Quintana Energy Services Inc. (NYSE:QES) Q4 2019 Earnings Conference Call March 5, 2020 10:00 AM ET
Ken Dennard - Dennard Lascar, IR
Christopher Baker - President and CEO
Keefer Lehner - CFO and EVP
Conference Call Participants
George O'Leary - Tudor, Pickering, Holt
Ian MacPherson - Simmons
Greetings, and welcome to the Quintana Energy Services' Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host for today's call. Mr. Ken Dennard. Thank you. You may begin.
Thank you, operator and good morning everyone. We appreciate you joining us for the Quintana Energy Services conference call and webcast to review fourth quarter 2019 results. With me today are Chris Baker, QES's President and Chief Executive Officer; and Keefer Lehner, Chief Financial Officer and Executive Vice President. Following my remarks, management will provide a high level commentary on the financial details of the fourth quarter and outlook before opening the call for questions and answers.
There will be a replay of today's call, it will be available by webcast on the company's website and that's quintanaenergyservices.com. There will also be a recorded replay available until March 12, 2020. For information on how to access that replay feature please refer to yesterday's earnings release.
Please note that the information reported on this call speaks only as of today, March 5, 2020. And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
In addition, management's comments may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of QES' management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of these risks, uncertainties and contingencies.
The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the QES website.
And now, I would like to turn the call over to QES’s President and CEO, Mr. Chris Baker, Chris?
Thank you Ken and good morning everyone. Thank you for joining us today for Quintana Energy Services fourth quarter 2019 conference call.
While the fourth quarter and the year as a whole proved to be extremely challenging, our efforts to right size and optimize our operations are having a clear positive impact on results. As an example, our directional drilling segment saw a sizable drop in revenue, both sequentially and year-over-year, yet adjusted EBITDA and adjusted EBITDA margin came in at or near all-time highs.
Furthermore, and perhaps the best illustration of these efforts is the fact that we generated roughly the same consolidated adjusted EBITDA in Q4, as we did in Q2, despite seeing revenue decline by $30 million.
Finally, we generated over $14 million in free cash flow during the fourth quarter in the face of deteriorating market conditions, and constraint customer spending. These are remarkable accomplishments given that activity and pricing were under pressure all year, and the fourth quarter had the additional stress of the seasonal slowdown due to budget exhaustion.
There are a large number of external forces that impact our business and industry as a whole that remain outside of our control, so we are focused on the levers that are within our control and spent 2019 ensuring that QES is best positioned to whether what is becoming the new normal in the oilfield services market. This dedication to cost cutting and optimizing our geographic footprint and operational processes and procedures enabled us to battle through the budget exhaustion period and white space on our calendar.
Additionally, in early Q1 we announced a corporate reorganization to consolidate and streamline our completion and production services business under one management team and system. We are very excited about this initiative and believe this is the largest internal value creating project in the history of QES.
Lastly, before I pass the call over to Keefer, let me take a moment to highlight our team's phenomenal safety record achieved for 2019. We achieved a 2019 total recordable incident rate of 0.87, which represents a new record for QES.
In addition, we set a record for our lost time incident rate at 0.5, and also materially improved our [TMVIR] driving stat by significant margin. I'd like to thank all of our team members for their outstanding performance and unwavering commitment to providing the highest level of customer service in an industry leading safety environment. We believe that our culture sets us apart from our peers and the proof is in our result.
With that, I'll now turn the call over to Keefer, who will review our financial results in greater detail. And I will return at the end of the call to provide some concluding remarks around our outlook. Keefer?
Thank you, Chris. Good morning, everyone.
Let me begin with an overview of our segment financial performance starting with directional drilling. For the fourth quarter of 2019, directional drilling revenues of $54.6 million decreased 4% sequentially, and we're down 10% from the fourth quarter of 2018.
Relative to Q3 of 2019, day rates were up although utilization and rig days were down. For the fourth quarter of 2019, we had a total of 4,357 rig days, and a monthly average of 59 rigs on revenue, of which 52 were follow me rigs.
During the fourth quarter, we successfully drilled 372 wells for 36 customers on 74 discrete rigs across 31 different target formations. Fourth quarter adjusted EBITDA for the directional drilling segment came in at $9.7 million, which was up 7% from the third quarter of 2019 and up over 3% year-over-year.
We are pleased to announce that directional drillings fourth quarter results were the best quarterly adjusted EBITDA performance since 2014. Adjusted EBITDA margins for our directional segment increased by more than 170 bps sequentially to 17.6%.
Now on the Pressure Control. Our Pressure Control segment generated total revenues of $23.3 million for the fourth quarter of 2019, which was down 13% sequentially, and down 26% year-over-year. Pressure Control adjusted EBITDA on Q4 was $2.5 million, which was down by a third from $3.7 million earned in Q3 and down by nearly half from the year ago period.
The segments adjusted EBITDA margin also compressed sequentially falling from 13.7% in Q3 to 10.6% in Q4 of 2019. The margin decrease was driven by broad-based revenue declines as utilization and revenue days fell for all service lines except the well control business, which posted record revenues, which is a nice result given the efforts and inroads we have made in this business over the last 12 months.
Moving on to Pressure Pumping, the Pressure Pumping segment generated total revenues for the quarter of $10.2 million reflecting a 63% sequential decrease and an 81% decline from last year's fourth quarter. For the fourth quarter of 2019, we saw our average revenue per stage increased 7% sequentially driven by a shift in job mix offset by a corresponding 66% decrease in stages completed.
During the quarter, Pressure Pumping frac to total of 235 stages, compared to 700 stages in Q3 of 2019 and 1,363 stages in Q4 of 2018. The sequential decrease in stages was driven primarily by low fourth quarter activity overall, and increased white space on our calendar driving low utilization of our single active spread.
During the first quarter of 2020, we have reactivated another spread and both spreads are currently in service and highly utilized. Pressure Pumping adjusted EBITDA for the fourth quarter was a loss of $3.5 million, compared to a profit of $1.2 million in Q3 of 2019 and a profit of $4.1 million in Q4 of 2018.
Lastly, we'll close out the segment discussion with Wireline services. Wireline revenue for the fourth quarter was $7.8 million, which was down 21% sequentially, and down 43% from the fourth quarter of 2018. The sequential decline was driven by a 20% decrease in revenue days, and a 7% decrease in day rate.
Wireline activity was burdened by the same completion slow down, impacting our pressure pumping and pressure control results for the quarter. Wireline adjusted EBITDA for the fourth quarter of 2019 was a loss of $814,000, which has improved from a loss of $2.7 million in Q3 of 2019 and from a loss of $1.3 million in Q4 of 2018.
Now I'll turn to our consolidated results. For the fourth quarter of 2019 revenues were $95.9 million, representing a 21% sequential decline and down 40% from last year's fourth quarter. Our consolidated adjusted EBITDA was $5.2 million in the fourth quarter of 2019. This was down from $8.7 million in Q3 of 2019 and down from $13.9 million in Q4 of 2018.
The sequential decrease in EBITDA was largely driven by revenue declines in the Pressure Pumping and Pressure Control segments partially offset by flow through from our cost cutting initiatives and ongoing corporate restructuring program. Consolidated G&A expenses were $13.5 million for the quarter, which was up 5% from the third quarter of 2019. This increase was largely the result of higher stock-based compensation expense, offset by lower sales and marketing expense in the quarter.
During Q4, we recognized an additional $1.4 million in bad debt expense related to revenue generated earlier in 2019. The majority of which was tied to pressure pumping operations for Alta Mesa. Our unallocated corporate overhead expenses were $3.9 million for the quarter, which was up 39% compared with a $2.8 million in the third quarter of 2019. For 2020, we expect our adjusted corporate expenses to come in around $2.3 million to $2.8 million per quarter.
Fourth quarter interest expense was $792,000, which was down from the third quarters interest expense of $898,000 and up from $626,000 in the same period of 2018. Going forward, we’d expect interest cost to be largely consistent with our Q4 levels. The provision for income taxes in the fourth quarter of 2019 was a negligible amount and related primarily to state margin taxes. Our Q4, 2019 net loss was $7.9 million, which has improved from a net loss of $47.4 million in the third quarter of 2019 and down from a net loss of $1.6 million in Q4 of 2018.
Now I'd like to briefly discuss our cash flow statement, balance sheet and liquidity position. During the fourth quarter, operating activities provided cash at $16 million. Our net working capital for the quarter was $39 million, which was down approximately 15% sequentially. As activity slowed in Q4, we effectively managed disbursements and were able to unwind approximately $9 million in working capital. Going forward, we will continue to proactively manage our working capital and optimize free cash flow.
Gross CapEx totaled $6.2 million during the fourth quarter of 2019, compared to $7.6 million in the third quarter of 2019 and $11.8 million in the fourth quarter of 2018. During the fourth quarter capital spending was driven primarily by maintenance spending across all segments. We also had asset sales of $3.7 million in the quarter, which were largely driven by the monetization of some of our obsolete assets.
This yielded a net CapEx of $2.5 million in the fourth quarter, which were netted against our combined Q4 operating cash flows of $16 million. We generated free cash flow of over $14 million during the fourth quarter. I'd also like to note, we have two additional Mid-Con facilities categorized as assets held for sale on the balance sheet. Going forward, we expect to continue streamlining and monetizing assets though the amounts involved are not expected to be as material as they've been over the last two years.
For our 2020 full year gross CapEx, we are forecasting $20 million to $30 million for the full year, most of which will be tied to maintenance or sustaining CapEx. As always, we will remain highly disciplined in evaluating our capital spending and we'll just these amounts as conditions and activity warrant.
Other cash flow items of note in the fourth quarter include the repayment of $12 million on our revolving credit facility as well as $472,000 in share repurchases totaling 198,000 shares bringing our total year-to-date share repurchases to 771,000 shares. To-date, we have spent $2.8 million on share repurchases, leaving $3.2 million available under the plan approved by the Board in August of 2018.
We ended the fourth quarter with a total debt balance of only $21 million and $14.7 million of cash on hand, yielding a net debt balance of 6.3 million. Our balance sheet remains one of the strongest in the sector. And we ended the quarter with $37.7 million of net availability under our revolving credit facility, bringing our total liquidity to $52.4 million.
Finally, I'd like to remind everyone that beginning in the first quarter of 2020. Our financial results will reflect our new reportable segments structure, reducing the number of reportable segments from four to two, and going forward will consist of drilling and completion and production. In conjunction with this new segment structure, we've begun to reorient and streamline our completion and production segment in an effort to further drive efficiencies and cost savings.
Specifically, we're combining support functions for our new completion of production segment into a single headquarters in Oklahoma City. Therefore, functions such as accounting, HR, HFC, sales and other administrative roles will be centralized. Additionally, we are streamlining our geographic footprint, our systems, our processes and our procedures. Prior to this, these activities will decentralized across three segments that were legacy independently run businesses.
With this new arrangement, we can better align our operations, eliminate redundancies and work more efficiently. Keep in mind that the restructuring of our legacy completion and production business segments should be completed by mid 2020 and is expected to yield annual cost savings of $4 million to $6 million once personnel, systems and facility migrations are completed. This range of expected savings is up approximately 25% at the midpoint, from our previously released range of $3 million to $5 million due to increased efficiency is being identified as we've begun to implement the changes.
With that, I'll turn the call back over to Chris.
Thank you, Keefer.
Looking out towards the first quarter, the mark stabilized in the beginning of the year as our customers replenished their budgets. On the completion side, we've seen activity bounce back from Q4 lows while the directional side things got off to a bit of a slower start, as the market has been hesitant to add rigs. In the last two weeks, we have seen tremendous volatility commodity prices and the broader market in general in response to overarching concerns regarding the spread of the coronavirus. We have not seen this market volatility impact our business to-date that are monitoring the situation closely and will react quickly and appropriately to any market shift.
In our Completion and Production segment, our Pressure Pumping business has two of it spreads running at healthy utilization. Although activity has rebounded somewhat pricing and margins remain depressed. Revenues will improve from fourth quarter level, but will likely be below third quarter levels. However, this revenue increase coupled with cost cuts should be enough to return adjusted EBITDA back to positive levels.
Our Pressure Control business is likely to experience continued softness in Q1 since completions related drill activity lags frac work. Given the week frac market in Q4 and budget exhaustion slowdown, we expect that drill out activity to start very slow in Q1 and we have seen exactly that thus far. Despite a challenging pricing environment for coiled tubing, we believe that the large diameter units will stay largely utilized through the quarter.
Wireline activity was somewhat soft to start the year, but activity has improved of late, and the team has done a great job of increasing utilization and high grading our activity to higher efficiency customers. Given the current trend, it appears that the business will be at positive EBITDA run rate by the time the first quarter is completed. For the full year 2020, we are not expecting meaningful activity improvements over 2019 levels and believe the market will continue to be challenging and highly dependent on the duration of the current macro challenges.
Nonetheless, we remain optimistic about our ability to successfully navigate the environment in light of the meaningful progress we've made in optimizing our cost structure, streamlining the organization, and adapting to adverse market conditions. Throughout the year, we will continue to critically evaluate our cost structure and focus on driving improved returns.
As I have touched upon, while we strive to operate as efficiently and cost effectively as possible, we have to balance the possible short-term benefits of reducing our costs with longer term need to effectively serve our customers, operate safely and pursue growth opportunities. Maintaining this balance is challenging, but we have the right people, the right strategy and the right asset, as well as a healthy balance sheet to weather the difficult times and emerge stronger when the market recovers.
We are faced with a challenging market today that QES is well positioned with strong core businesses and an industry leading balance sheet. While our number one priority is safety and execution in the field, our team is acutely focused on opportunities to create significant value through strategic consolidation. Our customers continue to consolidate, but we have yet to see widespread consolidation in the oilfield services industry.
We believe the service industry needs to consolidate and lockstep with our customer base in order to create larger platforms that are better positioned to not only provide services to larger E&P operators, but also to better position companies in terms of size, scale, flow and liquidity. To that end, we continue to evaluate numerous strategic opportunities and believe that our balance sheet positions us to be a first mover in consolidation.
We acknowledge that investor interest in our space is challenged. But that does not deter us from executing our strategy of delivering safe, high quality services to our customers. As always, we will continue to maximize EBITDA and free cash flow will be a prudent steward of capital and preserving the strength of our balance sheet while also pursuing accretive strategic consolidation opportunity.
With that, we will now take your questions. Operator?
[Operator Instructions] Our first question comes from George O'Leary with Tudor, Pickering, Holt. Please proceed with your question.
On the M&A front just since it's where you’ll kind of ended the call. How would you describe [bid-ask] has progressed over the last six months have bid-ask spreads kind of compressed at all - of the coronavirus fears caused those to widen back out. And then is there anything that you guys might be willing to just divest rather than go through some sort of a corporate transaction and how that kind of M&A market if you will within the OFS space?
Yes, fair questions George and good morning. This is Chris. I guess a couple of points, look the bid-ask spread are still in my mind all over the place. It's they're somewhat volatile. They're pretty wide and I think every potential party has some degree of uncertainty or hair around trading at kind of fourth quarter multiples right. Historic lows when you look at the OFS.
I think it's too early to say what's going to happen with regards to corona and how that shapes people's opinion, but I will say I think we have found there are some parties. They're starting to see the merits of a combination. They're starting to see the merits of strong balance sheets and partnering with those with strong balance sheets. And I think we're going to be able to move the needle on that front pretty soon. Keefer you have anything else from M&A?
With regards to the divesting, look we have those conversations at our Board all the time Keefer and I discuss opportunities that we've seen some of our peer groups, and peer companies go through kind of some two and three way spin merge type transactions. And we're open to evaluating all of those possibilities. I would say with regards to divesting for cash. I don't think there are many cash buyers.
There's a lot of competition with assets trying to be divested right now for cash. And so, I think that’s difficult and when you look at what we're doing on the consolidation front on the completion side of the business. I think when we exit that, we're going to be as lean as anybody out there from a call structure standpoint.
So, we're highly encouraged and optimistic that the business lines that we had losses in, we can turn those around pretty quickly. And those issues have been really white space on the calendar. I'm very pleased with the team's execution in the field across the board especially in pressure pumping. We continue to execute at a very high level and we continue to see that today.
Great, that’s very helpful color, Chris. And then the CapEx budget that you guys just laid out it. I wondered if you could frame what sets for us the upper and lower balance of that CapEx budget, and then - I realized most of that will be maintenance CapEx based on your commentary. But from a gross CapEx perspective in which businesses do you expect to deploy the lion's share of that gross CapEx.
Yes, George this Keefer, I will jump in on this one. So we communicated the range of $20 million to $30 million on the call. Also indicated that CapEx spend is predominantly going to be focused on the maintenance and sustaining side of things. On the gross CapEx side, it's largely going to be nominal this year, primarily focused on the directional drilling side of the business just given the continued success we've seen there and the results in terms of EBITDA and EBITDA margin levels.
In terms of what's going to drive the flex between the bottom and top end of the range, it's largely going to be kind of activity driven, and largely focused on pressure pumping activity could drive a swing there between those two numbers. So, as activity plays out over the course of the year, obviously that drives the majority of our maintenance spending. And just given it still early in the year and line aside on calendars and activity levels into the back half remain murky. We've kind of guided to a broad range right now.
Got you, okay that’s super helpful Keefer. And then just line in the press release comment, I wonder if you could peel back the onion a little bit on the directional drilling side. I get the fewer standby rate that’s fewer days on standby - that’s pretty self-explanatory. But from a higher end tools perspective, can you just describe what types of things guys are asking? Is it just a BC or tool, they want more rotary steerable?
What are you guys seeing there from a technology uptick perspective and kind of - is that something that may recur in 2020? Are these tools that your customers have decided they like or was it just kind of a random Q4 mix issue that was a kind of the femoral tailwind to results?
Yes, it’s fair question, George. Look, we've seen a continued migration throughout the year and I think you would have seen a higher percentage of specialized tools at rig count not rolled the way it did, right. So you have to kind of adjust your mindset on specialty tool days in the face of a 19% rig count decline kind of across the year. But what we're seeing across the board is increase in rotary steerable, increase in pressure well drilling, azi gamma 0.25 File 9, we have some ink on the fly et cetera as well as just much higher demand especially in the Permian and South Texas for our Q-series performance motors.
And so, we had tremendous success with those motors as we rolled not over the years. I think that's a big portion of what drives us to be one of the top quartile or number one DD companies for most of our major customers. And so, it's been a combination of all of those things. And of course, we're tracking up behind the scenes so we kind of can see what percentage of our overall days those specialty tools are associated with.
How that plays out with commodity prices where they are, is clearly TBD. But at the end of the day, what we know is performance drilling and performance in the field is what's holding up our market share and driving rate and performance across the board, right.
Our next question comes from Ian MacPherson with Simmons. Please proceed with your question.
Similar questions, when I look back on your 2019 performance and you’re talking about the consolidation landscape. I mean what stands out is being potentially vastly undervalued and Quintana is DD right, based on the franchise strength there, but also frankly, the EBITDA results relative to the rest of the business?
And I wonder when you're thinking about options for consolidation, if directional drilling in the rest of Quintana are natural present or if you think that may be your best option from locking value would be a separation of your drilling in your completion businesses?
Yes well, first of all, good morning Ian, this is Chris, it's a very fair question. And as I think we alluded to with George, at the end of the day, all options are on the table. And if there's something that gets us to critical mass, flow, liquidity and scale, where we potentially spin off completions layer in drilling or vice versa. We're open to all options if the valuation works out, if it works out for the board.
I take your point with regards to own the face of it completion and production doesn't have the necessary critical mass. But I think if you look at the losses within pressure pumping and Wireline in context of even the midpoint of the range that Keefer alluded to with the cost savings, that in and of itself would have turned it back to a positive. And we are moving very quickly.
We're very proud of the team and the team work they've done on the consolidation efforts to kind of streamline that business. We're also seeing what I would deem, maybe more pricing discipline especially on the spot market work within pressure pumping, and we're seeing better utilization across the calendar. So, we're pretty confident that those businesses are going to turn EBITDA positive pretty quickly.
Understood, thanks Chris. Keefer your free cash flow was good in the quarter. You had a - looks like a pretty good working capital release there. And that was a large pivotal element for your free cash flow profile for Quintana for the full year. So it seems to me that that's a big element as we think about your ability to maybe generate free cash in 2020 in an uncertain environment. Do you have any guidance on working capital for this year?
Yes Ian thanks, good question. Obviously, I think really proud of the team's efforts to effectively manage working capital over the back half of the year, particularly as we saw, activity levels decline in Q3 and Q4 from a topline perspective. So, I think we did an admirable job of turning our working capital investment into cash and in turn use those proceeds to immediately paydown the credit facility and are really happy with where we ended the quarter and the year from a net debt perspective.
So, I think we continue to have one of the stronger balance sheets in our space. Certainly look to continue to lead in this area as we go forward. As we think about working capital for 2020, I would think about kind of assumptions on AR and AP days. Our working capital as a percentage of revenue to be kind of inline with where we were in the back half of the year. We will kind of flex up our working capital investments here at the beginning of 2020.
We've obviously deployed a second frac spread early in January. And we're going to see the top line bump back up as we work through Q1 relative to where we were in Q4. So that will be a little bit of an incremental investment. But we're going to remain diligent to manage the payable side to make sure that we are harvesting as much free cash flow as we possibly can out of the business.
[Operator Instructions] That concludes our Q&A session for today. At this time, I'd like to turn the floor back over to management for closing comments.
Thank you. And once again for joining us on this call and your interest in Quintana Energy Services, we look forward to speaking with you again next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.