared to 64% in 2014. Our fleet upgrade program continues having already delivered one new PeakeRig this year. We expect to deliver three additional rigs in 2016, which will complete our contracted new build program. Once the new build program is complete, our rig fleet will be 80% pad capable. Last and most notably, Nomac remains an industry leader in safety with a total recordable incident rate of 0.97 in 2015.
Switching to pressure pumping, despite the difficult market environments Performance Technologies continue to diversify its customer base with non-CHK revenues increasing from 3% to 17% of total revenue year-over-year. And as Jerry mentioned earlier, we are currently working for three non-CHK operators and have added a new customer to our portfolio just this quarter.
Reductions in cost per stage for the quarter approached 15%, as our team continues to effectively manage their supply chain. And again, we emphasize that our cost management does not come at the expense of properly maintaining our fleet. Our preventive maintenance program is ongoing and in full of effect. It's important to note that, like Nomac, PTL remains an industry leader in safety performance with the TRIR of 0.74 for 2015.
At the end of the quarter, our hydraulic fracturing backlog was roughly $283 million in revenues with an average duration of 13 months. Now despite continuing market headwinds in Q4, Great Plains oil field rental was able to increase gross profit margin from 6.7% to 7.6% quarter-over-quarter, while continuing to diversify its customer base.
In fact in Q4 Great Plains worked for 84 different customers which include 11 first time customers. We believe we are gaining market share despite the downturn and now we have grown our customer list in this segment of the business to over 120 operators and non-CHK customers account for 59% of Great Plains revenue in 2015. That figure is up 40% from the previous year.
Effective cost cutting initiatives during the quarter led to a 27% reduction in operating costs to Great Plains and we remain encouraged at our ability to capture market share through our scale and by bundling our equipment and services.
In closing, let me reiterate what Jerry said at the beginning of the call. To say that 2016 is going to be challenging quite frankly is an understatement. That said, we firmly believe that we are equipped to manage effectively through this cycle and succeed when both drilling and completion activity levels increase. We're pleased with the cost management initiatives and customer diversification strategy that have been implemented by all three operating segments of SSE.
I'll now turn the call over to Cary Baetz to discuss our financial results. Cary.
Cary D. Baetz
Thank you, Karl and good afternoon everyone. I'm going to keep my comments short and will focus on the sequential quarterly changes. Year-over-year changes and detailed segment financials can be found in our press release of this morning and the 10-K that will be filed later today.
For the quarter, Nomac had revenues of $89.6 million and gross margin of $54.7 million or 61%, compared to $80.3 million of revenues and gross margin of $39 million or 48.5% for the last quarter. Both revenues and gross margins were helped by the early termination of poor rig contracts for a total of $11.8 million. Gross margin also benefited from lower labor related costs per revenue day as our labor costs more closely aligned with historical rates after unprecedented drops in drilling activity last few quarters.
Performance Technology, our hydraulic fracturing segment, recorded revenues of $91.9 million and gross margin of $13.8 million or 15% for the quarter compared to $118.1 million of revenues and gross margin of $14.2 million or 12% last quarter. The decrease in sequential quarter revenue was primarily due to a 12% decrease in revenue per stage.
Margin erosion was contained as we continue to maximize the advantage of our supply chain logistics. However, we did see an increase in our repair and maintenance expense as we continue to invest in our equipment. Great Plains oil field rental segment, recorded $11.3 million of revenues, which was down from $15 million last quarter.
Gross margin as a percentage of revenue was 7.6% which was 13.4% improvement compared to the 6.7% last quarter. Revenue was negatively impacted by a decrease in utilization while the improvement in gross margin as a percentage of revenue was principally due to reduced labor costs.
It's been a busy year with the transition away from CHK and the implementation of the newer ERP, but it was a successful year on both fronts due to the efforts of everyone at SSE. And as I pointed out in previous call, this work was done with fewer employees as we tried to stay in front of the declining market.
For the quarter, SG&A was down $10 million or 37.5% to $16.7 million. The number includes $3.8 million of non-cash stock-based comp and $400,000 in severance-related expenses. SG&A for the quarter, benefited by an incentive true up of $2.2 million. For the company we recorded adjusted revenues of $192.8 million and adjusted EBITDA of $56.3 million including $11.8 million in early rig termination, compared to adjusted revenues of $213.5 million and adjusted EBITDA of $41.1 million last quarter.
Our cash balance at the quarter end was a $130.6 million, this was down $25.6 million compared to the end of last quarter due to a $6.8 million increase in working capital and $53.9 million in growth capital expenditures primarily associated with the new build rig program. The cash combined with our availability under our asset based revolver gave us over $250 million in liquidity at quarter end.
Again, please remember that a revolver is asset based, moving our account receivables will impact the availability month-to-month. For the full-year, capital expenditures were $205.7 million and these expenditures were primarily for the construction of the new contracted PeakeRig and maintenance.
Once we have completed our plan growth capital expenditures, we will shift our focus towards using excess cash flow from operations to reduce our outstanding long-term debt. Until then, we expect growth capital expenditures to be funded from cash flow from operations cash and our revolver.
This does it for me again and thank you for your interest in Seventy Seven Energy and I'll turn it back over to Jerry.
Jerry L. Winchester
All right thanks, Cary and Karl. I believe we're now ready for questions. So operator, you may open the lines for questions.
[Operator Instructions] Your first question comes from Jason Wangler of Wunderlich.
Hey good morning or good afternoon guys. I was just curious, you mentioned as you keep kind of pushing towards the broader customer base so to speak, I'm sure obviously price is such a big thing as a safety you guys mentioned. But is it really just going out and getting bid for the most part in the reputation as well as or are there some other things we should be thinking about as you guys are trying to kind of navigate just picking up as much work as you can in what's obviously pretty tough environment?
So Jason, this is Karl, I'll answer that. Actually, we used pressure pumping example and this quite frankly also is the same answer for Nomac. We're not a price leader on the downside. Both of the last two new customers that we picked up, we bid the work originally we're not successful. At a point later, the client decided to remove or expand, either remove a crew in our place to expand and came back to us and said would you on what do you bid, yes, we would and we moved forward. And in both cases, we've secured those immediately with extremely good service quality on location and execution. So that's how we played it on the rig side, it's the same thing. You will not see Seventy Seven and our product lines being necessarily the price leader on the downside.
Sure and maybe just expand on that. Are you starting to really see a lot more of the attrition, I think you may have mentioned at the beginning as far as just equipment not being kept up or other things of that nature where then companies that are like yourselves are able kind of step and say, hey we still have the equipment of the right way, that suppose to be running the right people or is that starting to become more of a factor as well not we're kind of almost 14 to 16 months into this?
Jerry L. Winchester
So I think out in the field in operational side, the examples that we have which are admittedly from our lens is maybe narrow, but that was service quality at the field level, a combination I think of organization, people skills and maybe equipment or lack of maintenance. But what I will say on that point in the pressure pumping market, you have just drive bys today and you've seen some of this and reports on the industry.
What you can see from the fence, you see a tremendous amount of attrition in yards where very, very few of the units that are sitting in the yard would be usable just from of visual inspection. So I think that has become - that is the wear and tear and the lack of reinvestment in capital or maintenance is actually beginning to be pretty significant.
That’s helpful. Thanks a lot.
[Operator Instructions] Your next question comes from James West of Evercore ISI.
Hey this is Alex Nuta on for James. So I have a question on the sales sand reserves to emerge, can you share some additional financial details as to CapEx reimbursement as well as what type of lower sand cost benefit you're receiving?
Jerry L. Winchester
Yes. So I won't get into the specifics, but I will tell you the framework or structure of the deal, we essentially made an agreement to effectively transfer the reserve asset if you will to them in exchange for a significant long-term agreement that gives us a discount on whatever point current sand price and that is an escalator. So that in the events that sand, today sand has dropped dramatically from say 2014 numbers ex-mine.
But as that goes forward if sand prices were to go up dramatically the fog rig goes up the larger and larger discount that that provides us on a fixed annual volume of supply that they would agree to deliver. So that helps you in understanding the structure, it's just a different way and we believe the best way to monetize or create value out of that asset versus us retaining the asset and being in the sand business.
And can you share the amount of CapEx reimbursement you expect to receive or is already in the 4Q numbers?
Jerry L. Winchester
Yes the front end CapEx was minimal.
Minimal. Okay and then my second question is in the event of Chesapeake bankruptcy what happens to the Nomac and PTL backlog and just generally the pressure pumping contract as a whole?
Jerry L. Winchester
Well I think I don't want to speculate on that. Too complex and really not a place that we want to go. What I will say is this, as it stands right now and our relationship with them operationally is outstanding. We work with them all the time, they obviously demand value and performance and we give that to them, but I would say our relationship with them operationally is excellent. We are engaged with them every day and have an active and ongoing operation with them operationally, but on the other point, we really just don't want to speculate on that subject.
Okay, fair enough. Thank you for your time.
Your final question comes from Peter Wollman of Invesco Ltd.
Hi good afternoon, thanks for taking my questions. So I had a few questions, and I'll just kind of run through them and it's kind of mostly around your contract. So given the couple - it sounded like four terminated rigs in fourth quarter, can you tell me how many rigs are contracted currently and then can you tell me also the percentage of your backlog both the rigs and the pressure pumping that's contracted with Chesapeake. And lastly, can you tell me the percentage of the rigs in the pumping that contracted, but not currently working right now? That’s basically sitting idle.
Jerry L. Winchester
Okay. So I think there's three questions there, I think you asked first what's the number of rigs that are contracted, it's 51 today. And the majority of those are contracted with Chesapeake. Today we have I think 19 rigs that are active and the remaining rigs are idle but contracted. And then your second question.
So you answered them all on the rig side, so then on the contracts for the pressure pumping, how much of that was Chesapeake, is that mostly Chesapeake as well and how much of that is actually sitting idle?
Jerry L. Winchester
Okay, so most of the contracted backlog on the pressure pumping side is if you recall the original agreement was a tiered three wind down of obligation from Chesapeake. First year seven fleets, second year five, third year three and the year starts at June 30 or July 1. But most of the backlog that we have is all Chesapeake as it were or on the frac side.
Having said that we have and we sated in our comments, we have a number of other clients that we're working for and as I've said today, three crews today are working for non-CHK work, which we average about six crews working right now. So that work is not “backlog and contracted,” but it's ongoing and we've earned that work going forward.
Oh great, so that's not in your backlog though and that’s just currently working.
Jerry L. Winchester
That's right, that is not part of the backlog number. In addition, its working revenue that we're generating in addition to a contracted structure, but the other point I would make when we use the term backlog it's not like having idle frac crews, the crews are working that are in the contract with Chesapeake today.
Okay and then on your frac equipment and you talked about this already a little bit, but just kind of the state of your frac equipment essentially. You were talking about a lot of equipment in the market is continued to be deteriorating. What's this state of your fleet in the sense. I mean the frac equipment that you have that’s sitting idle, is it really to go to work or I mean how much CapEx needs to be put into that equipment to bring it back to work?
Jerry L. Winchester
Okay, so of your questions about the state of our fleet. First of all this is one of the strength, our equipments are in extremely good shape, it's relatively young, sort of a three year average life age if you will. At the same time, we have a very robust rebuild program and when I say rebuild I mean we have leaned manufacturing process where we take all of the major components when we rebuild an engine, a frac unit that does reach its terminal hours.
Then the engine is fully remanufactured at the vender let's say a Cat engine will would go a Cat dealer for rebuild. A transmission goes to the dealer for rebuild. The pups are rebuilt completely and so that costs about 50% of new cost. Generally as a very-very thorough full rebuild and effectively you have a brand new unit and that is one thing that we're doing.
In addition, you have the general operations maintenance that we have maintained which is simple things like that oil change cycles and keeping that frequency on track, checking oil analysis so that our equipment is very well-maintained when it is operating. And the combination of this and I think the way I would capture as this.
If you drive by most yards in that El Reno, Oklahoma today, you will see most of the equipment and competitors yard looks very rough, and in fact from the visual inspection, you can tell that the equipment will not pump. If would drive through our yard in El Reno, you will see very-very few, a handful of units that appear to need to be worked on, the majority of them are new or in good condition on the ready line, ready to work if they are not add-on locations.
Okay great, thanks.
Jerry L. Winchester
Effectively, our full fleet is ready to be and can be on location pumping with no additional CapEx or rebuild CapEx put into, that's kind of the state of the quality or status of equipment today.
You now have a question from Matt Marietta of Stephens.
Hey guys, this Brooks Braden actually filling in for Matt, how are you all doing?
Jerry L. Winchester
Quick questions, so it looks like you all grew your frac fleet by an incremental crew to 440,000 horsepower, just was kind of wondering what was kind of the driving force behind adding this incremental crew and if it's currently working where?
Cary D. Baetz
That's an investment we made in 2014, we ordered that equipment in 2014 and pushed it about as far as we could, and so it showed up so we've got 20 brand new pumps sitting up there and they're ready to go to work.
Okay perfect and one quick follow-up. It looks like you all have held your rig fleet size pretty constant in recent quarters adding PeakeRigs while trimming your Tier-3 fleet, how are you guys looking at your Tier-2 rigs going forward which stayed pretty constant recently, is there any chance of some of those getting sold or scrapped?
Jerry L. Winchester
Probably, I would say no, one of the things that we're very proud of is our - you're right exactly what happened as our Tier-1 have come in, we have effectively finished off sort of the remainder of the any Tier-3. On our Tier-2 fleet and this is a critical point, our Tier-2 fleet is very, very high end Tier-2. Many cases it's only DC power versus AC power that’s separates them from Tier-1 category, so they have rocking systems, hydraulic catalogue on iron roughneck top drives. They perform at Tier-1 performance on location.
And so effectively we are not looking to necessarily trim that. There may be a few of them as time goes on that we trim down, but we are pretty confident in the quality of that Tier-2 fleet and just to add a point on that there is some information that we have on in the Eagle Ford and the Utica where we have heavy concentration. And the Eagle Ford particularly against all other competitors, we have some of the best drilling, average drilling times on wells there and we don't have a Tier-1 rig in there, they're all Tier-2. That's give you an idea that the performance of those units and the quality of the asset and crews.
Okay that’s perfect and then one quick one, if you all don't mind. How much more room do you have to trim on SG&A and any kind of run rate outlook or guidance you could give for that or depreciation?
Cary D. Baetz
Yes Brooks, SG&A for the quarter was $16.7, that's I'll say that's we've done a pretty good job of whittling that down, we are off the CHK services, we've got the ERP up in running. So we hopefully are running most of the consultants out that helped us with that. So I think we're fairly decent shape at that level at this point in time.
Okay perfect. I'll jump back in. thanks.
You have a follow-up question from James West of Evercore ISI.
Hey sorry guys. One more from me, so the 11 spreads, did I hear you correctly that four working and then the rest are parks?
No, we'll average about six crews, we average six crews in Q4, we'll have six crews operating in Q1 at the end of the quarter.
Six crews in 1Q. All right awesome. Thanks guys.
I would now like to turn the floor over to Jerry Winchester for any closing remarks.
Jerry L. Winchester
Thanks, that's all the time we've got for questions. So let me wrap up by reiterating we're pleased with our fourth quarter execution and I'm confident in our strategy moving forward. With an experienced team and modern high quality assets, we've proven our ability to diversify and grow our customer base in the face of very difficult market.
Reputation for quality service and equipment is resonating with both new and existing customers and our diversified footprint will provide a strong foundation for our growth. If you have any additional questions that weren't answered please follow-up with Bob Jarvis and we appreciate everybody's time. Thank you.
Thank you for your participation for today's call. This now concludes today's conference. You may now disconnect.
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