Basic Energy Services (BAS) CEO Thomas Monroe Patterson on Q1 2016 Results - Earnings Call Transcript

| About: Basic Energy (BAS)

Basic Energy Services Inc. (NYSE:BAS)

Q1 2016 Earnings Conference Call

April 21, 2016 9:00 AM ET

Executives

Jack Lascar - President and Managing Partner, Dennard-Lascar Associates LLC

Thomas Monroe Patterson - President & CEO

Alan Krenek - Chief Financial Officer

Analysts

Marshall Adkins - Raymond James

Jason Wangler - Wunderlich Securities

Chris Denison - Stephens

Brian Uhlmer - GMP Securities

Waqar Syed - Goldman Sachs

John Daniel - Simmons & Company

Josh Large - SunTrust

Dan Pickering - TPH Asset Management

Walt Chancellor - Macquarie

Operator

Greetings and welcome to the Basic Energy Services First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Jack Lascar. Please go ahead, sir.

Jack Lascar

Thank you, Kristine, and good morning, everyone. Welcome to the Basic Energy Services first quarter 2016 earnings conference call. We appreciate you joining us today. Before we begin, I’d like to remind everyone that today’s comments include forward-looking statements reflecting Basic Energy Services’ view of future events and therefore potential impact on performance. These views include the risk factors disclosed by the Company in its registration statement on Form 10-Q and Form 10-K for the year ended December 31, 2015.

Further, please refer to these statements regarding forward-looking statements incorporated in our press release from yesterday. Please also note that the contents of this conference call are covered by those statements. In addition, the information reported on this call speaks only as of today, April 21, 2016, and therefore you’re advised that time sensitive information may no longer be accurate as of the time of any replay.

With that, I’ll turn the call over to Roe Patterson, President and CEO.

Thomas Monroe Patterson

Thanks, Jack, and welcome to those of you dialing in for today’s call. We appreciate your interest in our Company. Joining me today is Alan Krenek, our Chief Financial Officer. Today, I’ll briefly recap first quarter results and give a current overview. Alan will then discuss our financial results in more detail. I’ll then wrap things up with some final comments about what we’re currently anticipating for the second quarter and the reminder of 2016.

I won’t dive deep into our operating segments. I think the information is readily available in our release and public filings. This should allow more time for questions if necessary. I would also like to announce that we’ll be suspending our monthly operating updates. Instead, we’ll rely on our investor presentations and quarterly releases for operational updates.

Turning to our company status and first quarter results, as I’ve said in previous calls, this industry downturn has been unprecedented both in terms of link and the decline in activity levels. While this current period holds different characteristics from the mid 80s or the late 90s, it has been equally devastating to our industry.

Our extensive efforts to reduce cost, limit capital spending, preserve liquidity and scale our business to fit any level of customer activity have been proactive and successful. However, as the reduction in activity mounted, like all service companies we were unable to get ahead of the decline, no matter how proactive we tried to be.

I want to thank all of our employees for their tremendous efforts and sacrifices to help the company in this process. These efforts are now beginning to have a meaningful impact. The measures we have put in place and continue to add to extend our runway and should put us in a strong position upon a recovery.

We’re fortunate to have a young fleet of equipment that has been well maintained. Even the units we’ve enforced to cold stack are being maintained in a way that should keep our reactivation cost lower than most service providers. As an example, we’ve stacked over 140,000 hydraulic horsepower to date and we routinely operate these units, so they’ll be in optimal condition when we need them.

We’ve remained one of the toughest competitors in all of our legacy markets by striving to be the service company with the lowest cost structure. We’ve seen an increasing level of attrition within the ranks of our competitors as activity declines. In contrast, our utilization hasn’t experienced the same pace of decline and has even remained stable in some business lines. This is why we believe we have gained market share in some segments. This result is attributable to our outstanding local leaders and field employees.

The first quarter did not start as we had originally anticipated. We had expectations that the growing inventory of maintenance and workover projects that were differed at the end of 2015 would be completed in the first quarter. Even though these projects offer the lowest cost per barrel of all CapEx options available to our clients to different dips in WTI prices below the $30 mark kept customers spending in decline.

This drop in oil prices compounded with some severe weather impact caused revenue to fall by 19% sequentially. We also saw some frac projects in Western Oklahoma get delayed by some regulatory issues related to injection wells. While we have no injection wells in this particular area, we do provide frac services, so we felt the impact of this project correspondence.

The good news is that we’ve started to see an improvement in production related activity in late March, which has continued in April. This increase has been seen mainly in our well servicing and fluid services segments. It seems today’s prices have at least offered the possibility of financial returns to justify some maintenance activity.

We still believe there is a large inventory in differed maintenance and workover projects in all of our markets. That should come back quickly if commodity prices continue to stabilize. We’re pleased to have such a large portion of our fleet dedicated to these ongoing production businesses. This allows us to stay steadily busy when customer stop spending money at the drill bit on frac work. These improvements in utilization should flow quickly to the bottom line, as we’ve substantially lowered our fixed cost.

Preservation of liquidity has been and continuous to be one of our highest priorities. We spent approximately 6 million on CapEx in the first quarter and half of that amount was rollover projects from the fourth quarter of 2015. In our February call, we mentioned CapEx of 40 million for 2016. At this time, we anticipate that our CapEx will be well below this original amount. We continue to lower our field level cost and we have reduced headcount by approximately 40% from the peaks of 2014.

SG&A expenses are down by over 13 million per quarter from our peak levels in 2014. We also reset payroll taxes in the first quarter of every year. This year that impact resulted in about 120 basis points of margin decline for the first quarter. This impact will diminish in the second quarter.

Assuming further improvements in utilization and not including interest expense payments, we still expect to get the company to cash flow breakeven by the end of 2016. We continue to evaluate all options available for delevering, including strategic combinations and debt restructuring. While there is no new update on this front, it is a top priority in our list of financial objectives.

With that, I will turn the call over to Alan.

Alan Krenek

Thanks, Roe. This morning I will provide additional details on our first quarter income statement, as well as discuss selected balance sheet and cash flow items. As customary, when making comparison, comments will focus on sequential changes.

First, I would like to cover a few components of our revenue and segment profit in our well servicing segment, Taylor rig manufacturing generated $4.1 million in revenue, compared to $2.6 million in the fourth quarter. Taylor segment net operating margin was 102,000, compared to operating margin loss of 106,000 in the fourth quarter.

In the completion and remedial segment for the first quarter compared to the prior quarter, 42% of the revenue was generated from pumping services, compared to 53%; 24% from coil tubing compared to 22%; 29% from rental tools compared to 20%; and 5% from other services in both quarters.

The reported net loss for the first quarter was 83.3 million or $2 per share. Excluding the impact of special items covered in the earnings release, we reported an adjusted net loss of 54.8 million or a $1.32 per share. This compares to a net loss of 55.2 million or a loss of $1.36 per share in the fourth quarter.

Weighted average shares outstanding for the first quarter were 41.6 million. Adjusted EBITDA was a negative 11.1 million or 9% of revenue compared to a negative $7.5 million or 5% revenue in the fourth quarter.

G&A expense in the first quarter was 29.6 million or 23% of revenue, compared to 32.6 million or 20% of revenue in the prior quarter. The lower G&A was due to significant cost saving initiatives including headcount reductions and lower incentive compensation. Bad debt expense was 285,000 in the first quarter.

Please note that we have made significant progress on lowering our G&A expense since the fourth quarter of 2014 when it was 43.3 million. We expect G&A expense in the second quarter to be around 29 million as we benefit from additional cost reductions that were implemented in the first quarter. We expect G&A expense to be further reduced to around 28 million per quarter in the second half of this year from additional plan cost-saving initiatives.

Depreciation and amortization expense declined to 56 million compared to 60 million in the fourth quarter. We expect that depreciation and amortization expense for the rest of the year to be around 55 million per quarter.

Net interest expense was 18.7 million in the first quarter, compared to 17 million in the prior quarter. Interest expense included a partial quarter’s worth of interest associated with the 165 million term note that was completed in late February. On an as-reported basis interest expense was 20.7 million. This amount includes 2 million of deferred debt cost that were written off in conjunction with the reduction of our revolving credit facility from 250 million to 100 million. We expect quarterly net interest expense to be 23 million on a go-forward basis.

The operating tax benefit rate for the first quarter was 36%. This does not include evaluation allowance of 27.3 million related to a temporary impairment of the company’s tax intervals. We expect the operating tax benefit rate to be 35% for the full year of 2016. Our cash balance was 75.1 million at March 31, compared to 46.7 million at December 31.

We had 83.6 million of restricted cash, 78.1 million of this is from our term loan that will be made available in almost equal portions at the end of May and August as we satisfy certain post-closing conditions of our term loan. In addition, during the first quarter we used 5.5 million to cash collateralize a portion of our letters of credit as our borrowing base on our revolving credit facility had been reduced because of lower accounts receivable. We expect that situation to correct itself in the near-term and bring the 5.5 million back to unrestricted cash.

Several other items to note in connection with the term loan, we reimbursed on lenders for 2 million for their expenses and we incurred 1.2 million of expenses on our side. Net change in working capital in the first quarter was impacted by a larger than normal reductions in accounts payable including liabilities, as the majority of our annual profit taxes are due in the first quarter.

We expect working capital changes to be somewhat neutral in the near term. No amount was outstanding under our 100 million revolving credit facility at March 31 and we had 18 million of availability of which 15 million was subject to leverage covenants. We had 50.3 million of letters of credit outstanding at March 31, playing at December 31st. After we file our 10-Q early next week, we expect to close on the additional 15 million delayed draw as per our term loan agreement.

Our DSO at the end of March was 58, down from 65 at the end of December. Our over 90-days receivables represent 6% of our accounts receivable balance at March 31. We continue to experience good collection results despite the current operating environment.

Total debt at March 31 was 1 billion, of which 47.3 million was classified as current. A new accounting standard update now requires that debt issuance cost to be presented as an offset to the curing value of our debt.

Total debt at March 31 is comprised of the following, term loan due in 2021 of 165 million; senior notes due in 2019 of 475 million; senior notes due in 2022 of 300 million; capital leases of 99.7 million and unamortized premium on the 2019 senior notes of 888,000. This is offset by the term loan discount of 11.4 million and 12.1 million of unamortized debt issuance cost on the senior notes.

During the fourth quarter total capital expenditures were 6 million, which included 1.2 million for expansion projects; 3.8 million for sustaining and replacement projects; and 1 million for other. Expansion spending included 821,000 for well servicing, 357,000 for fluid services, and 23,000 for the completion and remedial segment. Roe has already discussed our expectations for capital spending for 2016.

Our main focus, as we move through 2016, will be to preserve our liquidity. We have made significant progress on reducing cost throughout the organization. We will look at further reducing infrastructure costs by evaluating less profitable operating locations and taking appropriate actions.

At this point, I will return the call back over to Roe.

Thomas Monroe Patterson

Thanks, Alan. The first quarter was impacted by steep dips in WTI pricing and weather interruptions. But it ended with some very positive signs in production related activity. Looking forward in the second quarter, we expect oil prices to remain choppy, but we also expect some improvements in our utilization levels, better weather and longer daylight hours should contribute to this result.

Our cost cutting initiatives are paying dividends and we’re starting to see the effects go through our financial statement. If we continue to execute on our current strategy, I believe we will attain our goals for cash flow by year-end. I’m not forecasting the recovery or when it occurs or at what price. Obviously, lower service costs present better financial returns for our customers in a lower commodity price environment, so oil shouldn’t have to get to $60 a barrel before we see some improvements in activity.

As I’ve said before the gating item will be labor. The longer our industry stays in this present condition the longer it will take service providers to respond to any increased demand because of the experienced personal in our industry has lost. In addition activity levels won’t react until confidence and more importantly credit return in to the EMP space. It appears the second half of 2016 is the soonest, we could see this pattern shift.

Once recovery does set in, rates for our services could rise quickly as accrued equipment will be in short supply. And it will take improved pricing to un-stack any idle equipment. This is why we are working hard to retain market share, retain key employees and keep our equipments in great shape. We expect to be in a very opportunistic position as activity levels rise.

That’s the end of our prepared remarks. So I’ll turn the call over to questions, operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you, our first question comes from the line of Marshall Adkins with Raymond James. Please proceed with your question.

Marshall Adkins

Roe, I know you’re not forecasting recovery, but I am. So I want to get a little more color on the status of your fleet and the ability to respond to an upturn in next year in 17. Specifically, I know you got a lot of stack horsepower and some stack workover rigs, how much is it going to cost you to get that going again, then maybe some commentary on the rest of the industry’s as well.

Thomas Monroe Patterson

Okay. Well, I will tell you what we’re doing. We have a monthly program for every single piece of equipment at stack, this includes our blenders, hydration units, all the pumps, frack band, you name it. We start it, we turn it, we try to engage the horsepower as much as we can to put it under some stress, so that we keep the equipment in the most optimal shape that we can put it in. Obviously if we are not hooked up anything and pressuring it up pumping on, it’s hard to put a load on the equipment, but we do the best we can to make sure it is in great operating condition. We do that every single month, there is a cost associated with that and all the stacked horsepower is out there in the rest of the country especially stuff that is buried in the back of these yards, that’s not happening into that stuff, so I’m glad it happened to our equipment and I’m glad we have been able to do it. Right now we think - we track piece of equipment and the cost we think to bring each piece of the equipment back up to what we’d call the perfect condition ready to deploy. We still think that number is under about $0.10 on the dollar versus replacement cost. It is about $0.075 for us right now, versus what we think the replacement cost is which is about somewhere in the neighborhood of about $750 to $800 per horsepower. So that’s what we have done with that particular equipment. We feel like, un-stacking it won’t be the problem, finding crews for it will be the problem.

Marshall Adkins

So, if kind of stay on that line of question for a minute, we’ve heard from a lot of industry players that there is a meaningful deterioration their ability of the horsepower and specifically to come back online. It sounds like at least your thought processes is it is going to cost lot to get your fleet, you haven’t had really any attrition in your fleet, but everyone else’s seems to be having attrition some in a huge way. How do I reconcile the difference there, [indiscernible] are you working it different way or what is the difference?

Thomas Monroe Patterson

Well we have worked ours differently. During the peak we did a lot of lower horsepower work which extended the life on our equipment that is number one. Number two, we do have a very new fleet we bought a lot of horsepower in 13 and 14, so that’s stuff as we - as it come down, was pretty new. I wouldn’t say our attrition level is zero. We have got some older pumps that probably never go back to work, but it is pretty small amount of our overall fleet. I would attribute the rest of the attrition with overall industry fleet to how much of that horsepower was already at the end of its useful life when it got stacked to begin with, so the dollar amount to bring that stuff back to work is considerably more than $0.10 on the dollar versus replacement cost. It’s probably running $0.50% to $0. 60, $0.75 of new cost. At that point you are better off building a new pump not thinking all that money into an old pump. So there is a huge portion of the 18 million or so horsepower that was out there, that was already at the end of the useful life when we stacked it during 2015 as an industry.

So I think that the portion that is probably people don’t recognize as quickly, then you got some other fleets out there, some of our competitors we have seen stack their equipments, cannibalize their equipment - they may talk about a stack fleet that is ready to go back to work when you look at it it’s missing engines, it is missing transmissions, the fluids in all robbed of off it. I mean you’re talking about some primary components they’re missing; you’re talking about some big CapEx dollars to get that stuff back into usable shape. Well that’s not is going to be the fleet that our customer goes why really want that one. I want that fleet that’s missing radiators and engines. They are going to want the fleet that you can turn it on pretty quick and go back to work, if they are going to pay to un-stack some horsepower. So, I think if you can keep your fleet in that shape and I know some competitors that are doing just that, they’re doing what we’re doing, that horsepower comes back pretty quick, but the attrition level across the industry is far greater than most people have given it credit. There is a lot of horsepower that never come back to work because we chew through it for replacement components as any OEMs out there they are not selling a lot of replacement components. So we are using up that stuff as an industry and a lot of that horsepower was at the end of its useful life when we stacked it at the end of ‘14 anyway and through ‘15.

Marshall Adkins

That’s great color, one last one for me you mentioned the labor side is probably going to be constrained. How do we know - it’s not like we have been hiring a bunch of people and I’ve heard the same thing from a lot of other players as well, but I’m just curious, how do we know that labor - it seems like, people show up out of the woodwork when there is an upturn, but everyone is in consensus it’s a little bit different I just want to know why that is or why do you think that is.

Thomas Monroe Patterson

I think the length of the downturn is probably going to be the biggest impact on our ability to try to get rehire is done. Some of the folks have been burned by the industry pretty good and they are not just going to come back, they’ve got stable - if you look at the unemployment rates across the country especially in Texas, Oklahoma and New Mexico, these people went and found other work. So because the unemployment rates didn’t jack-up as we laid them off. And I think that stable income and other markets that aren’t as volatile as ours is probably pretty attractive for some. Some will come back, the dollars will bring them back and they will come back. We just think it is going to be a small number and we think that the rest of the workforce that we have to crew up this idle equipment with will be pretty green. Efficiencies will go down, we’ll have a training period where we have to teach those new employees how to run the equipment and how to behave in our industry and not get hurt, it’s a process, it doesn’t happen overnight, we’re talking months maybe even a year or more to be able to recruit a lot of this equipment, it will be a huge gating item just trying to attract that labor back in to the market. We throw enough money at it, we’ll get some good people back, but remember if we are going to throw money at it we are going to raise rates too because the factors [ph] can’t afford, but to pay any higher wages without some of offset in rate.

Marshall Adkins

Great job Roe, thank you.

Thomas Monroe Patterson

Thanks.

Operator

Our next question comes from the line of Jason Wangler with Wunderlich Securities. Please proceed with your question.

Jason Wangler

Good morning.

Thomas Monroe Patterson

Good morning Jason.

Jason Wangler

I was just curious on the Taylor side, looked like you had a nice bump there. Could you maybe just walk through what you’re seeing in on that end?

Thomas Monroe Patterson

You know most of the activity is non-oilfield related right now and it is basically manufacturing of water well rigs. So that’s what you are seeing, you’re not seeing any well servicing or rig activity.

Jason Wangler

Okay, that’s helpful, that’s kind of where I was curious about. And then just on the - it seems like the production side is holding up a little bit better, but on the completion side is it just still a focus from the EMP companies just continually hitting on price, is it competition coming in and you’re just cutting somehow even lower, is it both just kind of where you are seeing those what seemed like continued pricing pressures despite the fact that you know we’re sitting where we are on the margin side.

Thomas Monroe Patterson

It’s just rig count. Less wells being drilled less work for these fracking companies that remain in the space, so the number of bidders have less and less to bid on every single month, every single week. So they all get crowded into the same bidding space and that just keeps the lid on rates and makes it tighter and tighter and harder and harder to get that work. There can only beat one winner. I mean you can’t have three frack companies frack one well. So, we will only get one winner on each well and as the number of wells go down and decrease, it just gets tougher and tougher to make a living in that business.

Jason Wangler

Well, I guess, maybe is it - are the E&P, I guess, pushing? I guess, what I am asking, are they sending out letters? Or are they coming after you guys? And I need to cut it or is it, I guess, your competitors just continually cutting price I guess is what I’m curious on, because I guess maybe it’s coming from both ends is all I’m just wondering about?

Thomas Monroe Patterson

No, I don’t think pricing has come down much late in the last quarter or quarter and a half. I think we’ve seen pricing pretty much bottom. And the reason is because we are really very, very close if not right at cash flow breakeven and in some cases, some frackers have bid below what we think is cash flow breakeven, so I think that prices just can’t go any lower. Customers always want lower prices, so they are always asking, but I haven’t seen a push, any meaningful push, letters or anything like that lately where they are asking for further discounts, more than anything else they just don’t have anything to do. They don’t have any work to do.

Jason Wangler

That’s helpful. Thank you very much. I’ll turn it back.

Operator

Our next question comes from the line of Matt Marietta with Stephens. Please proceed with your question.

Chris Denison

Hey, guys, this is Chris Denison on for Matt Marietta. We are just wondering just talking about this inventory of maintenance workover projects, could you just dive in a little more? I mean what kind of opportunities are you seeing? What’s maybe the magnitude that you would expect? And how they play out if prices were to stabilize around current levels?

Thomas Monroe Patterson

Well, as the year wrapped up in 2015, we saw more and more customers shut in wells that were, say, under 15 barrels a day and just not do the maintenance work if they had a pump go down or a rod part or some relatively minor maintenance item. They just refused to fix it. They just weren’t going to spend the money at sub $30 or sub $35 per barrel. They just weren’t going to do it. So they just said we’ll come back to it. And I guess what we’ve seen is when prices have tipped up into the higher $30 range, $38, $39, above 40, customers have been more willing to go ahead and do some of that work. We know that as we’ve heard and listened to customers talk about shutting in these wells and not doing that maintenance work that that inventory continues to grow or has grown. So as we work that off, if prices stabilize or go up from here, it could mean for our utilization on the well servicing and fluid service side, it could mean 200, 300 basis points in utilization, maybe more.

Chris Denison

Right, understood and then on the Oklahoma side, I mean, what do you guys see as the risk going forward here in relation to your frack projects and then any risk on the salt water disposal wells side?

Thomas Monroe Patterson

Well, we don’t have any SWDs in the area that’s kind of gotten all the scrutiny. That’s fortunate, but we do frack in that market for a couple of customers. And right now the fracking is completely shut up. It’s completely postponed. We’ve got several wells to do in there, if it ever comes back. I think probably the solution is going to be injection of water in different zones rather than the zone that’s under the scrutiny. So I think they will spread it out, spread out the water into different zones and move it around rather than concentrating in one particular zone, which is what they were doing before and that ought to alleviate a lot of the issues and the scrutiny on it. I mean there is varying opinions out there whether you believe the science, the injection wells are actually causing - inducing tremors and you can debate that all day, but I think the solution will be some sort of compromise for water injection into different zones and that ought to happen sometime in the next six months or so.

Chris Denison

Right, understood. Yeah, I appreciate the color guys. We’ll turn it back over.

Thomas Monroe Patterson

Thanks.

Operator

Our next question comes from the line of Brian Uhlmer with GMP Securities. Please proceed with your question.

Brian Uhlmer

Very good morning gentlemen.

Thomas Monroe Patterson

Good morning, Brian.

Brian Uhlmer

I have a couple of easy ones for you. You called out skim oil a few times in the PR. What percent of your fluids business is related to those sales?

Thomas Monroe Patterson

Yeah, it’s not very much as a percentage, but you have to realize that basically -

Brian Uhlmer

It’s all margins.

Thomas Monroe Patterson

It’s all margins. So, it typically had been running at about close to 2 million a quarter.

Brian Uhlmer

Okay.

Thomas Monroe Patterson

It was down in the first quarter.

Brian Uhlmer

Is that sort of at the spot rate in basin or is it generally discounts at that spot rate?

Thomas Monroe Patterson

It’s always a discount to post it, always. And discount can grow if pricing falls quickly the spread between skim oil price and posted can grow. So, it can come under some real pressure in a low price environment.

Brian Uhlmer

Right, okay, perfect. Also, secondly a little more difficult question, kind of walking through the imaginations of the 3% to 4% revenue decline sequentially, can you walk us through where the majority of that decline is going to come through, if we are above 40 here, if the discussion would pretend us to believe that well, servicing revenue should be at a minimum flat and potentially up this quarter, so with almost all of that revenue decline become necessary from completion, is that how to look at it?

Thomas Monroe Patterson

That’s correct. That’s exactly how to look at it and look, we’re giving you our best guess based on what we see right now. We could get surprised and revenue could surprise to the upside, we will see. You just can’t throw the rig count decline or what you expect the rig count decline to be and layer it on top of what our revenue is going to be, because so much more of our work is increasingly production related. So, if the rig count goes down, which we expected to do, our completions business will suffer and that’s what you see in our guidance. What we are saying is we expect the increases in fluid services and well servicing to not quite offset the decreases we could see in the completion related segments.

Brian Uhlmer

Okay. That makes sense. Now, on the bright side, if we go to Marshall’s boom cycle in 2017, can you walk us through the cash flows and your ability to ramp receivables as we go through that? Let’s just say, you burn another 100 million bucks through the back the next three quarters and the cycle doesn’t pick up at all, as we get into ‘17 and pickup, how do we finance those receivables and have you guys started looking at that and the methods to do that if you start to increase the revenue 20% to 25% in any given quarter?

Thomas Monroe Patterson

Yeah, I think we do in our models that we have developed for 2017, we have been able to do it without having to have any additional borrowings other than utilizing the basically $35 million of our availability on the revolver when those receivables grow. Of course, we have more availability. So we would use that 35 million and we think we would have sufficient cash flow balance at the end of the year combined with the 35 million of availability on the revolver to expand a surge in revenues.

Brian Uhlmer

And can you - sorry to keep going on that one, but how does that revolver expand based on receivables? Is that already written into it? And do you expect that you will be able to pretty easily expand if revenues do go up even greater clip that what the revolver could handle?

Thomas Monroe Patterson

Well, right now it’s pretty much set at the maximum amount. Once we take this $15 million of additional, however, as our intangible asset value grows, then we have more availability under some of our indenture that would allow us to grow that revolver.

Brian Uhlmer

Okay. Right, right, not right now, but as we grow the company, it sounds great. Thanks, guys. I will turn it over.

Thomas Monroe Patterson

Thanks, Brian.

Operator

Our next question comes from the line of Waqar Syed with Goldman Sachs. Please proceed with your questions.

Waqar Syed

Thank you. Gentlemen in the CNR business, how did the monthly revenues change? Did you see continuous decline throughout the quarter or was March better than February?

Thomas Monroe Patterson

About the same, it weren’t really much changed. It was higher in January and it declined slightly in February and stayed the same in March.

Waqar Syed

Okay and then you mentioned the P&A activity had picked up some. Is that just temporary kind of pickup or do you think that continues into second quarter and perhaps later as well?

Thomas Monroe Patterson

I think that some of these regulatory bodies are paying close attention to the temporarily abandoned well bores and they are forcing some of our customers to go ahead and make a decision, are you going to put it back on production or you going to go ahead and plug-in abandon it and they’re just holding their feet to the fire a little bit better than they have in the past. So that’s - the regulatory push has been probably the drive on that plug and abandon work. I will say back to your previous question on CNR remaining flat, remember that as the quarter unfolded and the rig count continued to fall, we saw an increase in our Rental & Fishing tool revenue and an increase in coil [ph] and a couple of other parts of that segment that offset the decreases in frack. So don’t think that frack was steady throughout the quarter, it was actually coming down and these other segments were off setting it.

Alan Krenek

And correspondingly, the margin in March because what of what Roe just said were significantly better than what it was in January and February in CNR.

Waqar Syed

The margin was better because of the makeshift or because you were able to right size the company?

Thomas Monroe Patterson

Combination of both but the makeshift in services helped quite a bit.

Waqar Syed

Okay. Then in terms of cost cuts obviously, you have been pretty aggressive in those. As the cycles kind of turns and we have fire activity, hopefully - meaningfully next year, how much of this cost cuts are cyclical in nature and how much are kind of secular that you can capture over the long-term?

Thomas Monroe Patterson

I think that - we’re probably - it’s a small amount that’s going to be cyclical. We have to reinstate some of the comp and seen comp type related items that has been stripped as conditions improve and we start to compete for employees, we’ll have to make sure that our incentives is equal to what we see in the competitor space. But a lot of the infrastructure realignment we have done and the cost-cutting measures we have put in place we think there is pretty sticky and should be there for a while.

Alan Krenek

Back compared to fourth quarter of ‘14 to first quarter of ‘16 on the G&A front, there has been reduction in headcount of about 230 people. I would say that we are not going to have to go back and rehire the majority of those people, we may have to hire a few more, but we’ll be able to retain those savings from those headcount reductions.

Thomas Monroe Patterson

That’s just G&A

Alan Krenek

That’s just G&A

Thomas Monroe Patterson

The field employees obviously have to rehire as we redeploy equipments.

Waqar Syed

Are there any layers of management in the field as well that we may have taken out that probably won’t return or is just the G&A costs the ones that are going to be more secular nature.

Thomas Monroe Patterson

No, I think there’s some infrastructure and overhead on how we manage our business that we stripped out that will be pretty sticky, it will be awhile before we see those layers return. So we would have to see a considerable improvement in rig count before we would ever be in a position to need those back so we feel like fixed cost are going to be remind very low and we are going to be able to any improvement utilization should flow through to the bottom-line quickly.

Waqar Syed

And you mentioned, did I hear clearly that the well servicing utilization was up 203 basis points so how are from about 35% in March to maybe closer to 37% to 38% is that what you said.

Thomas Monroe Patterson

No, what I said was it could go up that much. I was asked to try to quantify what the work over inventory and maintenance inventory projects are like and what that could do to our utilization rate. So if those projects are reactivated and that maintenance is performed we could see somewhere 200 to 300 basis points improvement utilization, may be more. We will have to see how that goes, but it could have that kind of impact on our utilization rates if customers choose to do that work.

Waqar Syed

So where does the utilization stand today in March it was 35% for wealth service rates.

Thomas Monroe Patterson

It’s 35 in March.

Waqar Syed

And do you have an update on where we stand today.

Thomas Monroe Patterson

It ought to be improving for April is what we said on the call

Waqar Syed

Okay and then just one final question for me. You mentioned that you will stop giving monthly guidance on monthly operational data updates. Why is that?

Thomas Monroe Patterson

Well, I think the markets to job right now greatest volatile these updates swing every month. And you know they are not always good reflection of how the quarter is going right now. And I think they have lost importance at this point in their value. You notice the rows that spent and so at some point in time we feel that it is relevant to start doing it again, we will start doing it again.

Waqar Syed

Sounds good, thank you sir.

Thomas Monroe Patterson

Thanks.

Operator

[Operator Instructions] Our next question comes from the line of John Daniel with Simmons & Company. Please proceed with your question.

John Daniel

Hey guys.

Thomas Monroe Patterson

Hey John.

Alan Krenek

Hey John.

John Daniel

Given the rebound in oil prices from the lowest reached Q1 at what point do you think you’re going to start going back to the customers having that discussion on release pricing just given the unsustainable nature and what point do you think you actually get some relief?

Thomas Monroe Patterson

Well I have said this a couple of different times that historically we need to see expected utilization rates kind of in each segment reach in the mid-70s before you can get some pricing traction. I don’t think this is going to be a similar recovery this time around John. I think that utilization rates probably about 60 start to want those discussions this time because we are going to have to get some great help to pay improve wages. So we start working, employees are there, we start getting more hours and we start needing to make some more hires for relieved crews. To attract that labor and keep the current labor we are going to have to pay a little more and do that we are going to have to have price improvement. And I think that is another thing substantially happen with a little bit of frenzy over accrued equipment because the customers needed or wanted it is going to get chewed up pretty quick it is going to get obligated very quickly and that ought to also bring about some quick pricing relief. I think that utilization - effective utilization rates in the 60s probably starts to engage those discussions overpricing improvement.

John Daniel

Okay, you mentioned also you had a good discussion on the sort of the equipment attrition. Let’s assume that a frack company as major component parts from the unit, that’s benefit with the demand horsepower begins to accelerate and that same company to try go out and replace those component parts and deploy that unit, notwithstanding there’s a difference in quality between that repaired unit and new one. How long does that process, the overall process take to get that unit ready to go.

Thomas Monroe Patterson

Probably 60 days from the time you order the component - depending on what the component is most of them are readily available right now. So I’m going to say 60 to 90 days, you can get what you need and get it installed and have the unit ready for work. Now, that timeframe will shrink quickly if everybody tries to go through the same door at the same time.

John Daniel

Okay, fair enough. Well, you also mentioned in the prepared remarks that you guys are looking at strategic combination at this point your buyers for larger wheels are which rather pursue regional talking opportunities and then on that same point if you were to look at the larger transaction you need to go to the debt restructuring process in order to accomplish a bigger deal.

Thomas Monroe Patterson

So the answer to the first question as there is no bias. We would look at anything that made good sense. Obviously we are short on currency; our equity is our best currency right now to make a transaction happen. So we are limited with dry powder, but we would be interested in anything that makes like I say good financial sense. Second question, the answer is yes. Either the targets debt and ours both will have to be restructured one of the other, I mean most of the targets that are big have enough depth that are kind of toxic at this point. So we would have to have some sort of restructuring to make most of those transactions work and make sense.

John Daniel

Okay thank you for your time.

Thomas Monroe Patterson

Thanks John.

Operator

Our next question comes from the line of Josh Large with SunTrust. Please proceed with your question.

Josh Large

Hi guys, good morning. Did you just provide 2Q segment guidance?

Thomas Monroe Patterson

No.

Alan Krenek

No.

Josh Large

Okay, so it sounded like working capital is going to be minimum benefited all this year. How should we think of CapEx and capital leases going this year? You said it is less than 40 million now.

Alan Krenek

As far as capital releases we are going to enter into very few based on that capital spending plan that Roe talked about. So what that means is the capital lease balance is going to be declining at a pretty good rate throughout the year, which means the lease payments that can see the cash flow statement are going to go down accordingly.

Josh Large

I guess previous guidance at 15 million of the 40 would be capital leases, is 15 million still convert good run rate for that this year even though the 40 is not the -

Alan Krenek

Maybe more like 10, yeah. Yeah, it will go down accordingly. It would take a big pop in activity for that to change, yeah.

Josh Large

Okay great, then if you could going to little bit more detail on well service margin improvement quarter over quarter I know a lot of restructuring was involved servicing was - except the primary beneficiary.

Thomas Monroe Patterson

Yes.

Alan Krenek

Yeah and right sizing wages, wages were tricky and I’ve said this before it was hard to go down on wages in well servicing because there was so many entrants into that business in 2013 and ‘14 as those competitors have kind of fallen through the cracks and left the market we have been able to right size wages a little easier but as those competitors are going out they fight hard by trying to raise wages and keep the best people in an effort to keep utilization high. And so they put an artificial lift on wages and the work doesn’t justify those wages or the amount of work that doesn’t justify those wages, but the competitive nature of the space did and we had to be competitive. So as that’s falling out and work has come down and lot of those competitors have left the space we have been able to right size those wages. I think that is the biggest driver there. We’ve also done some considerable cost cutting initiatives, I don’t want to take away from that and some restructuring on overhead how we manage those businesses that’s all been contributing factors to that, but I think the biggest driver has been right sizing the wages over the last quarter. And that’s a process that is ongoing we are continuing to do that today.

Josh Large

Okay, could you give us sense of I guess how much of the rightsizing has been done already I think you said it is continuing to say, should we continue to think that is going to be a pretty decent benefit going forward?

Alan Krenek

I hate to put a percentage on it and try to quantify for you because it is moving target, it is going to move with activity. So as demand changes you know we will see that change if demand goes up and we see a tick in well servicing go up, those wages could actually flatten out and maybe even go up, if it stays around.

Josh Large

Okay great that was all I had. Thank you for your time.

Alan Krenek

Thank you.

Operator

Our next question comes from the line of Dan Pickering with TPH Asset Management. Please proceed with your question.

Dan Pickering

Good morning guys

Thomas Monroe Patterson

Hi, Dan.

Dan Pickering

So just looking at the timing of incremental cash coming onto the balance sheet I mean clearly I think you guys feel like you got good running room here. I heard I think Bryan throw out a $100 million cash burn through the remainder of the year, do you think that’s a reasonable level, should it be less, should it be more kind of what sort of breathing room do you think you’ve got before the cash becomes squeeze.

Alan Krenek

Yeah, a couple of things, I don’t think it’s going to be 100 million for the next three quarters. So I think it’s important to note that when you look at the progression through the quarter - the first quarter you know we had a total of $11 million negative EBITDA for the quarter. Well, about 80% of that was generated in the first two months. So we saw significant progress in the month of March on the cost savings standpoint as well as improved margins. So I would say that we look - last earnings call, we said that once we figure in the additional interest payments from the term loan that the cash burn would be about 28 million. And we think that we did and that’s assuming the basically a zero EBITDA generation and so roughly 2000 in CapEx and then capital lease payments coming down to about 10 million. About 2 million in CapEx and 10 million in capital lease payments and then some add backs for some non-cash items coming back in. Now, as we generate some positive EBITDA then that gets lowered and I think Roe said that basically by the end of the year and our definition of cash flow break even we should be pretty close.

Dan Pickering

Basically I think what here you are saying Alan is as you got a window well into ‘17, if not to the end of ‘17 assuming some moderate improvement in the business. You lost 2 or 3 million of EBITDA in March, I think it’s what you’re implying and that’s improving with cost cutting et cetera and so we ought to be the point where the end of ‘17 feels like an okay place to be.

Alan Krenek

If we see those improvements that you mentioned.

Dan Pickering

Okay great I just kind of wanted to confirm the numbers thank you.

Alan Krenek

Thank you.

Thomas Monroe Patterson

Thanks Dan.

Operator

Our next question comes from the line of Walt Chancellor with Macquarie. Please proceed with your question.

Walt Chancellor

Hi good morning, I think you mentioned to Bryan the ability to expand the revolver and recovery scenario under your dentures I mean what’s the magnitude of that how much did that revolver role about?

Thomas Monroe Patterson

We expand the current our ability to half the current revolver as receivables go up without tripping any kind of negative covenant that’s number one. And then if we even see further improvement in AR which will affect our tangible asset value which we only have a certain percentage of that we can put secured indebtedness under the bond and dentures, as that goes up, as AR goes up, we’ll have room to expand the revolver should we choose to.

Walt Chancellor

So I guess what proportion.

Alan Krenek

That’s not a near-term event.

Walt Chancellor

Do you have a sense of the proportion of those increased receivables that could be applied?

Alan Krenek

No, I think at this point that that’s a pretty tough question to answer. So I don’t know how to answer that.

Thomas Monroe Patterson

It’s quantifying of that right now, is probably not something need to be good, we just need to see grow AR what we need to do.

Walt Chancellor

All right fair enough and then Alan did you mention the share count in the quarter?

Alan Krenek

Yeah, it was 41.6 million.

Walt Chancellor

And how is it going to progress through the balance of the year.

Alan Krenek

I think it should stay about the same.

Walt Chancellor

Okay thank you.

Alan Krenek

Thank you.

Operator

Mr. Patterson we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thomas Monroe Patterson

Okay. Well, thanks everybody for calling in. We’ll talk to you next quarter.

Operator

Ladies and gentlemen this does conclude today’s teleconference you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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