U.S. Markets open in 4 hrs 47 mins

Edited Transcript of BAS earnings conference call or presentation 1-Mar-19 2:00pm GMT

Q4 2018 Basic Energy Services Inc Earnings Call

MIDLAND Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Basic Energy Services Inc earnings conference call or presentation Friday, March 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Schorlemer

Basic Energy Services, Inc. - Senior VP, Treasurer, Secretary & CFO

* Trey Stolz

Basic Energy Services, Inc. - VP of IR

* Thomas Monroe "Roe" Patterson

Basic Energy Services, Inc. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Basic Energy Services' fourth quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Trey Stolz, Vice President of Investor Relations. Thank you, Mr. Stolz, you may begin.

--------------------------------------------------------------------------------

Trey Stolz, Basic Energy Services, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, operator, and good morning, everyone. Welcome to Basic Energy Services' Fourth Quarter 2018 Earnings Conference Call. We appreciate you joining us today.

Before we begin, I'd like to remind everyone 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 companies in its registration statements on Form 10-Q for 2018 and 10-K for the year ended December 31, 2017. Further, 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 these statements. In addition, the information reported on this call speaks only as of today, March 1, 2019, and therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay.

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

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thanks, Trey, and welcome to those of you dialing in for today's call. We appreciate your interest in our company. Joining me today is David Schorlemer, our Chief Financial Officer.

I'll start by providing some highlights on 2018, and I'll briefly cover fourth quarter operationally. David will then discuss our financial results in more detail and provide some additional color on our future investment plans. I'll wrap things up with some strategic comments about 2019. From the beginning, it was clear that 2018 was going to be a more challenging year than we or the market had anticipated, as the narrative for our customers shifted from robust growth to maximizing free cash flow. Simultaneously, we enacted our own set of strategic initiatives to streamline our businesses, create efficiencies and maximize our own free cash flow.

Growth remains a priority, but creating value and capital has been our focus and the company is well positioned for 2019.

Despite the volatility we experienced, we generated free cash flow for the first time since 2016. We also delivered a 12% increase in revenues, 17% increase in adjusted EBITDA, while maintaining total direct company margins essentially flat at 23% amid our previously announced strategic alignment initiative. From an operational standpoint, activities in our production services segment, like well servicing and midstream water logistics, delivered improved financial results throughout the year. Meanwhile, some completion-oriented businesses, like pressure pumping, underperformed due to the excess supply of frac equipment. We believe this overabundance of frac horsepower has probably peaked in the fourth quarter. The strategic realignment we launched early in 2018 to exit noncore markets and business segments and relocate our assets to operating areas where our customers are busiest was essentially complete by the end of the year. This strategic realignment, while clearly necessary, had its cost in terms of time and resources and impacted our second half performance.

Just as a reminder, this was an internal initiative to exit noncore markets. We have relocated those assets to operating areas where our customers are busiest, leaving some legacy markets that have never fully recovered from the downturn. This initiative has 2019 set up for a better performance if demand for our services continues to grow. While these relocations and divestitures caused short-term disruptions to our top line during the third and fourth quarter, they also created some important flexibility into our business model by reducing capital expenditure requirements. Streamlining of our fleet, footprint and strategy will far outweigh any temporary reduction in revenue. We anticipate that going forward, this initiative will accelerate profitability and free cash flow as a design to improve utilization cost efficiencies, lower maintenance CapEx and leverage our scale in these core markets.

Moving to our fourth quarter results. Our performance during the quarter was impacted by the typical seasonal slowdown. These include the usual weather interruptions, holidays and shorter daylight hours. However, this fourth quarter saw some additional impacts. Record-setting rainfall during October in Texas and Oklahoma plus a significant drop in crude prices mid-fourth quarter put further pressure on utilization. Altogether, we've built these additional interruptions, represented approximately $10 million of revenue decrease.

Even with these challenges, our decremental margins were better than anticipated, and we only lost 30 basis points of total direct margin during the quarter. The well servicing segment experienced slightly lower utilization, due largely to the heavy rains from October and the asset relocations and a typical seasonality around holidays in the shorter daylight hours.

We experienced better pricing that was implemented late in the third quarter. And as a result, we managed to deliver an increase in revenue per rig hour. Segment margin remained even with the third quarter around 18%, despite the asset movements as part of the realignment initiative. Demand for 24-hour packages remains stable, averaging 23 packages for the quarter. We expect demand for these packages to increase as they are required for maintenance, work over and completion of long lateral well bores. We currently have plans to deliver another 2 to 4 additional 24-hour packages during the first half of 2019.

The reason is very simple. Many E&P companies are striving to maximize their cash flow, moving work over and maintenance projects up in priority due to the lower spend per barrel of oil recovered.

Our fleet is uniquely equipped to handle this demand, not only from conventional wells, but also these long lateral horizontals as we combined our high-spec rigs with our rental assets to form these packages. The midstream water logistics segment continues to perform very well, and the amount of total water disposal volumes via high margin pipeline during the quarter increased 27% sequentially to a new high of 3.2 million barrels or 33% of total water disposal volumes.

The Permian Basin operations moved nearly 60% of its saltwater disposal volumes via pipeline, another new record. As water disposal volumes via pipeline continued to expand, we are reducing the number of active fluid trucks as we replace fewer at lease expiration.

Total water volumes for the fourth quarter were also a new quarterly record, totaling 9.9 million barrels, an increase of 5% over the previous quarter. Water volumes have continued their trajectory in Q1. This segment contains the most potential of any in our portfolio. Therefore, we are announcing plans to build multiple, discreet gathering and infrastructure projects within our existing saltwater disposal well network. These midstream projects will include additional disposal wells in the Permian Basin, long-term contracted pipeline water commitments and the opening of several of our disposal facilities to selected third-party truck volumes. We expect these growth projects to require between $25 million and $30 million in 2019, representing over 75% of our full year growth capital expenditure plans.

On the completion and remedial services side, our coiled tubing, rental tools and snubbing businesses were stable throughout the fourth quarter with the exception of some weather impact.

As stated earlier, declining oil prices and an overbuild of frac horsepower, led to a reduction in pressure pumping activity and pricing. In addition, we are experiencing a decline in sand revenue as customers procured directly from sand providers. However, this change improves overall margins as the markup on this pass-through sand is very small. Customers reacted quickly to the falling oil prices in the fourth quarter, choosing to delay frac jobs until they can sell their fresh production at higher levels. This pushed pricing even lower in an oversupplied and crowded frac market. We saw competitive pricing fall below breakeven cash levels at the field level in some markets, and we deem this to be an unacceptable strategy, even in the short term. In response, we have stacked 3 of our 8 active spreads during the fourth and first quarter of 2019. This also reduces CapEx spend for the segment. We can quickly redeploy this warm stack equipment should the market outlook improve. However, we also remain able to stack additional assets in the frac market if the market does not recover sufficiently. Defensively, we are also moving some idle frac pumps to our well servicing segment to work on high-capacity mud pumps and larger work over and completion projects.

Before I ask David to cover key fourth quarter financials, I wanted to highlight the fact that we have ample liquidity to fund our growth after we recapitalize the company with a new 5-year term, $300 million senior note, and a new 5-year ABL that replaces the prior $150 million asset-based lending credit facility. These steps strengthened our capital structure and provide much more liquidity. In short, the company has never been in a better position with liquidity to de-risk any consolidation initiatives or to diligently grow our core businesses at a measured pace.

With that, I'm going to turn the call over to David.

--------------------------------------------------------------------------------

David Schorlemer, Basic Energy Services, Inc. - Senior VP, Treasurer, Secretary & CFO [4]

--------------------------------------------------------------------------------

Thank you, Roe, and good morning to everyone. Over the next few minutes, I plan to highlight 2018 full year results, provide some details on fourth quarter results as well as cover selected balance sheet and cash flow items. I will also provide some preliminary guidance around our capital investment plans in 2019. Revenues for the 2018 fiscal year were $964.7 million, an increase of 12% from the prior year. Full year adjusted EBITDA for 2018 was $97 million or 10.1% of revenues, which compares favorably to the prior year of $82.8 million or $9.6 million -- 9.6% of revenues, which includes noncash compensation for both years.

As Roe mentioned, we increased full year adjusted EBITDA by 17%, not withstanding headwinds, including unusual weather conditions and planned strategic realignment initiatives during the second half of 2018.

In October, we completed a timely and transformative refinancing in which we closed on a new 5-year $300 million bond due in 2023. We also entered into a new 5-year $150 million revolving credit facility that freed up restricted cash of $45 million and which includes a $50 million sublimit for letters of credit. At December 31, 2018, our total long-term debt was $322.7 million and cash and cash equivalents were $90.3 million. Also at year-end, our availability under the new revolver net of LCs was $69.6 million, which brings our total liquidity to just under $160 million.

Our refinanced balance sheet and enhanced liquidity provides the company flexibility to confidently execute on our 2019 business plan. Our strategic realignment plan that we discussed in-depth during the second half of 2018 is essentially complete, and we are making significant progress in benchmarking cash G&A activities and streamlining and modernizing our business processes in 2019.

Turning to 2018 fourth quarter results. Revenues were $230.4 million, down 2% from $235.3 million in Q4 of 2017. We have estimated that holidays and severe weather negatively impacted Q4 revenue by approximately $10 million.

Moving on to details on our fourth quarter revenues, starting with the completion and remedial segment. 66% of revenue was generated from pumping services, 15% from coiled tubing, 18% from rental and fishing tools compared to 20% in the prior quarter, and the remainder was from other services.

The company's fourth quarter reported net loss was $46.7 million or $1.76 per share compared to a net loss of $20.3 million or $0.78 per share in the prior year quarter. Q4 numbers include significant charges from the October debt refinancing, including the prior term loans make-whole premium and related debt issue cost write-offs, discussed in detail in a moment. For those modeling our results, those special items amounted to $26.4 million or $0.99 in earnings per share.

In addition, weighted average shares outstanding for the fourth quarter and full year were 26.6 million shares and 26.5 million shares, respectively. Management believes that adjusted EBITDA allows investors to establish comparability period-to-period regarding the company's ongoing operations. Basic's adjusted EBITDA for the fourth quarter was $21.8 million or 9.5% of revenue compared to $28.8 million or 12.2% of revenue for the fourth quarter of 2017.

This calculation adds back net interest depreciation and amortization, noncash stock compensation, noncash impairment expenses, strategic consulting and realignment costs, loss on disposal of assets and deducts gains on disposal of assets. Please reference to our press release for the non-GAAP reconciliation of adjusted EBITDA.

Reported G&A expense for the fourth quarter was $35.5 million or 15.4% of revenue, an improvement from the prior year fourth quarter 2017 of $37 million or 15.7% of revenue.

Q4 G&A expenses include noncash compensation and strategic realignment expenses. Excluding these noncash and special charges, G&A expense was $30.1 million or 13.1% of revenue, slightly below comparable expenses in the prior year of $30.6 million. We judiciously managed cost during the period of holiday and weather-related revenue impacts in the fourth quarter of 2018.

We expect G&A expense in the first quarter of 2019 to range from $35 million to $36 million, including noncash stock compensation of approximately $3.7 million, which decreases in Q1 2019 as the result of the final vesting of certain share compensation expenses related to the 2016 emergence awards.

Fourth quarter depreciation and amortization expense was $32.3 million compared to $31.4 million in Q4 2017. We anticipate depreciation and amortization expense in the first quarter of 2019 to be approximately $26 million. Net interest expense was $10.7 million in Q4 compared to $10.8 million in Q3 of 2018. We expect 2019 quarterly net interest expense to be in the range of approximately $10.5 million to $11.5 million.

Loss on extinguishment of debt was $26.4 million in Q4, which included $17.6 million of make-whole premium on the term loan and $8.8 million of accelerated amortization of debt discounts and write-off of deferred financing costs. Tax expense for the fourth quarter of 2018 was $8,000, resulting in an effective tax rate of 0.15% compared to 0 tax expense in Q3.

As of December 31, 2018, the company had approximately $783 million of cumulative NOLs. The full year 2019 planned effective tax rate is expected to be approximately 0% due to valuation allowances that offset potential tax benefits.

Turning to the company's financial position and capital resources. Changes in our capital structure in the second half of 2018 have meaningfully strengthened our balance sheet, improved our liquidity position and lowered our credit risk profile. Our leverage ratio computed as net debt to adjusted EBITDA at year-end was 2.7x, down from 3.3x at the end of 2017. In addition, we continued to reduce capital lease obligations and ended the year with capital leases of $60.9 million compared to $100.6 million at the end of 2017, a reduction of $41 million of near-term debt. But this is only a first step in our plan to further delever the company and enhance capital efficiency.

During 2018, cash flow from operations grew by $49 million to $75 million for the year compared to $25.9 million during 2017. Additionally, full year 2018 positive free cash, computed as cash flow from operating activities less sustaining cash capital expenditures, was a solid $23.2 million. This is the first time the company has reported positive free cash flow since emerging from Chapter 11 in 2016. The operating cash flow improvements were due primarily to stronger operating results, prudent working-capital management and capital discipline. Cash capital expenditures for the year ended December 31, 2018, were $68.7 million compared to $63.4 million in 2017.

In 2018, we spent approximately $17 million on expansion projects and $51.8 million on sustaining these, which include replacements, refurbishments and other maintenance projects. We also had capital or financing lease additions for sustaining replacement fleet assets of $20.2 million in 2018 compared to $67.5 million in 2017. We expect to rely less on third-party leasing going forward. Our DSO at the end of December was 60 days, steady with 60 days at the end of September.

Our over 90-day receivables represented 4% of our accounts receivable balance at December 31. In 2019, we will be investing in further technology projects to enhance our capital efficiency and order the cash business processes between our customers who have shown a desire to improve this process as well. We have dedicated resources to do just that and expect 2019 to be an opportunity to greatly enhance business-to-business relationships that have the potential to differentiate Basic going forward.

In recent years, our customers have made significant investments in their contract management, procurement and supply chain organizations, and we will be meeting them with technology and special resources to capture opportunities to work more efficiently.

We expect our total capital investment plan in 2019 to be approximately $94 million. This will consist of three components: $16 million of noncash capital or financing lease additions for basic fleet replacements, including primarily rolling stock; $47 million in cash sustaining CapEx, which includes rig and other equipment refurbishments and other general maintenance projects; and $31 million for expansion projects, mainly related to our midstream water disposal business and higher-margin 24-hour rig packages and rental package tools. These midstream water disposal infrastructure projects include investments in long-lived assets with lower maintenance intensity as compared to our existing water logistics trucking and broader asset base. And while the full impact of these investments will not be realized in 2019, we believe the cash-on-cash returns of less than 4 years are very attractive and will ultimately reduce our ongoing capital requirements to sustain our revenue base. Additionally, these investments track with a secular trend associated with increasing liquids production and residual water disposal requirements in the industry.

Funding cadence will be leveraged to the first and second quarters for expansion CapEx, with balanced spending for fleet maintenance and sustaining and refurbishment programs. However, we are poised to adjust spending based on market conditions, and we have flexibility in our spending program. Our 3-year strategic plan 2019 through 2021 includes a significant focus on segment investments to drive margin expansion, while reducing services with particularly challenging commercial economics and higher maintenance and labor intensity where constraints are real in our core markets.

In addition, we are committed to steady progress of controlling fixed and variable costs through aggressive benchmarking, judicious management of working capital and strengthening our balance sheet through delevering transactions. Capital investments over the next several years will be strategically deployed to projects and investments that are expected to drive EBITDA performance, positive free cash flow and enhanced equity value for Basic. In fact, we are backing this up by introducing new improvement performance metrics within the organization, which we believe will lead to enhanced value going forward. With sustained capital discipline and liquidity preservation and execution in our core businesses, I am confident that we will be well positioned for success as we continue to rationalize and modernize our business and maintain a targeted and disciplined investment strategy biased toward long-lived assets and production-related trends in our industry.

I'll now the turn the back to Roe for some final comments.

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Okay. Thank you, David. The rapid decline in oil prices that occurred during the fourth quarter is impacting our customers' CapEx deployments in the early part of Q1. In fact, the activity levels in our production services segment did not return to the levels we experienced in the third quarter of 2018 until about mid-February of 2019. While this is a strong indication of activity levels for the remainder of 2019, the slow start to the year will drag on our first quarter results. We expect our leading-market position and all production service lines will continue to grow and strengthen throughout 2019, as we benefit from the steps we took in 2018 to better position the fleet.

Meanwhile, the frac business remains in a difficult state. Calendars are beginning to fill with booked projects, but the weak pricing environment has been a negative. And we also believe our customers are being very careful with their spend year-to-date. Customers may accelerate completions of drilled but uncompleted wells as the year progresses. We will just have to see. We will be ready to act quickly to reactivate warm stacked equipment if these new completions materialize and pricing improves.

Overall for 2019, we feel the slow start to the year will cause first quarter results to be reduced by 11% to 14% sequentially, but first quarter exit rates appear to indicate that the year will be flat with 2018 on the top line. Margins for 2019 should improve due to the streamlining and realignment actions that we took in 2018. In addition, during the first quarter, we should expect some margin resilience from our production services with the exception of the first quarter reset of payroll taxes.

The current consensus view for the remainder of 2019 indicates that E&P spending in the U.S. will be generally flat with 2018. This can clearly shift, again, very quickly based on the direction and the level of oil prices. Keep in mind that production-related businesses continue to represent an increasing percentage of our total revenue that is usually more stable and more predictable. As a result, during 2019, you should expect Basic to further transition capital initiatives to the production side of the business. We're particularly excited about the potential in our water midstream business, where our business model should represent very stable, contracted and long-lived revenue streams. We're also anticipating gradual easing of the takeaway capacity challenges that have played in the Permian Basin during the latter part of 2019, which coupled with a record high drilled but uncompleted well counts. We should see a positive impact to our 24-hour completion rig activity, especially in the Permian Basin for the second half of 2019.

Overall for 2019, our best indication so far is the year will deliver stable revenues and expanding margins in the production segment. Outside of our internal initiatives, how do we create margins and better free cash flow levels like what we saw in 2014? How can this be achieved in a market that could remain flat for the next year? The answer for us has been and remains that the next level of improvement must involve considerable levels of consolidation. Therefore, we are renewing and re-energizing our efforts to find good combinations that create better scale, de-lever our capital structure and improve our cash flow. These transactions will provide the path to insulate our shareholders from the cyclicality and volatility of today's energy landscape. I'm going to stress, above all, that our intention is to preserve liquidity at all costs. With those goals in mind and with the record we have established over the past decade for executing and successfully integrating financially sound acquisitions, we will seek out and acquire the right businesses with the limited use of cash. The potential cost synergies, particularly in the production-oriented services are significant. Even more importantly, scaling to achieve critical revenue mass is the only way to overcome the industries current fixed-cost structure. We've never been in a better capital or a strategic position to execute on initiatives and opportunities that lie ahead in 2019. We remain committed to our market-leading position as the service provider of choice for production-oriented business lines.

With that, I'm going to open the call up for any questions, operator.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Mike Urban with Seaport Global.

--------------------------------------------------------------------------------

Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

--------------------------------------------------------------------------------

Good to hear about the continued progress toward more of a midstream model on the water side. As you look to build out the infrastructure in that segment, is anything that you're envisioning in terms of these projects? Do you have any contracts on those or line of sight on customers that would take up that capacity?

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes, line of sight and contracts are being negotiated.

--------------------------------------------------------------------------------

Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

--------------------------------------------------------------------------------

Okay, great. And then just more broadly, now that you have the realignment need and restructuring more or less behind you, clearly, you do are seeing -- do expect and are seeing some uplift there as kind of implied by the guidance for higher market year-over-year. Are you able to quantify that at all in terms of EBITDA margin impacts? Just give us a sense for how much benefit you should get kind of in a revenue-neutral environment? So all of this equal, how much benefit are you getting from your trip?

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Well, from the realignment initiative itself, probably, I'm going to say there is a flow through on EBITDA that has been somewhere in the neighborhood of about 15% of total EBITDA. And that's what we've seen so far. Give us another quarter to see -- a full quarter to see how this plays out because we just finished all of this up about late November, early December, all of the asset relocations, et cetera, and divestment of a couple of businesses that we were in. So let's give it a little more time before we get too deep into quantifying what it means to us. We've already seen some margin impact, we've already seen some flow through EBITDA, but I'd like to see another quarter before I really start marking on a page and say, okay, that was purely realignment oriented, and this is normal business, et cetera.

--------------------------------------------------------------------------------

Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

--------------------------------------------------------------------------------

Okay, got you. And if I can just kind of follow up on that, just talking about flattish kind of year-over-year revenues and then margins. And then you started to talk about kind of the production businesses. Was that a total company comment? Or are you just kind of talking about better margins in the production-oriented businesses?

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Just the production-oriented business, which makes up the bulk of everything we do. Really, only frac is the pure completion part of our business. So everything but frac is the way you could take that.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

--------------------------------------------------------------------------------

Thomas Monroe "Roe" Patterson, Basic Energy Services, Inc. - CEO, President & Director [9]

--------------------------------------------------------------------------------

Okay, great. Operator, we appreciate it, and thanks. We'll talk to everybody in the next quarter.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.