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Edited Transcript of ESN.TO earnings conference call or presentation 7-Nov-19 5:00pm GMT

Q3 2019 Essential Energy Services Ltd Earnings Call

CALGARY Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Essential Energy Services Ltd earnings conference call or presentation Thursday, November 7, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Garnet K. Amundson

Essential Energy Services Ltd. - President, CEO & Director

* Jeffrey B. Newman

Essential Energy Services Ltd. - CFO

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Essential Energy Services Ltd. 2019 Third Quarter Results Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Jeff Newman, CFO. Please go ahead, Mr. Newman.

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Jeffrey B. Newman, Essential Energy Services Ltd. - CFO [2]

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Thank you, Marie. Good morning, and thank you for joining our third quarter conference call. Garnet Amundson, President and CEO, is with me on the call today. We'll give you an overview of our third quarter results and speak to the outlook. At the completion of our formal comments, we will open the line for questions. In this conference call, we will be discussing financial measures, including certain non-IFRS financial measures, such as EBITDAS and bank EBITDA. Please see our November 6, 2019, third quarter news release for definitions of these terms.

Today's call may include forward-looking statements. Such statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were used to formulate such statements. Actual results could differ materially, and there can be no assurance of future performance or market impacts. For additional information with respect to our forward-looking statements, factors and assumptions, refer to our November 6, 2019, third quarter news release. In this call, we will also refer to ECWS, which is the abbreviation for our Essential Coil Well Service operation, and we will refer to IFRS 16, which is the international financial reporting standard relating to lease accounting.

First, a few words about our quarter. The third quarter was another difficult one for the Canadian oil and natural gas industry. Drilling activity and well completions were down 33% and 21%, respectively, compared to Q3 '18. Political, regulatory and market access issues continue to result in lower E&P spending, which in turn, reduced oilfield service activity and the demand for our services.

In the quarter, Essential generated $39 million of revenue, $11 million lower than Q3 '18. Despite this activity in revenue reduction, EBITDAS of $6.3 million was only $750,000 lower than Q3 '18. This was due to our persistent focus on cost management and the impact of IFRS 16. On a year-to-date basis, revenue was $114 million and EBITDAS was $15 million. Throughout this prolonged downturn, our focus has been on keeping debt low. At September 30, long-term debt was $11 million and funded debt to bank EBITDA was 0.7x.

Working capital at the end of the quarter, consisting primarily of inventory and accounts receivable, was $54 million, well in excess of debt. Over the last 12 months, we have, in fact, reduced long-term debt by $13 million.

I will now speak to each of the businesses. ECWS reported Q3 '19 revenue of $23 million, 19% lower than Q3 '18, a decrease consistent with the 21% quarter-over-quarter decline in industry well completions. The revenue decrease was lower -- was due to lower activity as pricing was similar to Q3 '18 and the sequential Q2 '19.

While overall ECWS activity was lower than Q3 '18, we were pleased with the demand for our highest capacity coil tubing and pumping equipment designed to work on long-reach deep horizontal wells. Total operating hours for this equipment actually increased 7% compared to Q3 '18.

Despite lower revenue, gross margin as a percentage of revenue improved significantly from 19% in Q3 '18 to 26%. This was due to increased efficiencies and effective cost management, including wage reductions and a stronger focus on variable costs. Gross-up margin also improved with the adoption of IFRS 16 in 2019.

On a year-to-date basis, ECWS revenue of $65 million was 20% lower than the prior year period. Gross margin as a percentage of revenue increased from 17% to 23%, again, reflecting proactive and effective cost management.

Now a few words about Tryton. Tryton reported revenue of $17 million, 27% lower than Q3 '18 primarily driven by reduced industry activity. In Canada, our conventional tool revenue, which is primarily related to production and decommissioning work, was steady but still below Q3 '18.

Revenue from MSFS Tools improved from Q2 '19, but was below the prior year quarter and declined more than industry completions in the period. Tryton's U.S. conventional tools operation was busier than Q3 '18, resulting in higher revenue. Gross margin for Tryton was 22% for Q3 '19, similar to Q3 '18. Effective cost control and the impact of IFRS in 2019 helped preserve gross margin percentage, despite the revenue decline.

On a year-to-date basis, Tryton reported $49 million of revenue, a 27% decrease compared to the prior year period. Gross margin at 19% was only 4 percentage points lower than the comparable 2018 period despite the revenue decline. The margin decrease was a result of lower activity and fixed costs comprising a greater portion of revenue.

Garnet will now discuss our capital spending program and speak to the outlook.

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Garnet K. Amundson, Essential Energy Services Ltd. - President, CEO & Director [3]

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Thanks, Jeff. Good morning, everyone. On the capital spending front, our capital spending plans for 2019 are unchanged. Spending to date was $5.5 million, and our forecast for the full year remains at $8 million, mostly comprised of maintenance capital and with most of that being associated with our higher capital intensity ECWS business.

The second Gen IV retrofit is progressing well. We expect it will be delivered on schedule and on budget and ready for the field in December, meeting our target to have it available for the busier winter season.

As demonstrated in our ECWS results, there is still good demand for our deep coil rigs, even in this difficult market. The Canadian supply-demand balance for this type of equipment remains quite tight. Tryton's planned maintenance capital expenditures are primarily related to pickup truck replacement.

Now regarding our outlook. From Essential's perspective, activity in the fourth quarter started out slower than Q3 finished, but we are hopeful that a modest but steady level of activity will continue until customers exhaust their capital budgets later in the quarter. We are focused on balancing crew retention with cost management to ensure we have sufficient staff available for an expected busier first quarter 2020.

Last week, the Petroleum Services Association of Canada announced its 2020 forecast of 4,500 wells to be drilled in Canada, 10% below their 2019 estimate. For context, there were approximately 11,000 wells drilled in 2013 prior to the downturn and 4,100 wells drilled in 2016, which was the low point of the current industry downturn.

The Canadian industry is not attracting new capital investment that is required to increase E&P activity due to Canada's political, regulatory and market access issues. Access to capital for E&P and oilfield service companies has become progressively more difficult.

In this challenging environment, management continues to focus on what we can control, including ensuring our services meet customer demand, managing costs while maintaining our strong safety record, capital discipline and allocating free cash flow to repay our long-term debt. Low debt and a lean cost structure are competitive advantages as we continue to navigate these difficult times. When we released our results yesterday, long-term debt net of cash, was $6.6 million.

Operator, at this time, we would like to open up the call for questions.

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Operator [4]

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(Operator Instructions) There are no questions registered at this time. I would like to turn back the meeting over to you, Garnet.

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Garnet K. Amundson, Essential Energy Services Ltd. - President, CEO & Director [5]

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Thank you very much, and thanks, everyone, for joining us today. I hope you have a good day.

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Operator [6]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.