C&J Energy Services, Inc. (CJ) CEO Don Gawick on Q1 2019 Results - Earnings Call Transcript

About: C&J Energy Services, Inc. (CJ)
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Earning Call Audio

C&J Energy Services, Inc. (NYSE:CJ) Q1 2019 Results Earnings Conference Call May 7, 2019 10:00 AM ET

Company Participants

Daniel Jenkins - Investor Relations

Don Gawick - President and Chief Executive Officer

Jan Kees van Gaalen - Chief Financial Officer


Good morning. And, welcome to the C&J Energy Services earnings conference call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the call over to your host today, Daniel Jenkins. Please go ahead.

Daniel Jenkins

Thank you, operator. Good morning, everyone, and welcome to the C&J Energy Services earnings conference call to discuss our results for the first quarter of 2019. With me today are, Don Gawick, President and Chief Executive Officer; and Jan Kees van Gaalen, our Chief Financial Officer. We appreciate your participation.

Before we get started, I'd like to direct your attention to the forward-looking statements disclaimer contained in both the news release that we issued this morning and the related presentation, both of which are currently posted in the Investor Relations section of the company's website under the IR Home in Event Calendar subheadings.

Our call this morning includes statements that speak to the company's expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control, that could cause our actual results to differ materially from those expressed in or implied by these statements. We refer you to C&J's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q.

Our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our news release and related presentation.

With that said, I'd like to turn the call over to Don Gawick, President and Chief Executive Officer of C&J Energy Services.

Don Gawick

Thanks, Daniel. Good morning, everyone. Thank you for joining us today to discuss our first quarter 2019 operational and financial results.

Turning to Slide 4 and 5 of the posted presentation. I am pleased to share with you a few of our financial and operational highlights from the first quarter. Despite facing challenging conditions, we grew consolidated revenue 4% sequentially to $511 million and generated adjusted EBITDA of just under $50 million.

On our last earnings call, we discussed that we expected our fracturing business to continue to improve, and the strong performance in our fracturing business drove the sequential improvement with fracturing revenue increasing 22% sequentially to $236 million.

We capitalized on refreshed E&P capital budgets from customers to improve utilization and grow profitably back to double-digit annualized levels. This resulted in annualized adjusted EBITDA per fleet of $10.2 million in the first quarter. Delays and other challenges from unusually harsh weather negatively impacted all of our service lines to varying degrees during the first quarter.

Our nonfracturing businesses were also negatively affected by lower overall activity levels, select customers not commencing completion activities until late in the first quarter and some pricing pressure. We are encouraged to see activity levels improving, particularly for our nonfracturing businesses at the end of the first quarter. Customer demand and activity levels continue to strengthen, which positions us well for improved results in all of our operating segments for the second quarter.

In our Completion Services segment, revenue and profitability increased sequentially primarily due to refreshed E&P capital budgets and more dedicated frac fleets. These factors, in conjunction with our previously discussed strategy of dedicating fracturing fleets with more efficient customers, resulted in sequential improvement in fracturing utilization and profitability.

Revenue and profitability decreased both year-over-year and sequentially in our wireline and pumpdown businesses due to inclement weather in our major operating basins, curtailed customer activity levels in our largest operating basin of the Bakken and Rocky Mountains and in more competitive pricing environment. As we exited the first quarter, pricing has stabilized, and customer activity levels have improved, which we expect to result in higher revenue and profitability in both of these businesses in the second quarter.

In our Well Construction and Intervention Services segment, revenue and profitability decreased sequentially primarily due to the lower drilling rig count in our cementing business and unexpected equipment downtime in our coiled tubing business. We experienced a more competitive pricing environment and lower overall drilling rig count from mostly smaller public and private customers that utilize our cementing services, especially in West Texas and the Mid-Continent.

In our coiled tubing, business unexpected unit downtime and slower-than-expected completion activity levels in South Texas and the Mid-Continent negatively affected our first quarter results. With that said, the drilling rig count improved throughout the month of March. And all but 1 of our large diameter coiled tubing units were deployed as we exited the first quarter. We expect results in both our cementing and coiled tubing businesses to improve in the second quarter.

In our Well Support Services segment, revenue was essentially flat, but profitability decreased compared to the prior quarter. During the first quarter, higher payroll taxes and unusually harsh weather negatively affected all of our operating basins, especially in California where over 50% of our revenue and profitability for this segment is generated.

In our rig services business, we did benefit from the full quarter impact of prior rate increases and slightly higher deployed rig count, all of which was offset by periods of bad weather. We continue to experience improvement in customer demand in our fluids management business, but higher labor costs and inclement weather caused profitability to decline sequentially.

As we moved into the second quarter and the inclement weather subsided, we did experience improvement in customer activity levels and utilization, which should result in improved segment profitability in the second quarter.

Shifting the focus to our recent technology initiatives, our R&T division continues to bring operational and cost benefits to our core service lines, including enhanced safety and reduced environmental impacts. Our blender reliability program is providing significant benefits with well site nonproductive time down by over 50% and critical component life increasing by over 4x compared to the prior version of the blender.

Our data analytics program continues to progress with all but 1 horizontal and 1 vertical fleet streaming data to the cloud. In addition, we are upgrading our fracturing pump monitoring capabilities with the addition of vibration sensors on our fluid pumps. It enables improvement in well site pump configuration as well as early detection of required maintenance events to help prevent an equipment failure. The financial benefits of our R&T initiatives continue to increase. Our cost savings on internally supplied products were in line with the fourth quarter with an increase in sales of perforating products that was offset by a decline in control systems. The products developed by our technology teams are fit for purpose for the shale market and meet high-quality standards as can be attested by our success in selling to third-party customers.

Sales of our technology products for the quarter increased 10% sequentially and 72% compared to the first quarter of 2018.

With that, I will turn the call over to JK to review our first quarter financials. Then, I will wrap up today's call with additional thoughts on the operating environment.

Jan Kees van Gaalen

Thanks, Don. Good morning, everyone. Now moving to Slide 5 in the slide deck we've posted with our earnings release this morning and focusing on our consolidated results. First quarter revenue decreased 8% year-over-year but increased 4% sequentially to $511 million. We generated an adjusted net loss of over $18 million in the first quarter or a loss of $0.28 per diluted share. This compared to adjusted net income of approximately $29 million or $0.42 per diluted share in the prior year period and an adjusted net loss of approximately $18 million or $0.27 per diluted share in the prior quarter.

For the first quarter of 2019, we generated adjusted EBITDA of just under $50 million, which decreased 37% year-over-year and 6% sequentially. Starting in the first quarter of 2019, we adopted a new definition for adjusted EBITDA, which allows management to have a better understanding of the run rate progress of the underlying business, provides additional transparency to The Street and makes our results more comparable with our oil field services peers. We refer you to our reconciliation table of net income or loss to adjusted EBITDA in our earnings release and the earnings call slide deck that we posted this morning.

Now turning you to Slide 7 and focusing on the business segments. Completion Services segment revenue decreased 13% year-over-year but increased 12% sequentially to approximately $327 million in the first quarter of 2019. Segment adjusted EBITDA decreased 33% year-over-year but increased 23% sequentially to just over $54 million in the first quarter of 2019.

As Don previously mentioned, our fracturing business bottomed in the fourth quarter, and we experienced significant improvement in utilization, which resulted in fracturing revenue increasing 22% to $236 million and profitability improving sequentially.

Turning to Slide 8. Well Construction and Intervention Services segment revenue decreased 10% year-over-year and 15% sequentially to approximately $79 million in the first quarter of 2019. Segment adjusted EBITDA decreased 60% year-over-year and 59% sequentially to approximately $6.5 million in the first quarter of 2019. The year-over-year and sequential decreases in revenue and profitability were mostly due to the lower drilling rig count in our cementing business, an unexpected downtime from certain coiled tubing units, as Don previously mentioned.

Turning to Slide 9. Well Support Services segment have increased 14% year-over-year and was effectively -- essentially flat sequentially at $105 million. Segment adjusted EBITDA increased 25% year-over-year but decreased 47% sequentially to just under $7 million in the first quarter of 2019. The sequential decrease in profitability was due to multiple periods of unusually harsh weather and the reset of payroll taxes.

Turning to Slide 10 and moving to expenses. SG&A expense decreased 19% year-over-year but increased 8% sequentially to just under $54 million in the first quarter. The sequential increase was predominantly due to a higher short-term and long-term share-based compensation expense and higher payroll taxes that are typical during the first quarter. Looking ahead to the second quarter, we expect SG&A expense to range between $52 million and $56 million.

Depreciation and amortization expense increased 29% year-over-year but decreased 6% sequentially to just under $60 million in the first quarter. The sequential decrease was primarily driven by the disposition of certain assets in the prior quarter, lower growth capital expenditures and the younger profile of our fracturing fleet. Looking ahead to the second quarter, we expect D&A expense to range between $58 million and $62 million.

From a tax perspective, as we've previously reported, due to our significant NOL position, we expect that we will not be a cash taxpayer in 2019 outside of nominal state and local taxes. We also expect our effective tax rate to be close to 0.

Now turning to Slide 11. In the first quarter of 2019, free cash flow usage totaled $43 million, which included just over $47 million of cash flow from operations before changing in working capital. As a result of increased activity levels in the first quarter, our accounts receivable balance increased by just under $48 million, which we will expect will result in good cash conversion in the second quarter. We used $48 million of cash to fund capital expenditures, which decreased 28% sequentially and came in slightly below our previous guidance range of $50 million to $60 million for the first quarter.

As with the reduction in depreciation and amortization expense, the sequential reduction in capital expenditures was also due to the reduced growth, capital expenditures and younger profile of our fracturing fleet. As we discussed on our prior earnings call, we will continue to rigorously streamline cost and manage capital expenditures in order to generate free cash flow in 2019. And we continue to estimate that our capital expenditures will range between $140 million and $180 million for the year.

Staying on Slide 11 and moving to liquidity and the balance sheet. Our cash balance was just under $89 million at the end of the first quarter. Additionally, we had no draws outstanding under our credit facility, which had approximately $275 million of borrowing capacity, resulting in a total liquidity of $364 million as at quarter end.

We plan to maintain a financial philosophy that is focused on maintaining a disciplined capital deployment strategy and protecting our strong balance sheet and liquidity position.

With that, I will turn the call back to Don for a few closing comments.

Don Gawick

Thank you, JK. As we turn our attention to the second quarter, the outlook is positive. We expect consolidated revenue to increase mid- to high single digits sequentially, and we expect improved profitability in all of our operating segments.

In fact, the improved results compare very favorably against current consensus estimates, which we believe are still reflective of the general challenges that are negatively impacting many oil field service providers, especially in the pressure pumping space. This is also in line with our previous assessment that operational and financial results should gradually improve throughout the year as long as oil prices cooperate.

Last quarter, we mentioned that many of our customers were budgeting oil prices to range between $50 to $55 per barrel. With oil now in the 60s, we are optimistic that this could spur additional investment, and we experienced improvement in customer activity levels as we exited the first quarter, especially from smaller public and private customers. More favorable market conditions and weather should positively impact our business in the second quarter. With that said, the oil field services environment remains extremely competitive. Customers remain very price-sensitive, and many of our major and large independent customers are firm on spending within cash flow in 2019.

We remain focused on the things that we can control and continue to focus on generating targeted returns, maintaining capital spending discipline and generating free cash flow.

In closing, I want to thank our employees for their continued hard work and dedication. Despite the challenging market conditions we experienced in many of our businesses during the first quarter, our employees stayed focused on meeting our customers' needs and delivering our products and services with high service quality and safety. Their hard work and dedication positions us well for continued success for the remainder of 2019 and beyond.

Thanks again for joining us on our call today, and we appreciate your interest in C&J.

Operator, we are now ready to open the call to questions.

Question-and-Answer Session


Don Gawick

Thank you, operator. Hopefully, this slide deck that we've provided along with the call now has given a lot of clarity to our situation and as well, just really minimized the need for questions.

So I know a lot of folks are at OTC this week as well and hopefully enjoying that. We do appreciate everyone listening in this morning, and look forward to speaking to you after our second quarter results are out. Thank you.

Jan Kees van Gaalen

Thank you.


Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.