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Edited Transcript of CJ.N earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q2 2019 C&J Energy Services Inc Earnings Call

HOUSTON Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of C&J Energy Services Inc earnings conference call or presentation Tuesday, August 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel E. Jenkins

C&J Energy Services, Inc. - VP of IR

* Donald Jeffrey Gawick

C&J Energy Services, Inc. - President, CEO & Director

* Jan Kees van Gaalen

C&J Energy Services, Inc. - CFO

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Conference Call Participants

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* Bradley Philip Handler

Jefferies LLC, Research Division - MD & Senior Equity Research Analyst

* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* Christopher F. Voie

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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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 conference over to Daniel Jenkins, Vice President of Investor Relations. Please go ahead.

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Daniel E. Jenkins, C&J Energy Services, Inc. - VP of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to the C&J Energy Services earnings conference call to discuss our results for the second 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 and 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.

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [3]

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

Turning to Slides 4 and 5 of the posted presentation, I am pleased to share with you a few of our financial and operational highlights from the second quarter. Consolidated revenue totaled $501 million, and we grew adjusted EBITDA approximately 5% to $52 million and generated $26 million of free cash flow.

During the second quarter, market conditions became increasingly challenging, and the operating environment remained extremely competitive. We focused our efforts on and were successful in reducing our overall cost structure, disposing of noncore assets and implementing technologies that increase both efficiency and profitability.

We responded quickly with cost reduction efforts that included the restructuring of our research and technology division, the elimination of 2 executive management positions, the flattening of the management structure in our cementing business and other workforce reductions. All of these efforts helped to reduce adjusted SG&A expense 20% year-over-year and 11% sequentially and should result in further cost improvement over the coming quarters.

Also, the implementation of our upgraded SAP ERP system early in the third quarter positions us well for further productivity and efficiency improvements.

In our Well Support Services segment, we doubled adjusted EBITDA and returned the segment back to double-digit profitability margins, as we expected.

I am also pleased to announce that on July 31, 2019, we closed the sale of the majority of our South and West Texas fluids management assets in keeping with our previous comments around seeking strategic alternatives for that business within this segment. Although the sale will result in lower segment revenue in the third quarter, the transfer of people and assets to the buyer, along with additional facility closures, should result in improved segment profitability over the coming quarters.

In our Completion Services segment, revenue and profitability decreased sequentially, primarily due to lower utilization in our fracturing business and competitive pricing in our wireline and pumpdown businesses.

In our fracturing business, we experienced increased white space in our frac calendar driven by certain fracturing fleets catching up to customer drilling rigs due to high levels of operational efficiency, and we experienced changes in customer work scope that resulted in fewer multi-well pads and instances of lower-margin recompletion activity.

In response to lower activity levels, we strategically stacked 2 horizontal and 1 vertical fleet, which allowed us to maintain our profitability and better align our overall fleet utilization with current market conditions and customer demand.

Our smaller footprint late in the quarter resulted in profitability of $11.3 million in adjusted EBITDA per fully utilized fleet compared to $12 million in the prior quarter.

In our wireline and pumpdown businesses, revenue increased 11% sequentially, in line with previous guidance as customer activity levels improved, especially in the Bakken after harsh weather conditions in the first quarter contributed to a very slow start to the year.

However, profitability in these businesses remained flat due to continued pricing pressure, mostly from new market entrants, higher consumable costs, as customers push for more guns per run, and reduced asset deployment as customers began to release their deployed frac fleets.

In our Well Construction and Intervention Services segment, revenue decreased sequentially due to lower-than-anticipated customer activity levels and a more competitive pricing environment in our cementing business. However, segment profitability increased 8% due to assets returning to service in our coil tubing business and cost reductions in our cementing business.

The lower overall drilling rig count resulted in lower customer activity levels in our cementing business, especially in our largest operating basin in West Texas and the Mid-Continent. And in response and in line with our returns-focused strategy, we further reduced our cost structure by stacking lower utilized equipment, consolidating facilities, closing unprofitable districts and reducing labor and operational costs.

In our coil tubing business, we returned 2 large diameter units to service in West Texas by late May that increased overall asset utilization late in the quarter, which was partially offset by continued soft activity levels in both South Texas and the Mid-Continent.

In our Well Support Services segment, revenue was essentially flat with profitability doubled compared to the prior quarter, resulting in double-digit segment profitability margins. During the second quarter, higher customer activity levels in most of our operating basins, improved weather conditions and additional workdays with longer daylight hours all resulted in improved segment profitability.

In our rig services business, we benefited from improved customer activity levels in both California and the Bakken, and we experienced the highest deployed rig count in California and the Mid-Continent in over a year. This improvement was partially offset by rig declines in West Texas, an area that remains very competitive.

We deployed additional trucks in California to meet growing customer demand in our fluids management business. And now with the sale of our South and West Texas fluids assets, California will be our largest operating basin in our fluids management business going forward. Even though segment revenue will decline in the third quarter due to the asset sale, we are focused on increasing profitability over the coming quarters as we further streamline our asset base, close underperforming districts and reallocate assets to more profitable locations.

Shifting the focus to our recent technology initiatives, our wireless and disposable game-changer perforating gun system continues to be the gun of choice by our customers, and we estimate just over $4 million of cost savings in the second quarter when compared to third party pricing for perf guns and wireless accessories.

The adoption of our game-changer gun system has grown to 81% of all gunshot during the second quarter of 2019. We also continue to experience customers tailoring or changing gun configurations at much greater frequencies compared to last year, and having our own internal manufacturing organization allows us to respond rapidly to our customers' needs in order to meet the time lines for their wells.

In addition, we have experienced an over 200% improvement on runs per missed run in the second quarter when comparing our game-changer gun systems to conventional guns. With the next version of our disposable perforating gun system, which we expect to introduce early next year, we'll have a more flexible design, fewer components for arming and will be compatible with charges from all of the leading manufacturers to accommodate ever-changing customer preferences.

Additionally, we have now installed greaseless cable systems on approximately 1/3 of our perf and plug wireline trucks, and we plan to have 50% of our trucks installed with these systems by year-end 2019. The combination of our game-changer perforating gun system, greaseless cable systems and the 24-rig lock quick connect systems we have deployed in the field allows us to complete more stages per fleet per day in a safer, more cost-efficient manner.

With regard to technology initiatives within our fracturing business, we have continued with the installation of the latest fire suppression systems on our frac pumps, and we expect to have most of our fleets equipped with this technology by year-end.

In addition, we continue to upgrade our pumps and blenders with our proprietary MDT control systems, enabling us to send more data to the cloud in order to increase efficiencies and prevent instances of catastrophic failure of major parts and components. Our data analytics program continues to progress with all of our active fleets now streaming data to the cloud.

With that, I will turn the call over to JK to review our second quarter financials, and I will wrap up today's call with additional thoughts on the operating environment and an update on our merger of equals with Keane.

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Jan Kees van Gaalen, C&J Energy Services, Inc. - CFO [4]

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Thanks, Don. Good morning, everyone.

Now moving to Slide 5 in the slide deck we posted with our earnings release this morning and focusing on our consolidated results.

Second quarter revenue decreased 18% year-over-year and 2% sequentially to $501 million. We generated an adjusted net loss of just over $13 million in the second quarter or a loss of $0.20 per diluted share. This compared to adjusted net income of approximately $35 million or $0.52 per diluted share in the prior year period and an adjusted net loss of approximately $19 million or $0.28 per diluted share in the prior quarter.

For the second quarter of 2019, we generated adjusted EBITDA of just under $52 million, which decreased 43% year-over-year, but increased 5% sequentially.

Turning to Slide 7 and focusing on the business segments.

Completion Services segment revenue decreased 22% year-over-year and 1% sequentially to approximately $322 million in the second quarter of 2019. Segment adjusted EBITDA decreased 43% year-over-year and 12% sequentially to just under $48 million in the second quarter of 2019. As Don previously mentioned, we experienced more white space in our fracturing calendar that resulted in fracturing revenue decreasing 7% sequentially to $220 million.

I would also encourage everyone to review the reconciliation table in the back of our earnings press release, as we have tried to make our profitability per fleet metrics more comparable to our peers.

In our wireline and pumping businesses, revenue increased 11% sequentially to $92 million due to increased customer activity levels, especially in our largest operating basin of the Bakken. But profitability was essentially flat, primarily due to continued pricing pressure and increased consumable costs due to customers' preference for more guns per run.

Turning to Slide 8. Well Construction and Intervention Services segment revenue decreased 27% year-over-year and 8% sequentially to approximately $73 million in the second quarter of 2019. Segment adjusted EBITDA decreased year-over-year, but increased 8% sequentially to just under $7 million in the second quarter of 2019. This sequential decrease in segment revenue was due to fewer large diameter units in service in both April and May in our coiled tubing business and lower drilling rig count and continued pricing pressure in our cementing business, as Don previously mentioned.

Segment profitability increased sequentially, primarily due to the streamlining of costs in our cementing business.

Now turning to Slide 9, Well Support Services revenue increased 8% year-over-year and was essentially flat sequentially at $106 million. Segment adjusted EBITDA increased 17% year-over-year and doubled sequentially to just over $13 million in the second quarter of 2019. The sequential increase in profitability was due to higher customer activity levels, improved weather and additional workdays with longer daylight hours.

Turning to Slide 10 and moving to expenses. Adjusted SG&A expense decreased 20% year-over-year and 11% sequentially to $46 million, which was primarily driven by an 11% decrease in SG&A headcount since year-end 2018. As a percentage of consolidated revenue, adjusted SG&A expense fell to 9.2% from 10.1% in the prior quarter, which highlights the positive impact of our cost streamlining efforts in the quarter with sequential revenue decrease. Looking ahead to the third quarter, we expect SG&A expense on an unadjusted basis to range between $50 million and $55 million, which includes expected merger-related costs.

Depreciation and amortization expense increased 7% year-over-year, but decreased 3% sequentially to $58 million in the second quarter. The sequential decrease was primarily driven by the roll-off of select fully depreciated assets. Looking ahead to the third quarter, we expect D&A expense to range between $54 million and $58 million.

From a tax perspective, and as we have previously reported, 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 second quarter of 2019, we generated free cash flow of approximately $26 million due to continued strong cash flow generation from operations, closely managing working capital and disciplined deployment of capital expenditures. With regards to capital expenditures, we recognize that factors in the market and the behavior of our customers have changed, and we continue to change our approach to capital spending that is more and more focused on maintaining our equipment and increasing our efficiencies in order to improve returns and generate additional free cash flow.

In the second quarter, we used $43 million of cash to fund capital expenditures, which decreased 11% sequentially and came in below our previous guidance range of $55 million to $65 million. In addition, at the midpoint, we have reduced our 2019 full year capital expenditure budget by 6% with a revised change of $140 million to $160 million for the year, primarily due to reduced growth capital expenditures. Going forward, we will continue to rigorously streamline costs and manage capital expenditures in order to generate additional free cash flow in the second half of 2019.

Staying on Slide 11 and moving to liquidity and the balance sheet. Our cash balance was just over $114 million at the end of the second quarter. Additionally, we had no draws outstanding under our credit facility, which had approximately $266 million of borrowing capacity, resulting in total liquidity of $380 million as at quarter end. We plan to maintain a financial philosophy that is focused on a disciplined capital deployment strategy and protecting our strong balance sheet and liquidity position.

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

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [5]

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Thank you, JK.

As we turn our attention to the third quarter, we expect our consolidated revenue to decline mid to upper single digits sequentially due to the divestiture of the majority of our South and West Texas fluids management assets, which closed on July 31, continued white space in our fracturing calendar and lower activity levels and continued pricing pressure in our cementing business.

In our Completion Services segment, we have limited visibility towards the end of the quarter, and we are preparing for instances of budget exhaustion and delayed completion activity. We will continue to monitor market conditions and customer demand closely, and we will adjust our deployed frac fleet counts accordingly. Even though we anticipate improved financial results in our coiled tubing business from the return of 2 large diameter units to service with efficient customers in West Texas, we expect our cementing business will continue to face challenging headwinds that will negatively affect Well Construction and Intervention Services segment revenue in the third quarter.

After improving late in the first quarter, the drilling rig count serviced by our cementing business began to decline again in the second quarter, specifically in our largest operating basin in West Texas and the Mid-Continent, both of which remain extremely competitive. If current market conditions persist, we are prepared to further streamline our cost structure and stack additional equipment during the third quarter.

In our Well Support Services segment, we expect revenue to decline upper single digits due to the fluids management asset divestiture, which should be partially offset by slightly improved activity levels in our rig services and special services businesses. We remain focused on the things that we can control, and we will stay committed to maintaining capital spending discipline and generating additional free cash flow in the second half of 2019.

Before I turn the call over to questions, I would like to make a few comments regarding the exciting merger announcements we made in late June regarding our proposed merger of equals with Keane.

The announced merger of equals will create one of the largest U.S. oilfield services companies in the Lower 48 and will create a bigger, more stable platform for future growth and expansion of our core product lines and technologies.

The vast majority of conversations that I have had with our employees, customers and vendors are supportive and positive on this potential transaction. We remain on track to close the merger in the fourth quarter of 2019, and we received early termination of the waiting period under the HSR provisions with the Department of Justice, which satisfies a major condition to the closing of the proposed merger. The integration planning process has commenced and is progressing well. We remain excited about the potential of creating one of the largest oilfield service companies that focuses on the U.S. market.

In closing, I want to thank our employees for their continued hard work and dedication. Our employees have stayed focused on meeting our customers' needs and delivering our products and services with the highest levels of service quality and safety. Their continued hard work and dedication positions the company well for the future.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [2]

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So I wanted to start on the frac business, where you had some white space unanticipated in the, it sounds like, latter part of second quarter and maybe some more into third quarter. Can you generalize at all in terms of type of customer or basin or any other way where that was concentrated? Or was it pretty broadly distributed across your active fleets?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [3]

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No, it was fairly specific with a few customers that had delays in terms of the completion programs. We're with really some of our most efficient frac fleets and, quite frankly, with very, very efficient drilling programs. We have essentially caught up on the completion side of things, and there was a pause that came with very short notice in both cases for delays in the activity, and really didn't allow us enough time to be able to redirect those fleets elsewhere. So that slowed us down pretty significantly.

And on top of that, I would say there's a few of the spot fleets that we had out there that we saw a little bit more white space than we have seen early in the quarter. So -- and again, that was more of, I think, evening the pace of completion that they were following and moving at a little bit more leisurely rate as they move through the quarter and kind of looked at the pace they would continue through the end of the year.

So as we come into Q3, we've got another fleet that has been dedicated for one of our very large customers that we know midway through this quarter we'll basically be ending the work that we're doing for them is as they've essentially shut down the budget in that part of the country, moved from a gas -- very gas-rich environment, moving the dollars to an oil-rich environment. And so we're looking for potential opportunities for that fleet at this point, but it's only going to get stay deployed if we can do that at a level of profitability and, quite frankly, utilization that makes sense. So that's really kind of the largest unknown at this point in terms of Q3.

Going into Q4, there's clearly a lot of noise. The visibility is quite low. We're anticipating certainly at least the normal seasonality that we get in Q4. My personal opinion is we'll probably see some additional white space in the fourth quarter, though, as we do see some of the budget exhaustion that we haven't specifically been told about yet in many cases, but we're anticipating we see some of that there. So that's sort of our expectation for the second half, generally things getting a little bit slower before they turn back up hopefully at the start of 2020.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [4]

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Okay, Don. And I wanted to follow up with a question on the divestiture, and understand you may not be able to give all of this, but I'll ask it, and anything you can give would be helpful. Are you able to comment on the net proceeds we should expect or potentially on how many of your active trucks you're going to have left in the fluids management business? And last point to my admittedly long question, any other non-core divestiture opportunities you think might be actionable pre-close with Keane?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [5]

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Yes. So with respect to the specific transaction, where we sold our West and South Texas fluids management business, we're not disclosing the proceeds from that particular sale. But I will say we've not only made that one particular divestiture, we're continuing to and then have continued to get out of the fluids business outside of California basically completely. And then we're moving in that direction very rapidly.

So you will see, outside of California, we won't really have a fluids business per se. We continue to look at opportunities for the rig business as well as opportunities for the overall California Well Support Services group in general, and there are some ongoing discussions and some interest in the market in that particular area. Again, we've seen that group continue to actually improve their bottom line and perform quite well, but being noncore we think it does make sense to continue focusing on looking for opportunities to divest ourselves of that particular business.

I would add as well that, that group has done an exceptionally good job of controlling costs. And that's something we've really focused on here as we got through the quarter with our completions business and with our intervention business as well. So we've seen a lot of cost reduction in terms of shutting down fleets, in terms of closing facilities, in terms of SG&A reductions that are quite significant on a quarter-on-quarter basis. We turned on our SAP implementation. Basically, the second week of July, we've seen some impact already from that. We expect to continue to see pretty significant impact with respect to the overall costs associated with the business.

And I think we've got a lot of things that we've already done that we were seeing some of the early fruits from, but we're going to continue to see the cost base come down across the business lines as we go through Q3 and go into Q4. So we're really focusing hard on the notion of controlling what we can and staying on top of the overall activity level, so that we can keep our profitability up and obviously stay focused on free cash flow.

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Operator [6]

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And our next question comes from Chase Mulvehill with Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [7]

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I guess I will stick with frac here to start. When did you end up stacking those 2 horizontal fleets and 1 vertical fleet in 2Q?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [8]

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Yes. So we had the one vertical fleet that we laid down in May, and then the first horizontal fleet was laid down mid-June, and the second horizontal fleet we actually didn't physically lay down until the very end of the quarter. It did sit idle, though, from about June 6 on as we are looking for opportunities to put that fleet back to work or potentially move the fleet with the same customer to another basin. Once we got a clear indication that there wasn't anything out there that met our financial requirements and the customer didn't have a need for that fleet in a different area, we made the decision to shut that down.

So the 2 horizontals actually, when it went down really post Q2, if you will, it wasn't working in the last 3 weeks. The other one went down very late in the quarter.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [9]

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Okay, great. And it sounds like that you've got some uncertainty on one more horizontal fleet in 3Q, so one of those might go down in the Mid-Con. So it looks like you might be running 12 or 13 horizontal fleets in 3Q. When we think about the mix here for how many of those are dedicated versus spot, and then maybe how much you think will be running zipper in 3Q, maybe some color there would be helpful.

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [10]

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Yes. So we're currently at 14 equivalent horizontal fleets and the 1 vertical fleet. The vertical feet continues to stay active. As you say, we've got one fleet at risk here in the middle of this quarter, which is coming up pretty soon, and we'll take a look at whether or not we can deploy that somewhere. If not, obviously, we'll make the decision to shut that down and get those costs down.

By the way, we haven't specified the basin that that's in at this point. But -- because there are a couple of different moving parts in the equation. But yes, it's one horizontal fleet at risk currently. So if that shuts down, we'd be at 13 horizontal equivalent -- or, sorry, 13 horizontals and 1 vertical.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [11]

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And what does it look like for zipper work in 3Q, maybe relative to 2Q for those fleets?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [12]

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The zipper work continues to be roughly 2/3 to 3/4 of our business overall. And then that overall pattern hasn't changed for the dedicated fleets. We're seeing maybe a slight reduction in the spot market of zipper work and going to some more single wells, but, again, that's becoming a smaller and smaller portion of the overall fleet.

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Operator [13]

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And our next question comes from Chris Voie with Wells Fargo.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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I was curious if you could discuss what your process is for deciding whether to stack a fleet, if it's just visibility for work or the expected level work you can get if you are trying to play the spot market. I don't know if you can describe if there really is any spot market at all right now.

And then secondly, obviously, you described the environment as competitive. Are you seeing requests for lower pricing on your fleets that are relatively busy right now? And do you think pricing is moving lower across the portfolio? Are people giving up price at this point?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [15]

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Yes. So in terms of our criteria, if we have a dedicated fleet for instance, like the one we bought in Q3 currently that's running that the customer has decided to take a look at shutting down that activity for at least the remainder of the year, what we'll do is specifically go look at opportunities to dedicate it with another customer. We'd be looking for the notion of very high utilization, where we would be able to continue to go from well to well and generate the kind of EBITDA dollars that we're currently seeing at about the average we've got for the fleet level. If we don't see something that's dedicated, we do, obviously, look at the spot market and see if there's opportunities out there.

But as you say, that market's really quite tough at this point. And in general, we're not looking to add or keep any additional fleets in the spot market. So I'd say, overall, the likelihood of that fleet going into the spot market and staying in the spot market would be quite low.

As far as pricing for the fleets that we've got working, I think we've seen that bottom, and we were not really seeing any particular pressure there. I know when the spot market continues to be a struggle out of there, and you will see folks occasionally throw out a lower price in an effort to try and keep their spot fleets working. That's a game that we're not playing if the pricing continues to drop in that market. That's where we did see, for instance, dropping to one vertical fleet, where we just didn't really see the kind of returns that made sense. And for the horizontal fleets, we'll follow that same philosophy. We're not interested in working at lower prices than we're currently at. We're really interested at keeping our EBITDA per fleet somewhere in the range that we're currently sitting.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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Okay, that's helpful. And then on wireline and pumpdown, that seems to be trending pretty well. Is there a tailwind there from more bundling activity across your fleets? Or are you actually gaining share outside of your own pressure mine fleets as well?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [17]

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Yes, we've actually seen the revenue come up nicely from Q1, as we expected, with both wireline and the pumpdown business. I will say, though, there's a number of new entrants into that market. We're seeing people come in. They're trying to get their business up and running, trying to get their customer base in place. And so the pricing has suffered somewhat. That's why although we saw the revenue come up quite nicely, the profitability really stayed quite flattish more so.

So we're protecting the profitability there and protecting the kind of customer relationships that we've established over the years. I think you're going to see probably more and more in that area customers declaring that they're having difficulty generating the kind of margins that they want. But certainly, a number of new entrants in the marketplace have made that a pretty challenging market in terms of being able to do anything on the pricing side.

In addition, we mentioned it in the script, we're seeing a trend where most of our customers, if not virtually all, are shooting more and more guns per stage in an effort to continuously improve the overall productivity. They've seen some good results in a number of cases. So the kind of volume of guns that we've seen from, say, last year on a per-stage basis is quite striking and has really affected our overall perforating gun numbers. And just to give you some rough numbers, we averaged through much -- most of last year about 25,000 guns per month that we would shoot. We have seen that go in excess of 40,000 guns per month with essentially the same fleet, in fact, even with a few less wireline units running.

So it's really been a change in the mindset of the customers. Quite frankly, the ability to charge significantly more for those additional guns is limited when you've got a tough pricing environment like this. So that has affected a little bit the profitability of the wireline business. As I say, we're getting more and more revenue, but the margin is staying relatively flattish -- the profitability, rather, staying relatively flattish at this point.

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Operator [18]

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And our next question comes from Brad Handler with Jefferies.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [19]

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I was actually hoping to follow up. As it turns out, I guess, it's a follow-up to the last question. I was hoping you could put some numbers around some of the pricing pressure you are experiencing in wireline, and then, I guess, cementing as well.

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Jan Kees van Gaalen, C&J Energy Services, Inc. - CFO [20]

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So with -- let me -- this is Jan Kees. Let me talk about the cementing. Over the quarter, cementing pricing was down in certain select basins, and utilization was down approximately 6%. With regards to the third quarter, we are expecting a flat to down pricing environment, mainly due to competitor's low pricing, but also a flat utilization as the market conditions in that market start to stabilize.

In terms of the fracturing pricing -- sorry, the wireline pricing, my apology, wireline pricing slightly down during the quarter. We have activity well up, primarily in the North area like Bakken, which is traditionally a strong area for the company. In terms of associated wireline trucks, that number still sits around 40% to 50%, depending on the month of our fracturing fleets, and, as Don was alluding to, a strong increase in terms of the guns per run leading to a consumables number in terms of the P&L that has been increasing. We're working actively with our R&D team to reduce the manufacturing cost as well as the external cost for the guns that we source externally. So we expect some improvement towards the end of the year as those plans start to turn into execution.

But a little bit disappointing on such a good increase of activity to see some of that margin eroded away by the higher consumable cost.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [21]

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Sure, sure. JK, I appreciate all that color. If I could come back to the cementing commentary, perhaps you can explain some of the dynamics for us with respect to why it was down? And I guess what I'm thinking about is I think you all had tried to shift some of your exposure and, in a sense, if you will, sort of "high-grade customers". Are you seeing others sort of chase in the same direction? So -- and I don't know if it's still surface casing that we're talking about, right, or the surface portion of the cement job, but is that some of the dynamic? You just have people following kind of the trends of who's working, and, therefore, you just have that much more cementer on cementer competition, and that's what's really driving it? And maybe you can even comment separately, if you can comment from which basins are experiencing that.

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [22]

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Yes. So there's certainly several different factors at play. One in general will be our largest basin with regards to cementing is certainly West Texas. But there and elsewhere, we continue to see the overall rig count trending down through the quarter. So certainly, there's less cementing work just in general associated with that. And I think in an effort to keep costs under control, we've seen a little bit of a change in approach to the bidding process that many of the customers out in the marketplace are taking. So they're no longer necessarily awarding the cementing job in terms of surface, intermediate and production string to a single company. We'll see cases where they're, in fact, bidding out each portion of the wellbore. That's caused, I think, the attention of the cementing OFS companies in general to be fairly aggressive as far as winning, especially the long string. We're -- obviously, we've got a lot larger volumes and potentially a little bit better profitability.

So it's a bit of a mixture of some change in behavior with regard to the bidding process and then the existing players and an ever shrinking rig count, trying to hang on to share and generate as many dollars as they can. So hopefully, that answers your question. But it is a tough environment out there, and we've seen a number of cementing companies actually shut down operations in parts of the country, depending on what the activity level's been doing there. And it's become one of the more competitive product lines here over the last few quarters.

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Operator [23]

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And our next question comes from John Daniels (sic) [Daniel] with Simmons.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [24]

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Just a couple for me. On the trucking sale, are you guys able to tell us what the -- maybe you already did, but what the truck hours were for those trucks that were sold in Q2?

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Daniel E. Jenkins, C&J Energy Services, Inc. - VP of IR [25]

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John, it's Daniel Jenkins. The only numbers that we've put out there are the numbers in the back of our earnings call packet, and that included the assets that were actually sold in July. So those were second quarter numbers. We obviously operated those assets in the second quarter. We closed on the deal in late July. Let me do a little digging, and we can talk about some of that offline. We're also going to update our materials as we report third quarter to kind of show what the pro forma business looks like without those assets.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [26]

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Awesome. And did it include SWDs or is it just trucks?

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [27]

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It did include some of the SWDs, not all. So essentially, it's really 3 components. So we had the fluid handling trucks, a number of our saltwater disposal wells and a good number of frac tanks.

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Jan Kees van Gaalen, C&J Energy Services, Inc. - CFO [28]

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And the employees that have been offered new employment by the acquirer of the assets. And so as a result of that, you will see the headcount of the company coming down over the next quarter.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [29]

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Okay, got it. And speaking of just headcount and the labor situation. When we speak to most of the companies out there, one of the gripes is pricing is below the 2014 levels, and yet labor rates are 23% higher than back then, particularly when -- in segments like well servicing. I'm just curious, given reductions in activity, yard closures, all that stuff, I'm assuming the labor situation is not as bad as it used to be. And assuming that's right, at what point can the industry actually lower wages to try to enhance margins? I know it sounds like an awful strategy, but it might be necessary. Just your thoughts.

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [30]

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Yes. I would say, in general, the labor situation has eased up a little bit. It's amazing, though. On the trucking side for drivers, there is still a general shortage, which is kind of amazing. I would say there's been a little bit of relief with respect to that. In terms of you addressing the wage situation, I think that's something that's going to have to be a wait and see sort of let's see where the market settles out. Quite frankly, we're having pretty good success of continuing to get our margins up even with the fact that labor costs have continued to rise. And that again has been through just a lot of hard work and focus on streamlining our operations overall, staying in the areas where the activity is still strongest and the pricing has hung in there. And we're doing that without having to affect the kind of rates that we're paying our folks.

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Jan Kees van Gaalen, C&J Energy Services, Inc. - CFO [31]

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John, in general, our focus has been on the areas that we can control and very basically making sure the footprint is in line with the requirements, and, as Don says, where the market is, but also making sure that we cut out any unnecessary costs in terms of SG&A, but also operating costs and remain very, very focused on driving free cash flow and the returns of the business that way.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [32]

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Okay. Last one, would you be willing to give us a guesstimate of where cash will be at the end of Q3?

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Jan Kees van Gaalen, C&J Energy Services, Inc. - CFO [33]

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We expect free cash flow at a not a similar level as what we saw in Q2, perhaps a couple of million higher, but just slightly shy of 30.

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Operator [34]

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This will conclude our question-and-answer session. I'd like to turn the conference back over to Don Gawick for any closing remarks.

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Donald Jeffrey Gawick, C&J Energy Services, Inc. - President, CEO & Director [35]

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Great. Thank you, operator. I want to thank everyone for joining us today for the call, and I really do just want to stress a couple of key points, one of them being that we've been aggressively moving the direction of cost control as we've seen the market take a few turns. And with the expectation that we may see some more of that in the third and especially the fourth quarter, we're getting ahead of that situation very aggressively. We'll continue to control costs, control the things that we can in a very aggressive manner, so we can keep the cash flow up, make sure that we're operating in a very prudent way.

And then especially, I want to add and end on the notion that with the -- hopefully a merger happening in Q4, I think the upside to that is really, really tremendous for both companies, for both ourselves and Keane, and we expect to see some very nice impact to the operating environment for the combined entity as we move into 2020. So I'm very excited about that. And I think you're going to see a real powerhouse in terms of a new company in the OFS space.

So thank you again for joining us today. We appreciate it.

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Operator [36]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a wonderful day.