Forbes Energy Services' (FES) CEO John Crisp on Q4 2015 Results - Earnings Call Transcript

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Forbes Energy Services Ltd. (NASDAQ:FES) Q4 2015 Earnings Conference Call March 28, 2016 9:30 AM ET

Executives

Casey Stegman - IR

John Crisp - CEO

Melvin Cooper - CFO

Analysts

Brian Uhlmer - GMP Securities

Marco Rodriguez - Stonegate Capital Market

Evan Templeton - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Forbes Energy Services Fourth Quarter Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the call over to Casey Stegman, Head of Investor Relations. Sir, you may begin.

Casey Stegman

Thank you, Shannon, good morning everyone. Welcome to the Forbes Energy Services call for the fourth quarter of 2015. We appreciate you joining us today.

With me on the call is Mr. John Crisp, Chief Executive Officer; and Mr. Mel Cooper, Chief Financial Officer. The purpose of today's call is to review the financial results for the quarter, as well as provide you with some additional color on the business. Following management's brief opening remarks, the operator will provide instructions regarding Q&A.

During today's call, management will discuss adjusted EBITDA, which is a non-GAAP financial measure. Please refer to this morning's press release and the company's website for disclosures about this measure and a reconciliation of such measure to the most directly comparable GAAP financial measure, net income.

During this conference call, Forbes Energy Services management may make comments that reflect their intentions, beliefs, and expectations for the future. Such forward-looking statements are subject to risks, uncertainties, and other factors that may cause such future matters, including the company's actual future performance to be materially different from what is discussed today. Forbes Energy Services undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see the company's filings with the SEC.

With that, I'd like to turn the call over to Mr. Mel Cooper, CFO of Forbes Energy Services. Mel?

Melvin Cooper

Thank you, Casey. And keeping with the format of our calls, rather than reading prepared remarks at the beginning of our calls, we've incorporated that same information into this morning's press release. Again, we believe this is more efficient approach and hope it will be beneficial to our investors.

With that, we'll turn the call over to our operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Brian Uhlmer with GMP Securities. You may begin.

Brian Uhlmer

Good morning. Mel, John, I like your style but I didn't stop for a cup of coffee on the way of the call.

Melvin Cooper

Good morning, Brian.

Brian Uhlmer

Good morning. I want to start-off with an easy one, looking at your cash at the quarter end of about $75 million and $15 million on the revolver and your March 24th number of $75 million and $15 million on the revolver. Can you kind of walk us through -- how you stop the cash bleed and kind of how you project that out going forward and what have you done on the cost front or the expense front or what not to hold that cash balance through the first quarter?

Melvin Cooper

I'll talk about the working capital changes and then I'll pass it to John on the expenses. On the working capital changes, that's really what's kept our cash. Our receivables have decreased as you see from Q3 to Q4 and that's maintained our cash and we had our negative EBITDA for the quarter but as this phase has continued to slowdown we raked -- if you might call it benefit, the benefit of being able to maintain our cash balance. As far as our expense control or reduction's up past the dollar.

John Crisp

Yes, Brian the biggest thing is we are down by about 1050 for year 2015 from the beginning to the end. That's one and I believe our CapEx was under $500,000 for Q4 so we have really no need for much CapEx and we are just trying to be more efficient. We closed down a few yards during there year that were bleeding cash. Yes, we just tried to wither the storm and in doing so preserved some of that cash.

Brian Uhlmer

Okay, if you update on the status of your equipment and in terms of maintenance, in maintaining it and how you feel about your existing fleet of trucks and rigs? Their ability to go back to work without major CapEx, to get them ready for work and what percent would take some incremental dollar values and I am not talking $15,000 or $20,000 or minor repairs, major type upgrades that have been worn out. Could you kind of speak to that John?

John Crisp

Yes, to that point our oil surfing fleet, we have basically got 50% of oil serves and rig stacked. The other 50% that's running, we keep those well maintained, we're not prolonging in any of the maintenance on the working assets. For stacked assets, we have not cannibalized any of it. Yes, it has been tempting with times but patiently we have been trying to protect those assets for when things do turn around. Yes, going back to work the majority of those assets will be ready, with little servicing, yes sure we are going to spend $15,000 - $20,000, on some of that stuff, get inspections, get fluids changed and everything to get that stuff going. You have, some of it is going to require more because say a rig has a [ph:06.24] problem, instead of repairing it and spending valuable cash right now, we stack that, we keep it intact, we don't cannibalize it. But you know there is expense there in future but we could put majority of our assets back to work with little capital in there.

Brian Uhlmer

Okay, good answer and finally on the right side, you saw pretty steep decline there. Are the guys making more money per hour like yourselves, we have heard from them and kind of your mid-quarter updates in Q1, pricing is still going down and other 6%-7% oil servicing, an well on the lower end those guys are looking at 3% to 5%. Where do you think you guys end up shaking up kind of in that broad 3% - 7% price range on the service side?

John Crisp

Well you know we definitely see pricing pressured, we are going to fall in right there with group. You know here is the thing, pricing one thing but you know 2016 roll around, CapEx is strong on our customer end and as you watch this oil rigs counts go down, even though there is a lot of maintenance work out there, that drilling rig count is an indicator of what's going on in the industry. You know, there is customers that are delaying big capital site work overs and then there's customers who is delaying any kind of maintenance if it is not a cash positive type return on the repair job. So, with that our utilization in the industry has felled to a low.

So, you have two things working there, your pricing and your utilization. Now if the oil price stays about $40, you should start to seeing some of this maintenance type work come back around. But CapEx is going to continue to be very tight. I have heard people say that oil could get back to $50 and we as a service industry; we are not going to benefit from that because they are still not going to release their purse strings to release additional capital. In fact, they are going to start showing up their balance sheets. And I believe that, so we are going to fall right there in peer group, I don't know if I will be the high side or the low side. But we are all in the same problem industry.

Brian Uhlmer

All right and the hourly cost on services went up almost 10%. I would imagine that's primarily just from utilization and fix CapEx absorption from the yards and as such will we look for that to go down based on some closures, some labor cost reductions on an hourly basis moving forward or with the fixed cost is going to stay somewhere close to that level?

John Crisp

We definitely working our butt off trying to get hat number down. Yes, we are doing all the right things. I have a feeling we should start seeing the difference there and how much difference there will there be just to define the bottom but we are definitely going to continue this. And we are combining some of these overhead jobs and yards to eliminate fixed costs. But here is the problem, you eliminate $40,000 fixed costs and then the next thing you know your utilization is lacking $60,000 so you have a problem there. But we are continuing to trying to outrun that drop and here is the fact where no one's making any money, you can't fall too much lower or you have to rise on a checked work form.

Brian Uhlmer

Perfect, and finally, Mel what goes into your tax, credit and percentage rate there? Looks like your tax liability is almost gone, if there a probability of a cash refund at some point? Is that likely or unlikely and how should we factor and how are you going to accrue the tax benefit on the losses on the what percentage is a good one to use?

Melvin Cooper

Yes, the tax refund is not in the cards. Personally, that would be nice and the tax benefit I wish continue it at the rate we have got this year. I mean that's close enough and we are going to have to look out years ahead and determine the feasibility of using that which we constantly do so again, the rate we have got now is as close it gets to any brand.

Brian Uhlmer

Okay, perfect I will turn it over. Thank you, gentlemen.

John Crisp

Thank you, Brian.

Operator

Thank you. Our next question is from Marco Rodriguez from Stonegate Capital Market. You may begin.

Marco Rodriguez

Good morning guys, thank you for taking my questions. Mine is a follow-up on the cash flow questions. Can you give us a little bit better of a sense so far as your expectations whether or not we are going to be in a positive cash flow perspective cash flow from operations i.e. in the first half of 2016 and how are you thinking about it for the full year?

John Crisp

Well, definitely -- I will start off and then get Mel involved in this. Definitely you are seeing utilization drop in rates from previous Brian mentioned basically from 5% to 10% and the previous quarter labor went up 10%. It is pretty hard to stay in any cash flow positive direction for a while. Now where does that turn at? We don't know. We're hostage as a player in this industry. It depends on when these customers really start spending this capital. We're going to do our best to try to bring the cost down but other than that your guess is as good as mine. Mel?

Melvin Cooper

Yes, in this market environment problem is we are always chasing the slowdown and we are cutting cost as rapidly as we can like John mentioned doing all the right things. One of the thing that will happen this year we have a number of operating leases and we pay about a round number $700,000 a month for operating leases as we pay those off that will benefit us by eliminating that expense.

Marco Rodriguez

Got you and in terms of working capital are you continuing to kind of plan, continue liquidation on that in fiscal 2016 or how are you thinking on working capital accounts?

Melvin Cooper

You mean market, as far as the work does for us, using working capital to create cash, is that the question?

Marco Rodriguez

Yes, you mentioned in your prepared remarks that you definitely benefitted from working capital popping up your cash in 2015 so just wanted to get your expectations there.

Melvin Cooper

Well, certainly if 2016 is flat, that is probably not unreasonable statement, unless 2016 is flat from where we are in the first quarter then we would not benefit from additional cash which means that if we have a negative cash flow from EBITDA standpoint it will start eating into our cash without a doubt.

Marco Rodriguez

Got you, then in terms of the pricing aspects out there, you have obviously mentioned a couple of times a year, you are obviously impacted by the industry fundamentals, the overall climate just wanted to get a little bit of sense however, from the pricing conversations you guys are having with customers. Is it more your customers seeking continued concessions, or is it you have some players out there that are being really aggressive when it comes to pricing?

John Crisp

Well, it's a little bit of both. In fact what aggravates the outlook, we will spend the time in these RFPs and working out, and we have got sophisticated customer now. You know you used to make a deal, this is the price, you go to work. Now with these pyramid departments that all these customers have heck they want every cost, every way you run your business. They won't accept just a price now. You have to spend a lot of time working it. And as we are working this stuff, typically what's a joke, we want a three year deal, where you can't agree to three years but you do because all these deals will have a 30 day out, 30 days from us and 30 days from them and the deals null and voided.

Well, they have asked you for a three year deal and then 90 days later they are sending another RFP out. So we, are constantly I call it perpetual negotiation. It's never into it. What's fueling some of that is the other side, some of these other operators or some of these service companies, they are low balling the price and going to customers and saying we can do it for this. Well, that fuels another RFP. Well, pricing, like I mentioned to Brian, pricing is almost down to if you can't get something out of pricing then why do it? And I think in this industry we are there.

Marco Rodriguez

Got you. Then in terms of G&A in the quarter down at $6.1 million, was there anything one time that lowered that number or is that kind of a good run rate?

John Crisp

Well, we are continued to consolidate and we're going to continue to work. There's no really one time charges in there. Mel's done a great job in watching G&A and our goal is to push it down even lower, now how much more gain do we have, I don't think we lacking working capital where we are going to be flat but I definitely think we got some more room there.

Marco Rodriguez

And last question and I will jump back in the queue. What are your expectations for CapEx then in 2016?

John Crisp

Well, really our only expectation right now on CapEx is what we have to when the leases come do, on these operating leases. Some of them we have to buy them back, if we don't buy them back they will take them and they will put the equipment in perfect working condition and sell them at auction send you a bill of the difference. I believe that totals around $8 million through the year so that be about the only thing Marco.

Marco Rodriguez

Got you, thanks guys appreciate it.

John Crisp

Thank you.

Operator

Thank you our next question is from Evan Templeton with Jefferies. You may begin.

Evan Templeton

Hey, good morning guys.

John Crisp

Morning, Evan.

Evan Templeton

I am wondering if you could maybe comment a little bit on the EBL, the status on that, whether or not she has had, or when the next appraisal is, do you think you will hold on $75 million level and you need to address any of the covenants in that facility?

Melvin Cooper

We had an appraisal in, I guess, December / January. We still have a collateral base of above $75 million and we have no financial covenants that we are breaching or in fear of breaching right now in order to maintain the 75, I know that was a very short and concise answer but I will be happy to answer anything else Evan.

Evan Templeton

That's great and just when you say above 75 how much head room do you have on that number?

Melvin Cooper

It's getting closer. It's certainly a lot closer than it was, we don't have a share of that information yet.

Evan Templeton

Okay, that's great. That's all I have for now thank you.

John Crisp

Thank you.

Operator

Thank you I am showing no further questions this time. I would like to turn the call back over to John Crisp for closing remarks

John Crisp

Thank you, operator. Appreciate everybody's time this morning. This industry has been a challenge for the last 18 months and we feel like it's probably going to be another challenging year. As a service company all we can do is try to be as efficient as possible or capital and still maintain a core business. We don't want to get through this down turn and have wrecked completely our foundation so there is some balance there. And we are going to continue to work it; this has been a great exercise for our management. They have done a great job on thinking out of the box, on way success cost, from consolidating some duties through the areas and they have figured out ways to be more effective on resources they are trying to hang on to.

And we are going to continue on that as you have heard earlier in the call, this quarter here the industry is staying somewhere between 5% and 10% drop rate and we are part of that. We are going to fall in that peer group somewhere. The labor, we saw our labor go up in fourth quarter of 2010 by about 10%. We understand and are fully aware of that labor but you know you get to the point that you can only cut labor so much and what we are trying to do is we are trying to be more efficient with the labor.

And also, our cash, we are going to try to preserve the cash as a valuable commodity. We have been very fortunate that this is a great revolver, or covenants. As mentioned we basically went through a test in January on appraisal and we still basically have our face value or revolver. And we are going to keep that revolver for emergencies, for that rainy day and that rainy day is getting pretty closer, it looks like. Other than that I wish I could give you a brighter future but we are hostages of the industry and when the oil company does not spend any CapEx and when you see OpEx budgets being pulled in we are going to suffer just like everybody else. With that appreciate everybody's time and hopefully we get better news in the next quarter call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.

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