Newpark Resources' (NR) CEO Paul Howes at Barclays CEO Global Energy Power Conference

| About: Newpark Resources (NR)

Newpark Resources Inc. (NYSE:NR)

Barclays CEO Global Energy Power Conference

September 7, 2016 01:05 PM ET

Executives

Paul Howes - CEO

Analysts

Will Thompson - Barclays

Will Thompson

My name is Will Thompson, a member of the oilfield services team at Barclays. It's my pleasure to introduce Paul Howes from Newpark, CEO of Newpark Resources. Newpark Resources is one of the leaders in drilling fluids, providers of drilling fluids and has a differentiated mats technology that Paul will address. Paul was appointed CFO on March of 2006. Paul has had multiple experiences across different industries, including defense industry, chemicals, plastics, manufacturing and packaging.

So with that, I'll hand over to Paul.

Paul Howes

Good afternoon, everyone. I'd like to welcome you to the Newpark Resources presentation. This afternoon, I'll provide you with an overview of our business and outline some of the changes in the competitive landscape predominantly in the drilling fluids business.

To introduce or reacquaint you with the company, Newpark is a focused service provider in the oil and gas industry with two operating segments and a meaningful presence around the world. After experiencing a strong growth cycle spanning 2010 to 2014, Newpark like all other oilfield service companies experienced a meaningful decline over the past 18 months, resulting from the significant decline in commodity prices.

Our fluids business contributes over 80% of total revenues, and through continued global expansion now spans in the major markets of North America, North Africa, Eastern Europe, the Middle East, Latin America and Asia Pacific. Meanwhile, our mats business, which has been a smaller contributor to the company's revenue, but a very strong historical contributor to operating income, is currently in a transition phase, expanding beyond the well site and moving aggressively into non-exploration markets, the most notable new market is the utility industry, where our matting systems are being used during the construction and maintenance of power transmission lines.

Looking at the geographic mix, we have made significant progress in our efforts to expand globally over the past several years. The international markets have long been a key part of our strategy, not only because they represent continued growth opportunities in regions where we have lower market share, but also because the international markets provide greater diversification, helping to stabilize our revenue stream during times of significant volatility in North America.

In addition, contracts in the international market tend to be longer term, enabling us to drive operating efficiencies and achieve higher operating margins. As a result of the nearly 80% reduction in US drilling activity since the peak levels in 2014, combined with our continuing international expansion, we are currently generating nearly 60% of our consolidated revenues outside of the United States. Looking ahead, we expect this trend will eventually reverse as the US land recovers.

Now, let me talk a little bit more about our drilling fluids business. We are the largest independent drilling fluids provider in the world, standing number three globally behind Schlumberger and Halliburton. Our focus on the fluids business is a key strength enabling us to differentiate from our competitors, both in terms of technology and service quality. And while we are currently navigating through an extremely challenging cycle in the industry, it's important to highlight that we are seeing significant changes in the drilling fluids competitive landscape.

In the US land market, several competitors have recently announced large-scale reductions in their drilling fluids business, including exiting complete regions or shifting to a wholesale business model. Outside of the North American land market, we are finding that IOCs and NOCs are increasingly seeking out Newpark's drilling fluids business to participate in their projects, while the large integrated service companies reduce their focus on drilling fluids. As a result, we are seeing increased opportunities for long-term growth, predominantly with IOCs and NOCs in the international drilling fluids market and the deepwater Gulf of Mexico.

Now, we will take a look at our North American market in little more detail. As I mentioned a moment ago, while drilling activity in the US is down nearly 80% from peak levels in 2014, managing this region through this historic downturn has been our biggest challenge. To successfully navigate through the cycle, we followed a balanced approach. On one hand, we moved aggressively to manage our cost structure, reducing our North American fluids workforce by nearly 60% since the beginning of 2015. While at the same time, we work diligently to protect and in some cases add to our core competencies, while streamlining the business to ensure that we have the capabilities to fully capitalize on the US, eventual US recovery.

We've also worked extremely hard in improving working capital from reducing our inventory to collecting receivables. And as the upper bar chart shows, our North American revenues in 2015 and ‘16 have tracked very closely to the overall market decline. In this difficult environment, where we are facing not only decline in drilling activity, but also pricing pressures from our customers, our primary goal has been to protect our market share. As you can see in the lower graph, not only did we maintain our North American market share, but we've also been successful in expanding our share in this very competitive environment.

So what's the key to these share gains? Ultimately, it comes down to superior service and execution, having the right products, the right people and the right solution for our customers. As we look ahead, our goal is to leverage the increased market share position into meaningful revenue growth as the US recovers. And with the changes in the competitive landscape, we see additional opportunities or share gains and further revenue growth.

Now, turning to our international business, as I touched on earlier, international expansion has been a key part of our long-term strategy at Newpark, while not insulated from the market volatility driven by the price of oil, the international markets tend to be more stable than North America as IOCs and NOCs generally continue to execute on long-term drilling programs. As illustrated in the lower graph, despite the challenging industry dynamics in 2015, we saw an increase in our international activity, led by strong growth in our EMEA region, putting aside currency translation of $57 million, the takeaway from this slide is that our international business saw a meaningful increase in customer activity during 2015, despite the declining market. The primary driver was share gains in several key countries. And in 2016, that strong performance in our EMEA region has continued with the first half on pace to exceed 2015 levels.

For many years, we've had a disciplined and methodical approach to entering new countries in growing market share. This approach has resulted in a number of new contracts, which have expanded our geographical reach, including contract wins in the Black Sea, Kuwait, Algeria, Republic of Congo, Uruguay and Albania. While these contracts have been very meaningful in our efforts to grow market share and to improve our geographical diversification, what's more meaningful to us is the customer mix of these awards. ExxonMobil, Kuwait Oil Company, Sonatrach, Eni, Total and Shell, which is another key part of our strategy. To upgrade our customer list from small independents to the large IOCs and NOCs.

While most small and mid-sized oilfield services companies pulled back over the past 18 months or eliminated their capital spending altogether, we've continued to make strategic investments, investments that will provide continued growth opportunities well into the future. Following the completion of our Fluids Technology Center in 2013, we completed our new Fluid Manufacturing and Distribution Center earlier this year. The state-of-the-art facility represents another significant milestone, providing us with world-class manufacturing capabilities to ensure the highest quality drilling fluid products in the industry, including our evolution family of high-performance water-based systems and our new offshore product line Kronos. This facility also provides added capabilities to support the development of the next generation of fluid technologies.

Also, I'd like to touch on the final piece of our major infrastructure investment, the recapitalization of our deepwater Gulf of Mexico facility located in Fourchon, Louisiana, a project that is currently nearing completion. As I mentioned earlier, the deepwater Gulf of Mexico is a significant opportunity to expand our presence with IOCs even in the current environment. Deepwater markets are the most technically challenging in the world, with wells generating revenues of up to ten times your typical land-based well.

Our efforts to penetrate the deepwater began several years ago in Brazil. We have since added to our deepwater resume by completing a series of deepwater wells from ExxonMobil in the Black Sea and during the first half of this year, we worked with Total in Uruguay on a world-record setting well for ultra-deepwater, drilling in the water depth of over 11,000 feet.

With our facility nearing completion and our expanding resume in deepwater, we believe we can successfully leverage our international deepwater success back home here in the Gulf of Mexico. This market has historically been dominated by only three fluid companies, Schlumberger, Halliburton and Baker. By completing both organizational and capital investments to enhance our capabilities, we are confident that we will take a meaningful share of this deepwater market in the upcoming years.

Fortunately, we entered the current cycle with a strong balance sheet, which has allowed us to continue to make these long-term investments in our fluids business. Ultimately, we see the investments as a requirement, a requirement that E&P operators will demand from a global technology leader in drilling fluids.

Now, turning to our mats business. The transformation of our mats and integrated services business has been a great success in recent years, driven by our customers desire to improve operating efficiencies and their need to protect the environment during drilling and completion operations. And given the current regulatory environment, which we do not see a lessening of regulations going forward, quite the opposite, we expect them to increase. Our mats business has historically been a very profitable business for us, with operating margins at or above 40% for 19 consecutive quarters, spanning from 2010 and early 2015, driven primarily by the North American oil and gas market.

In light of the dramatic decline in drilling activities, 2015 was the year of transition for the mats business, as we pivoted and refocused our efforts on expanding into other markets, including construction and maintenance for power transmission and pipeline infrastructure. And while it takes time to penetrate new markets, we are seeing meaningful signs of progress. And as you can see on the lower pie chart, two thirds of our revenues are now derived from non-E&P markets, most notably the utilities industry. Given the expectation of continued weakness in drilling activity through the end of 2016, our primary focus will be the continued penetration of these non-exploration markets, both in North America and Europe.

So, how do we plan on accomplishing this? Essentially, by following the same approach and strategy that led to our leadership position in the oil and gas industry. Our DURA-BASE product line is the premium composite matting solution in the market and similar to our strategic investments in drilling fluids, we've continued to invest in our mats business during the recent cycle with the objective of strengthening our business and positioning it for future growth. In 2015, we officially commissioned the major capacity expansion of our mats manufacturing facility, a project we began in 2013 in an effort to address capacity constraints that were limiting our growth. Although the incremental capacity is not needed in the current environment, it does provide the ability to support our new market expansion objectives, as well as the eventual oilfield recovery.

More importantly, however, we also completed the mats technology center, which is pictured in the top photo on the slide. This new facility improves our capabilities to develop new products and enhance existing lines, while building upon our intellectual property portfolio. It also allows us to experiment with material composition and evaluate new formulations with an endgame of enhancing performance and optimizing the cost of existing and new products. Ultimately, our goal is to fully transform the offering from a matting product to a worksite system solution, driving to the lowest cost position for our customers.

And as we move into new markets, it's important to highlight that we believe the non-exploration markets have a larger addressable market size than the US exploration markets that we've historically participated in. We anticipate that our strategy will lead to a more diversified and stable revenue stream with a greater balance between different industry sectors and geographies. In order to penetrate these markets, we believe it's critical that we continue to innovate and expand our product offering and bringing unique value to our customers. One such advancement I would like to highlight is the Equipotential Zone Grounding System. Our customers that perform maintenance on high voltage transmission lines frequently need to create equipotential zones to provide fault protections arising from induced currents at nearby active powerlines. We have developed a new system that provides our customers with an ability to quickly and efficiently assemble an equipotential zone and I am pleased to tell you that since the beginning of the year, we have been awarded two US patents related to this technology. This is just one example of how we are creating unique value for both our customers and our shareholders.

And finally, let me talk a moment about our strategies for maintaining liquidity through the cycle. As we navigate through 2016, our objective is to strike the right balance between short-term and long-term, maintaining our focus on protecting our balance sheet and liquidity, while preserving our core capabilities and seeking to maximize long-term returns for our shareholders. We ended the second quarter with $93 million of cash on hand, an $11 million improvement from the first quarter, a net debt of $78 million and on undrawn credit facility. Substantially, all of our debt consists of $161 million in convertible notes during the fourth quarter 2017. As we progress through the cycle, we are taking actions to ensure that we are adequately prepared to settle the convert maturity, regardless of the timing of industry recovery. We are aggressively managing working capital to drive cash generation.

Since the beginning of 2015, reduction in working capital has generated nearly $100 million in operating cash flow and meaningful opportunities remain, particularly through the recovery of income taxes paid in previous years, and further reductions in inventory. So between available cash, liquidity from a credit facility and future cash generation from working capital reductions, the major pieces are identified to address the Q4 2017 maturity.

Further, by using our cash generation to settle a meaningful portion of the maturity, this will keep our debt level at a fairly modest point. Meanwhile, we also expect the capital expenditures will ramp down over the next few quarters. As I touched on a moment ago, over the past few years, we've made significant investments to enhance our capabilities, both in the fluids and the mats businesses. We expect our Gulf of Mexico deepwater shore base to be substantially completed within the next few months, at which time our ongoing capital needs should be limited similar to what we experienced following the 2009 cycle.

Looking forward, while we continue to see challenges in the near-term, it certainly feels like we are bumping along the bottom. And despite the difficult market conditions, we are continuing our efforts to expand our business globally and diversify our revenue streams. In other fluids business, we have long been focused on diversifying beyond US land, which includes continued international expansion and a meaningful penetration in the deepwater Gulf of Mexico. And with our facility nearing completion in the Gulf of Mexico, we are very optimistic that we will see deepwater revenues here in 2016. And with the changes in the competitive landscape in the US, we believe there will be additional opportunities to gain market share with our innovative family of product technology.

In the mats business, we are continuing to make progress on our efforts to diversifying the markets that are less dependent on drilling activity. Although we are in the early stages of this penetration, we expect to see some volatile based on time and customer projects. We remain confident in our ability to create a meaningful share or take a meaningful share of these markets longer term. Similar to drilling fluids, we also desire to be the leader of innovation and service quality in our mats business. And to that end, we are very pleased with the recently patented equipotential zone [indiscernible].

In closing, I'd like to say that Newpark is uniquely positioned to take advantage of the eventual market recovery, both in our fluids and mat businesses. We have laid the foundation for future growth and improved shareholder returns. Thank you for your time and attention.

Will Thompson

We are going to take Q&A directly to the breakout at [indiscernible]. Thank you.

Paul Howes

Thank you.

Question-and-Answer Session

Q -

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