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Edited Transcript of PES earnings conference call or presentation 31-Jul-19 3:00pm GMT

Q2 2019 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Wednesday, July 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Tucker

Pioneer Energy Services Corp. - Executive VP & COO

* Lorne E. Phillips

Pioneer Energy Services Corp. - Executive VP & CFO

* William Stacy Locke

Pioneer Energy Services Corp. - President, CEO & Executive Director

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Conference Call Participants

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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Michael William Urban

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

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Anne Pearson Vincent

Dennard Lascar Associates, LLC - SVP of IR Counsel

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Presentation

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Operator [1]

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Good morning and welcome to the Pioneer Energy Services Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Anne Pearson of Dennard Lascar Investor Relations. Thank you. Ms. Pearson, you may begin.

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Anne Pearson Vincent, Dennard Lascar Associates, LLC - SVP of IR Counsel [2]

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Thank you, Omar, and good morning, everybody. Before I turn the call over to Pioneer's CEO, Stacy Locke; and CFO, Lorne Phillips, for their formal introductory remarks, I have a few of the usual items to cover. First, a replay of today's call will be available by webcast and also by phone replay. You can find the information for both in this morning's news release.

As a reminder, information reported on this call speaks only as of today, July 31, 2019, so any time-sensitive information may not be accurate at the time of a replay.

Management may make forward-looking statements that are based on beliefs, assumptions and information currently available to them. While they believe these expectations are reasonable, they can give no assurance they'll prove to be correct. They are subject to certain risks, uncertainties and assumptions described in today's news release and also in recent public filings with the SEC.

So if one or more of these risks materialize or should any underlying assumptions prove to be incorrect, actual results may differ materially. Also note that this conference call may contain references to non-GAAP measures. You'll find a reconciliation to the nearest GAAP measures in this morning's news release.

Now I'd like to turn the call over to Stacy Locke, Pioneer President and CEO. Stacy?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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Thank you, Anne, and good morning. We appreciate you joining our second quarter call this morning.

Joining me here in our San Antonio office is Carlos Peña, our Chief Strategy Officer; Brian Tucker, our Chief Operating Officer; and Lorne Phillips, our Chief Financial Officer.

I would like to say at the outset, we certainly recognize the diminution in value in our common equity, the risk associated with our ability to repay or refinance our $475 million of indebtedness is what is driving our equity down, and this risk is also reflected in our public bond prices, which are trading at a substantial discount.

We are working in earnest to solve this situation. And as our press release states, we are proactively exploring various strategic and other alternatives to address the uncertainties related to our ability to refinance our outstanding debt as their maturities approach.

Turning now to our second quarter. We had a very solid second quarter. Not every business met our objectives, however, overall, we beat our expectations. I'd like to cover a few of the highlights during the quarter.

Colombia, we had a outstanding quarter for our drilling operations there. We worked all 7 of our marketed rigs. We continue to have an 8th rig stacked that's going to require capital to reactivate and become a marketable rig, which we're not planning at this point. But overall, it was the best quarterly EBITDA since the second quarter of 2014, and we are on track to have the best EBITDA year since 2014.

This quarter illustrates the potential of Colombia to generate $6 million to $7 million in EBITDA per quarter when all things are working right. We are essentially at full utilization since we count the 1 stack rig in our util count. But more importantly, we had more days during this quarter at full day rate as opposed to the completion rate, mob rate or standby rate. And we also had a little bit of day rate improvement on some of the contracts. It is a promising trend in Colombia where operators are doing more pad development work similar to in the United States. And this has helped increase our operating more days at full day rate. In the current quarter, certain operators -- in the current environment, certain operators' plans are a little bit up in the air as we look into the third quarter and the remainder of the year. But it affects just a few of the rigs. We are optimistic about the outcome. But until we have contract certainty, we will need to guide conservatively for the third quarter and the remainder of the year there in Colombia.

In our well servicing segment, we had a nice improvement in utilization to 60%, the highest in recent quarters, also an improvement in our average hourly rate to $569 an hour, which I believe continues to be the best in the industry for another quarter. Equally as good, best quarterly EBITDA since the second quarter 2015.

We had a nice increase in our 24-hour work. I noticed this morning, we had 8 rigs today working on 24-hour work, which included an increase in our completion activity as well. So overall, in our well services business, a very, very good quarter.

In our wireline services segment, revenues were up quarter-over-quarter, mostly due to a 12% increase in our completion stage count, but margins were off a little over 2% in the quarter. Overall, it was a softer quarter than we had expected, but we'd see opportunities for improvement later in the year. We had some favorable tests with the preassembled perforating guns in the quarter, and we'll continue additional testing for the remainder of the year. We'd see this to be a very promising trend in the wireline segment.

We remain focused on ways to improve our wireline performance and margins as we proceed through the rest of the year.

In our coiled tubing services business, we faced strong competition, competitive pressures in both the Rockies and in the Eagle Ford, causing both our utilization and our pricing to suffer in the quarter, and we are working diligently to improve this overall in our coiled tubing performance for the remainder of the year.

Capital expenditures were down quarter-over-quarter. Cash flow was up and it was positive. In the second half of the year, we expect to be cash flow positive while recognizing that in the third quarter, it might be tougher just due to our bond interest payment coming due in that quarter. We have no discretionary capital spending planned for the remainder of the year, just routine capital spending.

I'd now like to turn the call over to Lorne to recap some of the financial results.

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [4]

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Thanks, Stacy. This morning, we reported revenues of $152.8 million and adjusted EBITDA of $20.7 million as compared to the previous quarter revenue of $146.6 million and adjusted EBITDA of $19.9 million. Reported net loss was $12.9 million or $0.17 per share, and our adjusted net loss was $11.8 million or $0.15 per share.

Adjusted EBITDA was up quarter-over-quarter primarily resulting from higher revenues and margin contribution from our well servicing and international drilling segments, and a decrease in the fair value of our phantom stock award expense, for which we recognized a $0.8 million benefit in the current quarter compared to a $0.8 million expense in the first quarter.

Looking specifically now at our cash position in the quarter and future cash expectations, I'd note some of the following that -- and Stacy mentioned some of this, but I'd like to cover it as well. We increased our cash and cash equivalents $3.3 million to $31.1 million during the second quarter. Also we expect to spend approximately $19 million on capital expenditures in the second half of 2019, decreasing our full year capital expenditure expectations to $50 million. Given that, and our semiannual bond payment in September, we anticipate the second half of 2019 to be cash flow positive, but with the third quarter likely reflecting a small use of cash and the fourth quarter generating cash to get it to positive cash flow in the second half of the year.

Finally, again, as Stacy noted earlier, although our term loan does not mature until December 2021, we are proactively exploring various strategic and other alternatives to address the uncertainties related to our ability to refinance our outstanding debt.

Looking now at production services. Revenues in the second quarter were $87.8 million, up 1% from the prior quarter driven by well servicing and wireline, which were up 12% and 3%, respectively, while coiled tubing revenue was down 26% due to the decline in utilization and pricing that Stacy mentioned. Gross margin for the production services business was 17%, down from 20% in the prior quarter primarily driven by coiled tubing services in which gross margin was 9.2%, down from 23% in the first quarter. Although stage counts increased sequentially, wireline services was impacted by softer average stage pricing resulting in a gross margin of 11.8%, down from 14.2% in the prior quarter.

Well servicing partially offset both coil and wire services with a gross margin of 28.7%, which was up from 28% in the first quarter.

In consolidated drilling services, revenues were $65.1 million, up 9% from the prior quarter and utilization remained steady at 92%. Consolidated drilling margin per day was $10,396, up slightly from $10,349 in the prior quarter.

Our domestic drilling fleet remained fully contracted for the majority of the quarter with the exception of 1 rig in Appalachia that was idle in May and June. Average margin per day was $10,131, down from $10,944 in the first quarter.

As expected, during the quarter, we had slightly elevated repair maintenance levels in our Appalachia and North Dakota regions due to the timing of annual inspections and maintenance that typically occur in the post-winter months. Margin per day in the current quarter was also down from the prior quarter due to stacked rig cost for 1 rig at the end of its contract in Appalachia and some higher mobilization cost associated with the rig that moved to West Texas from South Texas.

And finally, in the first quarter, we had a $0.3 million margin benefit from recognition of early term on a domestic drilling contract that did not repeat in the second quarter.

International drilling utilization was 86% and average margin per day was $11,023, up from $8,894 in the prior quarter. And our margin per day in that quarter increased, as Stacy mentioned, due to more drilling days relative to the first quarter, and we also had some benefit from day rate increases on certain rigs of approximately $1,000 per day.

Going forward, we do expect international margin per day to stabilize around $9,000 to $10,000 per day. Currently, 16 of our 17 AC rigs in the U.S. and 6 of our 8 rigs in Colombia are earning revenues. Of the 16 rigs earning revenues in the U.S., 14 of those are under term contracts. Our contract roll-off is as follows: 2 in the third quarter of 2019; 7 in the fourth quarter of 2019; 1 in the first quarter of 2020; 2 in the third quarter of 2020; 1 in the fourth quarter of 2020; and 1 in the first quarter of 2022.

Turning now to the company-wide expense items. G&A expense was $18 million. For Q3, we expect G&A expense to be approximately $20 million. Depreciation and amortization was $22.9 million in the second quarter and is expected to be around $23 million again in the third quarter. Interest expense was $10.1 million in the second quarter and is expected to be approximately $10 million in the third quarter. Excluding the valuation allowance, the effect of foreign currency translations, state taxes and other permanent differences, our tax rate in the third quarter would have been in the 21% to 23% range. We had $9.7 million in committed letters of credit and $59.8 million available under our $75 million asset-based lending facility at the end of the quarter.

The facility remains undrawn. As we mentioned previously, our reported cash balance at quarter end was $31.1 million, which includes $1 million of restricted cash. Cash capital expenditures in the second quarter were $14.5 million. Again, we estimate that full year 2019 capital expenditures to be approximately $50 million, which includes approximately $8 million for final payments on the construction of the new-build drilling rig that began operations in the first quarter as well as previous commitments on high-pressure pump packages for coiled tubing completion operations.

With that, I'll turn it back over to Stacy for final comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [5]

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Thank you, Lorne. As we look to the third quarter and the remainder of the year, our expectation is that the second half of the year will be a little bit softer. Drilling rig count has gradually declined through the course of this year and we expect that to continue through year-end. Completions we believe will be trending a little bit lower as we know certain operators that will slow completions in the second half of the year, some taking pauses, some reducing activity in certain areas and many trying to live within their cash flows.

This is unfortunate in the -- particularly in the production services space because the third quarter is usually the seasonally most strong quarter with the more favorable weather patterns, longer daylight hours and no bird-nesting stipulations in the Rockies. But -- so there is a possibility that it could trend a little bit more favorably than we're forecasting. But at the present time, we're going to remain a little bit cautious.

So for our production services segment, we anticipate revenues to decline in the range of 3% to 6%. We think we can hold margins flat at 70 -- 17%, mostly due to reining in some cost. And then in the U.S. drilling operations, we think utilization will be down slightly in the range of 88% to 92%. We know of 1 additional rig in the Appalachia region that we believe at this point may stack. We think that, again, we should be able to hold the margins per day roughly flat in the $9,700 to $10,200 per day range.

In Colombia, due to the uncertainty that I referenced earlier, we think our utilization could be a little bit lower in the 70% to 75% range and margins probably moderating a bit, as Lorne pointed out, to the $9,000 to $10,000 per day range.

So with that, we'll conclude our prepared remarks. And we'd be happy to entertain any calls. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Daniel Burke, Johnson Rice & Company, L.L.C.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [2]

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Let's see. Stacy, good to -- you guys buttoned down the CapEx for this year just a little bit. Can you talk about what you're doing -- what's allowing you to achieve that? Maybe it's just releasing a growth CapEx hold that you had in the budget. I'm not sure.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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Well, I think in 2018, we made some discretionary capital decisions to add some equipment and complete that others -- complete 1 stack rig. And that was in anticipation of a more favorable 2019. So we kind of made those commitments, ordered that equipment, and then of course, we had the big oil price decline in the fourth quarter. And so we had to take delivery and make the final payments on those expenditures in the first half of the year really. So we were -- that was really the only discretionary that was budgeted for this year. And so we're now at the point where we've made those payments. I think we had a little bit -- right in the beginning of the third quarter, fairly minor $1 million or so. But the rest will be just routine. And we're not really changing our routine, we're watching it closely, keeping it tight, but we're also taking good care of the equipment. So it just allows us to rein that in a little bit for the foreseeable future.

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [4]

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And Daniel, one thing I'll just add there also is, there -- as Stacy guided, there's a little bit less activity anticipated than we had anticipated at the beginning of the year. And I think that also helps us to pull in, like he's talking about, as we need to do. So...

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [5]

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Got it. And then I guess just to ask the question. I appreciate the acknowledgment of looking at strategic alternatives and I'd understand if your prepared comments are as far as you can go. But any comments on what might be on the table or off the table in terms of things you'd consider at this point, Stacy?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [6]

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Well, I would say that I think it'd be in our best interest just to stick to the general comment in the press release that we're really -- we're looking literally at everything. And it's front and center, most important thing, we're working on. As Lorne pointed out, our debt maturities aren't -- the first obligation isn't due till the end of 2021. But that term loan goes current at the end of '20. So we are -- we had already began working on this before the big kind of equity drop. And we just feel it's in our best interest to proceed swiftly and early, so you're not up against some debt obligation wall, and try to position the company really to take advantage of this market.

There are lots of opportunities out there for consolidation. It needs to happen in our space. We've been had many dialogues, have been working hard on it. But our balance sheet is just really not in the shape to culminate any transaction. So we feel like it's in our best interest to try to get the balance sheet much better shape and then pursue these opportunities.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [7]

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Got it. And I appreciate that and the response. Maybe just one last real straightforward one. As we think about cash flow in the second half of the year, Lorne, can you get working capital to neutral on the year?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [8]

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It's possible. I certainly think part of the ability for us to be cash flow positive in the second half of the year. We do expect to get continued benefit from working capital in Q3 and Q4. Unfortunately, some of that is predicated on the guidance here. It would have lower revenues, which would lead to pulling some working capital out and we'd prefer that weren't the case. But I think as we see the world today, we will pull working capital out in the second half of the year, which will help us get to that positive cash flow in the second half. And I think getting to the neutral, it's -- I think we can -- we're certainly working on it and we've made some progress. But it's an area of focus not as you see from a lot of calls, not just from us but from the whole space.

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Operator [9]

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Our next question is from Mike Urban, Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [10]

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Great quarter internationally and taking a little bit of a step back in Q3, which is probably more just a normalization it seems like. With that strong performance that you've been delivering there, and I think what we've generally been hearing over the course of the earnings season so far is kind of some upward momentum in the international markets. Generally speaking, is that peaked any increased interest in those assets? Or improved your ability to potentially monetize those? Or still the status quo on that front?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [11]

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Well, I would say, we are really pleased with the performance we've had in Colombia. In years past, we've looked at monetizing those assets and were unsuccessful. We were hopeful that we could achieve these kind of results at some point in the future and we are now achieving them. So we are -- we're very pleased with what we have and the asset that we have, and our intention at this point is to hold on and continue supporting that group in Colombia.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [12]

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Got you. And then shifting to the U.S. What are you seeing in terms of leading-edge pricing? So kind of, I guess, 1 and maybe now 2 rigs stacking out. We've heard different things from different competitors, I think some folks are seeing a little bit of leading-edge pressure for super-spec rigs, others maybe not so much just under the view that utilization still is very high. And even if you were to go out and try and cut price, just given that operator budgets are prefixed here, even if someone wanted to pick up a rig, they necessary couldn't. So I'd be interested in your view and what you're seeing from a leading-edge pricing perspective?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [13]

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Yes. Mike, this is Brian. I think it kind of varies a little bit basin to basin. Certainly, we had some success with renewals and are in conversations right now particularly in the Permian that are kind of flattish kind of pricing from what we saw in 2018. And so we're -- we feel confident with that.

Appalachia is the one I think that's actually seeing a little more challenges there. And I'm certainly -- think we're probably not alone there. So pricing in that area has been affected a little bit more in our case at Pioneer there in Appalachia. So it's important to us, important area for us. So we've worked with our clients there and we certainly want to keep utilization up in that area. So -- but the Permian for us has been very solid.

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Operator [14]

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Our next question is from Jason Wangler, Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [15]

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Maybe just dovetailing on the previous question. With the softness you're seeing in Appalachia, whether it's production services or the drilling rigs, is there an ability to try and move those to other areas? Or is the intention to leave those there for now and kind of to wait out the storm?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [16]

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Yes. So in Appalachia, we're only there in a U.S. drilling fleet. We currently are running -- we have 6 rigs in the basin, an important basin for us. We moved quite a few of our rigs out of the Bakken in about 2015, 2016 over there. So we actually have a very solid team there. Our plans are via Appalachia for the long haul. We do -- obviously, as rigs go down or become free, we do want to make sure that we try to keep reutilization up. So we've certainly entertained moving those assets, 1 or 2. We certainly want to keep a critical mass there. But we would certainly entertain moving those out of the region when it makes sense for the company to do so.

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Operator [17]

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Our next question is from Steven Gengaro, Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [18]

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I guess two things, if you don't mind. The first -- and again, I'm not sure how much your comment is. But when you think about, maybe just from a bigger picture, strategic initiatives and if it was to involve an asset sale, how would you think about kind of a valuation relative to the sort of the cash flow those assets could generate for you over the next couple of years? Do you have any guidance there on sort of how I should think about that?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [19]

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I'll make some general comments, really not specific to us but I'll just state kind of the industry observation. There are -- M&A is very, very soft in any business in the U.S. today and certainly, for cash buyers. And so if you're able to make a transaction work, it's going to be at a much more lower multiple than where you're trading. So for a levered company, if you were to sell an asset, it's actually going to be from a net debt to EBITDA perspective, it's going to cause your leverage ratios to go up. So it's just not a ideal time for companies to make the sale. I think what's more opportunistic out there are the merger of equals or share to share type mergers to gain synergies and reduce G&A. Those type of operations would make more sense in this market.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [20]

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Okay. No, that's helpful. And you mentioned earlier the integrated perf guns on your wireline units. Can you give us a sense -- so when you're using that technology and -- my understanding is that there is some safety and clearly some cost savings that go along with that, do the -- are those cost benefits accruing to you? Or does the E&P -- I mean, obviously involved in the discussion, do they expect some of the savings? And how does that kind of affect your overall kind of cost at the -- wireline cost? And I guess on top of that, as you go forward and these integrated systems become a higher and higher piece of the puzzle, does that mean you can kind of lower the personnel at well side? And how should we sort of think about that going forward?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [21]

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Well, we're testing them right now. But I think that over time, we would have the ability to lower some cost in our business. I think generally, there is several different alternatives out there with different costs at the moment, which are higher than a traditional gun system. But you gain some efficiencies at the well, which would benefit the wireline company. I think there is potential for each participant in the chain to receive some benefit. And as it relates to wireline, it definitely has the potential to make our operation more efficient. And that could be through a combination of matters, including potentially greater efficiency at the well side.

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Operator [22]

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There are no further questions at this time. And I would like to turn the floor back over to management for closing comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [23]

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Okay. Well, thank you for the good questions and the participation on the call today, and we look forward to visiting with you again on the third quarter call. Goodbye.

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Operator [24]

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